Fishing where others can't in the ASX microcap universe

Our next speaker is Lou Winchester from Mere Weather Capital.

His presentation topic is fishing where others can't in the ASX microcap universe.

Mere Weather Capital is a specialist small and microcap boutique funds management firm.

The firm operates with a focus on absolute performance driven by a commitment to deep fundamental research and business understanding.

The Inception Fund offers a focused portfolio on ASX small and micro-cap opportunities.

The fund aims to own 10 to 25 stocks in a market cap range of 20 to 200 million.

Luke is the founder and portfolio manager with the goal of building a reputation as one of the leading small and micro-cap managers in the Australian equities market.

As one of the largest investors in the fund, his interests

with investors are fully alive.

Welcome, Lou, to the presentation.

Thank you, Angelina.

Happy to present to the investment markets team.

So for the sake of brevity, I'll jump through the disclaimer and talk about myself and Merriweather Capital.

So we're a relatively new investment management company based in Newcastle.

We launched in November 21 and we right now just run a single investment strategy, which is our inception fund, as Angelina said, focused solely on the ASX micro and small cap universe.

I'm the founder and portfolio manager sitting alongside me on the board of Meriwether Capital Investment is Harley Grosser who runs ARK Funds, an ASX listed company that provides some back office regulatory and compliance support which

allows me to focus on the investing side of the business.

And as Angelina pointed out, I've got the significant portion of my family's wealth invested alongside people in the fund, which I think is very, very important.

So I've been investing in the microcap space for well over a decade.

It is a space where I think it's very important to have that experience and compound that knowledge.

You get to know businesses, people and all that sort of stuff over time and building that knowledge base is extremely important.

I've been doing this for a while.

I've got Harley alongside me, who is also in that ASX micro and small cap space.

Not only the managing director of ARC funds, but also runs Capital H Management, which has been a high performing fund since 2018.

So we run the fund with four values.

I'll run through these quickly.

The first one is to be hard working.

When you play in the micro cap space, there's often not a lot of sell side research.

A lot of the stocks, they're under covered, under loved, and you've simply just got to go out there and turn over rocks.

I think you've got to be intellectually honest with yourself.

You know, these are small businesses, they're often not established business models, understanding, you know, the businesses where you can get an edge over the market.

I'll note for me, you know, that means avoiding things like resource explorers, early stage biotechs, early stage speculative technology companies, and focusing on more established businesses.

Third one, simply being accountable with yourself.

You will make mistakes, particularly in this microcap end of the market.

As I said, these businesses are small, they are emerging, they are growing.

It's common that you will make mistakes, but acknowledging when you do and obviously learning from them is extremely important.

And they're being aligned with investors.

To me, it's probably the most important thing to have from an investment manager, someone who's invested alongside you.

And that's what I always aim to do with my fellow investors in the Inception fund.

So we are a dedicated ASX micro and small cap fund.

We run concentrated 10 to 25 positions.

Right now it's around that 16.

The ideal market cap range 20 mil to 200.

That's a sort of range where a lot of other institutional funds just because of their size are unable to play in that space.

And I think that creates the inefficiencies to find compelling investment ideas.

As I said before, high conviction strategy portfolio weightings are usually between that five to 15 percent.

As I said before, I tend to focus on more established businesses.

You know, there are a lot of there's quite a lot of speculation in the micro cap end of the market, but you can avoid that.

You can find good little businesses that are growing and trade on reasonable valuations.

The four things I look for in every investment.

You want that alignment from management.

You want growth prospects, particularly for these small businesses.

You're not buying a small business for an asset play or a revaluation.

You want to see growth in the core business itself.

a reasonable valuation, and then for me, simple financial accounts.

There's quite a lot of complexity in owning small business models and emerging businesses.

The last thing you want to do is then overlay that with some complex financials and make it quite hard to analyse the businesses themselves.

And for me, you want to hold these businesses, you want to be able to hold these micro caps and watch them turn into small, mid, and sometimes even large caps on the ASX.

So the process is quite simple, idea generation starting at the top, as I said before, turning over rocks and just brute forcing, reading every, you know, ASX announcement for stocks in that sort of less than 200 million market cap universe and maintaining a good micro cap investor network, speaking to people, businesses, brokers, and just trying to find new ideas.

A very thorough research process.

As I said before, micro caps, there isn't a lot of sell-side coverage.

Often there's no other institutions owning these stocks.

And so you've got to rely solely on your own research, reading historical reports, speaking to management, and trying to find any sort of alternative information you can find, be that customers, competitors, things like that.

Valuation, I try not to get too cute with valuation.

I'd rather be roughly right than precisely wrong.

Especially, as I said, with these micro-cap businesses, their business models are usually evolving quite quickly.

You don't need a two-page DCF model.

You'd rather be roughly right than try and drill down that hard.

And thinking more relative to competitors, peers and the overall market.

You have to stay on top of these stocks.

As I said, they move quick as businesses and as share prices.

So staying on top of anything you can do to stay across the story outside of reporting cycles.

So, you know, maybe following LinkedIn or export data or job ads, things like that.

Ways to try and have a finger on the pulse of how business may be performing outside of quarterly or half year reports.

And then holding and selling.

As I said, you want to hold onto these businesses, allow them to compound.

The whole point is to find these micro small businesses and watch them grow into larger businesses.

So having a defined investment thesis of what I want to look for, what we want to see, and we're holding as long as that's intact.

We can stomach the volatility of moving share prices, but what we won't stomach is when businesses underperform the investment thesis we've set for them.

So we launched the fund in November 21, which was the start of quite a tough time for micro and small-cap companies.

So the inception data there through to the end of FY23, we had a strong FY23 in that context, returning about 8.59%.

But nonetheless, since inception, it has been quite tough down about 26 percent there.

Market sentiment for micro caps and small caps, it has stabilized a little bit through sort of September and October that that has worsened.

But as we come into quarterly reporting season and AGM season, I'm hopeful that, again, some fundamental news may sort of come in and outweigh the macro fears that people are putting on the market right now.

So in summary, we're a boutique micro cap fund.

As I said, we wanna be dedicated to that space.

We wanna stay small and nimble.

We wanna be able to invest in those companies 20 to 200 mil and size becomes your enemy.

So we are dedicated in that way.

A high conviction approach.

We don't wanna spread ourselves too thin.

We wanna do deep research and back ourselves with the work that we do and take that high conviction approach without portfolio positioning.

And low turnover, of course.

We want to hold these businesses.

Trying to trade in and out of low liquidity stocks can be tough.

So we want to do good work, back ourselves and hold them for the long term.

That investment philosophy has worked well for a while.

As I said, it's been a tough market the last sort of two years.

But prior to that, we achieved some really strong results in that micro cap market and generated some good returns and found a lot of good businesses that have gone on to do some very good things.

As I said before, I am experienced in that microcap space, been doing it for about 10 years.

And I think that is important.

You know, someone who's dedicated to the space knows the businesses, people, companies.

And for me, having the support of Harley and ARK funds allows me to focus on the important things of investing while they provide that back office support and compliance support.

There's the fun details there.

Again, for the sake of brevity, I'll leave that in my contact details if anyone needs further information.

Thank you, Luke.

Do you have time to take some questions?

Yep.

So a general question for you, why micro caps over the larger and perhaps safer parts of the market?

Yeah, look, as I said before, the structure of the market being lower liquidity, meaning that large funds are unable to invest in the space and won't even look, less sell-side research, it just leads to inefficiencies in pricing and these companies being under researched and under covered.

And whenever you have an inefficient market, it creates opportunities for investors who are willing to put in the work, do it themselves, and of course, stomach the volatility that comes with investing in the space that others may not be willing to stomach.

So, you know, I have this fundamental belief that because of the structure of micro caps, those inefficiencies will always be there.

And that's what we're looking to find, obviously been a tough period.

I don't think the longer term structure of micro caps themselves has changed and those opportunities will come back at some point in the future.

And after a tough two years for smaller companies, is now the right time to invest?

It's always hard to say exactly when, but you know, I think the market has done a very good job of refocusing a lot of businesses onto what matters, which is cash flow, profitability and long term sustainability.

We went through a period sort of post COVID where I would call it growth at all costs.

And a lot of businesses were swept up in that.

And I think now as capital's really dried up and liquidity's dried up, a lot of businesses have been forced to recognise the environment they're in and focus on getting their business models to profitability and sustainability.

And that's good.

And as I said, that creates opportunities.

You're now seeing that across the market, that re-pricing has taken effect.

And I think now we're in a really interesting time where a lot of businesses have made that transition and the market hasn't really reacted yet, which is creating those inefficiencies I was talking about before.

So I can't say for certain it's the right time, but I'm certainly more excited than what I have been in quite a while.

Well, thankfully for your presentation and the answers to my questions, look forward to seeing you again.