Microequities Value Income Fund

Profile of Companies the Fund will Invest in

There is information asymmetry in the market for 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 stocks listed on the exchange as these tend to have the largest daily volume of trading activity. By way of example, there are approximately 2,200 companies listed on the ASX, and 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 unresearched companies.

Additionally, many index fund managers tend to structure their portfolios to track or follow specific indices. This can suggest that the index fund managers are investing in both well performing companies and poor performing companies simply to imitate the particular index.

The Investment Manager is focused on growing, profitable companies with a performance track record and an undervalued share price. The Investment Manager uses a bottom-up approach to investing. Fundamental analysis of companies is undertaken using various models and key indicators to value companies before consideration of inclusion for investment by the Fund.

The Investment Manager conducts research that includes information gathering from customers, suppliers and competitors. As part of the investment process, it conducts face to face meetings with the company’s senior management to gain valuable insights into the operations of the company’s business units, strategy, and plans. The Investment Manager will only invest the Fund in businesses that it understands 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:

• Companies with a well established business model
• Companies generally should have at least 2 years or longer of historical EBITDA profitability
• 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 paying consistent dividends
• 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
  
  

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

The Microequities Value Income Fund (the Fund) will invest in ASX-listed microcap equities, in which a microcap is generally defined to be a company outside the ASX200 index at the time of initial investment and seek to preserve capital, provide investors with a sustainable income stream and achieve long term capital growth.

The Fund’s investment strategy will be the same as the Microequities High Income Value Microcap Fund (HIMF), a wholesale fund launched in March 2012. 

Investing in the Fund offers investors a range of benefits including:

• seeks to provide regular (semi-annual) cash distributions;
• portfolio structured with the objective of providing long-term capital growth and regular cash income;
• higher long-term growth profile than large-cap funds;
• access to the Investment Manager with extensive experience in the microcap sector;
• value investing philosophy;
• in-house research expertise and capability;
• bottom-up investment research-based experience;
• early access to potential high-growth companies;
• performance-based incentive for the Investment Manager;
• Microequities is a co-investor in the Fund;
• distributions may carry imputation tax credits; and
• investments are generally held for longer than 12 months thus delivering mostly discounted capital gains to unitholders.