Against the grain

Finding value in areas of the market neglected by both the broker and the funds management community is the way Perennial Value Management navigates, and how they secured this year’s Australia Small Cap Equities award.

Andrew Smith, head of smaller companies and micro caps/head of research at Perennial Value Management, said this created a valuation gap where they took their advantage from.

“While value investing is out of favour at the moment, we have been able to offset this by finding growth stocks before they have been priced as such,” Smith said.

“In that way we have been enjoying a re-rating in many of our stocks which we tend to then sell once popular and recycle the capital into undervalued names.”

Smith attributed team size, company visits and proprietary research, and pre-IPO opportunities as the driving force behind their strong performance.

“The team has worked very hard in an effort to uncover the best investment ideas in the microcap universe,” Smith said.

“We visited close to 1,200 companies last year, then built detailed models on the best 200 stocks to select 60 for the portfolio.”

Three main areas were identified by Smith when he had invested in stock: solid management, strong growth prospects and strong balance sheets.

“We start with the quality of management, assessing the motivation and skills of both the managing director and chief financial officer. We prefer high shareholdings by management to align interests,” Smith said.

Ben Griffiths, Eley Griffiths Group director, said their stock selection process worked through the market cycle consistently.

“It allocates portfolio active space to those stocks that offer the most attractive relative valuations and allocates away from those stocks who are less desirable, so to speak,” Griffiths said.

“It also adjusts for traded liquidity, so we are not forcibly buying into illiquid stocks and also dictates that the portfolio will hold between 35-55 names.”

“This enables a portfolio of tradeable names that has the right amount of diversification/concentration for risk management purposes.”

James Abela, portfolio manager for Fidelity Future Leaders Fund, said they had a bottom-up stock picking process, which he called “VST” for viability, sustainability and credibility.

“These are the three things I look for that identify the future leaders,” Abela said.

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