A UK small and mid-cap fund investing in highly cash generative companies with strong market positions that are expected to grow faster than UK GDP. Aims to deliver progressive long-term capital growth with no income.
In common with other Chelverton managed funds, we look to invest in companies which are listed in the UK, but which fall outside the top 100 UK equities. Our aim is to deliver capital growth to investors over the longer term and we do this by concentrating on companies that have particular qualities. Mainly we are looking for companies that are highly cash generative, which enables them to fund their own growth. Typically, they will have some form of sustainable competitive advantage, such as a unique product or a dominant position in a particular market, leading to high margins and thus, generating surplus cash. We like sensible, pragmatic management teams, who have a clear idea of how to push the business forward without diluting shareholder returns through unnecessary equity issuance, or off-piste excursions into unrelated activities. The portfolio contains companies at various stages of their development, but all have potential which has yet to be fully recognised by the market.
Our Investment Process
Our starting point is to use a formal quantitative screening process, which we have designed to look for certain characteristics, or put another way, the companies have to pass some tests before we will look at them in any detail. These include the ability to convert 75% of operating profit in to free cash flow from gross margins higher than 20%. We also test the balance sheet to see that debt is not too burdensome and that the amount of working capital is not too high. Whilst the screening of 1,200 stocks is reviewed monthly, in practice it evolves on a daily basis. Initially, this will generate some 150 ideas which qualify for further assessment, and approximately half of those will make it into the portfolio. In the second stage, we are seeking to gain a far better understanding of the company beyond the bald statistics; we want to know what makes it ‘tick’. We start by looking at sales, to what extent they are repeatable, and how broad the customer base is. We then look at the margins and how likely it is that they are sustainable.