Why Smaller Companies?

The long term investment case for small companies is a compelling one. Since 1955, the Hoare Govett Smaller Companies Index, i.e. the bottom 10% of the market, has outperformed the FTSE All Share Index by an average of 3.2% per year on a total return basis.


As a specialist small cap manager Chelverton believe that the sheer diversity and number of investment opportunities provide a significant scope to add value for our clients through our disciplined investment approach.

 

The approach is based around a number of factors specific to the investment universe:

 

  • The real opportunity for smaller company investors lies in the pricing inefficiencies created by the relative lack of data on the 1,500 or so quoted small cap stocks, Sell side economics makes independent research into smaller companies relatively rare and this provides a significant opportunity for specialist buy side managers, such as Chelverton.

  • There are few reliable earnings and cash flow forecasts for smaller companies that extend to anything further than a short-term horizon. By looking to hold stocks over the medium term, Chelerton can look beyond this and add value where the market becomes increasingly inefficient.

  • New issues will continue to offer small cap investors a broad range of opportunities, but we find that a lot of these can be over-hyped and over-priced. Of more interest to Chelverton in participation in equity fund raisings where we know the companies well, and in re-financings. In both of these instances Chelverton are often able to access equity at a discount.

  • Relative illiquidity in smaller companies means that disappointing news can often have a disproportionately adverse affect on a share price. By focusing on tangible medium term investment parameters, especially cash flow, these temporary disappointments can provide Chelverton with attractive invesment opportunities.

 

Article by David Horner - The Tortoise and the Hare (revisted)

 

Click here for an article by Neal Underwood of Fundweb 'Small Compulsion for Big Rewards'