Microequities Global Value Microcap Fund

Microequities Global Value Microcap Fund is an open-ended unregistered Managed Investment Scheme designed for the Australian wholesale market.

The objective of the Fund is to identify undervalued global Microcap companies, invest in them through a medium to long term commitment and seek to deliver superior investment returns. The Fund does not try to predict short term share price movements or the direction of the overall markets. The focus of the Fund is to identify global Microcap companies with proven business models that have credible growth pathways and buying them for substantially less than we consider to be fair value.

Potential investment candidates include profitable companies with identifiable prospects for sustained long term growth but whose market values are significantly below our assessed intrinsic value. Each business model that underpins a company’s earnings engine is assessed with particular regard to understanding the security of earnings and the distinctive competitive advantages (if any) of the business. The Fund is primarily concerned with seeking undervalued growth businesses.

The Fund invests primarily in global listed Microcap companies, which at the time of initial investment are generally below a market capitalisation of US$1 billion or equivalent in the company’s local currency. The Fund is able to hold and make further investments in Microcaps which have subsequently grown above a market capitalisation of US$1 billion.

The Fund will invest predominantly in companies in advanced economies such as the United States (US); the United Kingdom (UK); Canada; Western and Central Europe; Singapore; Hong Kong et al. The Fund may invest in companies with a higher market capitalisation, but these will be limited to no more than 40% of the assets of the Fund.

This limit does not relate to investments in companies which had a market capitalisation of less than US$1 billion at the time the Fund made its initial investment and which has subsequently grown above it.

At times the Fund may invest in IPO securities that are due to be listed on a public stock exchange within 3-6 months, and have lodged an offer document with the relevant exchange regulators. These investments will also be limited to no more than 10% (based on market value) of the assets of the Fund. The Fund will be limited to investing no more than 20% of the Fund’s assets in any one security or company. The Fund will invest no more than 10% (based on market value) of the Fund’s assets in companies listed on the Australian Securities Exchange. The Fund will make investments with a medium to long term time horizon of 5 years or greater.

It is not the intention to hedge the foreign currency exposure of the Fund arising from investing in overseas markets. The Fund may hold its cash assets across one or a basket of international currencies.

• Access to international investment opportunities not readily available to Australian investors
• Diversification from the Australian economy
• Access to unique companies with differing business models
• Higher long-term growth profile than large-cap funds
• Opportunity to invest in under-researched Microcap businesses
• Foreign currency assets diversification
• In-house research expertise and capability
• Microequities team members are significant co-investors in Microequities’ Funds
• Exposure to international economies
• Early access to potential high-growth companies
• Performance-based incentive for the manager
• Highly dedicated and experienced Microcap investment management team
• Stocks generally held for longer than 12 months thus delivering mostly discounted capital gains to unitholder

Profile of Companies the Fund will Invest in

There is information asymmetry in the market for global Microcap securities. Information asymmetry arises when one party has more or better quality information than the other. Stockbroking firms and investment banks generally produce research material for their clients in order to generate commissions from trading volume.

They tend to cover mainly the largest 200-400 stocks listed on each stock exchange as these tend to have the largest daily volume of trading activity. There are approximately 100,000 companies listed on global share markets. Many of these would not have been considered for research by brokers or other research firms, hence there may exist opportunities to profit from intrinsically undervalued and under-researched companies.

Additionally, many index fund managers tend to structure their portfolios to track or follow specific indices. These indices would cover the top few hundred stocks or a particular sector. This can suggest that the index fund managers are investing in both well and poor-performing companies simply to imitate the particular index.

Microequities is a fundamental deep value investor focused on investing in growing profitable companies with a strong track record, good management and an undervalued share price. We use a bottom-up approach to investing. Fundamental analysis of companies is undertaken by examining an industry’s competitive landscape, management team, historical financial performance, future business strategies and balance sheet using various indicators. Ultimately we value these companies using various methodologies before consideration for investment by the Fund. We will only invest in businesses that we understand and that have a historical track record of earnings.

The list below is a sample and is in no way exhaustive of some of the factors that may be looked at and taken into consideration when considering an investment by the Fund. As each company is unique, not all factors below will be suitable to be taken into consideration for the purposes of a valuation model of the company.

Investment Criterion

• Companies with a well-established business model
• Companies generally should be EBITDA profitable for at least 2 years.
• Companies with low manageable debt or no debt are preferred
• High cash flow generating businesses
• Companies with high earnings visibility and disclosure
• Companies with a predictable future earnings stream
• Companies in a growing sector
• Companies that have a growth catalyst division, product or service
• Companies with a strong competitive advantage or brand name
• Companies with stable management and a track record of delivering value to shareholders
• Companies where management has a significant stake
• Companies with a reputable board of directors
  
  

This approach to investment necessitates a medium to long-term perspective, and only under such an investment time horizon do investors capture superior capital generation. The investment performance of companies invested in is regularly reviewed. We are in close contact with senior executives and management of those companies and their investment case is re-examined. Companies that have not yet met our investment criteria are also monitored. The world is a dynamic place and investment cases do change.