Post on 07-Jun-2020
transcript
TAMIM Australian Equity Small Cap IMA presents:
A Guide to Successful Small Cap Investing
©TAMIM Asset Management 2017 2
The TAMIM Australian Equity Small Cap Individually Managed Account:
The TAMIM Australian Equity Small Cap Individually Managed Account
(IMA) is a portfolio of Australian equities investing long term capital in
the most compelling high quality small and micro-cap
value opportunities.
TAMIM works with some of the most highly regarded micro-cap stock-
pickers in Australia with extensive experience in all aspects of the
industry. The portfolio management team invests in businesses which are
trading at a large discount to their risk adjusted true worth. The IMA provides exposure to
companies listed on the ASX that we believe are under researched, not widely known and
outside the investment universe of many investors, and that offer attractive potential returns.
The investment approach can be summarised as concentrated value-style focusing on
securities outside of the ASX S&P 200 regardless of sector. The TAMIM Australian Equity
Small Cap IMA, seeks businesses where the difference between the share price and assessed
value (intrinsic value) is sufficiently large to afford a sufficient margin of safety to justify the
investment. The TAMIM Australian Equity Small Cap IMA owns a concentrated portfolio of
ASX-listed small and micro-cap companies.
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TABLE OF CONTENTS:
1 – Why Small Caps? 4 2 – Our Approach to Value Investing 12 3 – Intrinsic Value Explained 17 4 – Low Liquidity: Friend or Foe? 22 5 – Mitigating Risk in Small Cap Investing 25 6 – The Correlation Beauty of Microcaps 30 7 – Investing in Family Companies 33
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PART 1 – Why Small Caps?
SUMMARY: Investing in smaller companies has traditionally been a core strategy to achieving significant
long term wealth generation for high net worth individuals, family offices, entrepreneurs, etc.
And for good reason - we believe there are many compelling reasons to include smaller
companies in all portfolios. In this section we investigate why smaller company investing can
be so lucrative and the core strategies behind successful smaller company investing.
THE EVIDENCE: There seems to be consensual agreement in research circles that smaller companies tend
to out-perform larger companies over the long term. As you would expect the vast
majority of the research in this area has been focused upon the US market so we’ll be
primarily looking at US-based evidence. However, the conclusions remain valid for ASX
investors in our experience.
The chart below shows the
long term returns of the
smallest 30% of listed US
stocks versus the largest
30% over the past 90 years.
The data shows that the
smallest 30% have on
average out-performed the
largest 30% by 2.1%
through this period.
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And if we look at the same data and break it down into market cap deciles, the results become
even clearer - the smaller the average market cap, the higher the average out-
performance. The chart below shows (on the right) the top decile largest companies (by size)
versus the top decile smallest companies and compares their performance. Each step towards
the left is one decile lower in the size ratio. The trend is clear:
This data provides compelling evidence that smaller companies offer ripe picking grounds for
out-sized long term returns.
This is consistent with our experience in the portfolio underlying the TAMIM
Australian Equity Small Cap IMA (DMX Capital Partners) which is 72% ahead of the
All Ords after fees since launch 17 months ago (as at 31 August 2016) - this out-
performance reflects the combination of applying a value investing style to a filtered
universe of high quality smaller companies:
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WHY SMALLER COMPANIES TEND TO OUT-PERFORM: In our opinion there are a number of compelling reasons why the strategy of investing in
smaller companies tends to out-perform the market over the long term:
1. A less efficient market
One of the great attractions of smaller company investing is that the majority of ASX listed
smaller companies remain below the radar of most investors. Rather than competing with
some 30 analysts who each have a detailed financial model on the company as is often the
case in the larger company universe, there is often no broker coverage of smaller companies.
Beyond the low broker coverage, we often work on companies, which have very few
individual investors following them. This lack of coverage, and resulting lack of analysis,
creates significant room for market inefficiencies in the stock valuation, and also leaves
ample room for smaller company investors to generate an information edge versus the limited
market following. As the market becomes more aware of these initially unknown companies,
the potential for a significant re-rating is high. Eventually brokers start looking at these stocks
as their market caps increase and the cycle of out-performance continues. The data below
shows that small cap funds are far more likely to out-perform than large cap funds reflecting
these significant inefficiencies at this end of the market.
“Wall Street research is focused on under 20% of publicly traded companies, those with market
capitalisations of over $1.5bn. This leaves a large number of companies with scant analyst
coverage. With few investment managers performing in-depth research on small cap firms and the
rest relying on conventional research, an astounding number of small cap companies get
overlooked. Focusing on this larger number of undiscovered companies increases the odds of
uncovering hidden value.” - First Wilshire
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2. Better management access
In our experience smaller company management teams are generally more receptive
towards engaging with investors than larger company management teams. The reason
for this is simple: smaller company management teams are generally aiming to improve the
markets’ understanding of their businesses, and often only have to deal with a few investors
who are looking at their businesses. Smaller businesses often continue to be led by the
founders, who are usually very passionate about the company and very keen to tell its story.
However, if you are the CEO of a large cap like Telstra, your time is spread in so many
directions it is simply impossible to build relationships with the 30 analysts following the
company in addition to the many thousands of investors who are exposed to the company.
This dynamic means smaller company investors are often privileged to get to know
management which allows for a deeper understanding of the publicly available
information.
3. Low correlation with the broader market
This is a benefit which is often ignored and misunderstood by the investment
community. Smaller companies tend to do their own thing a lot more than larger
companies reflecting: a) these businesses often have smaller market shares and/or operate in
niche areas and are thus less likely to be affected by macro shifts,
b) smaller companies are often trading at a significant discount to their large cap peers due to
a lack of market awareness - this lack of awareness also protects their stock prices when their
larger cap peers are selling off. The portfolio underlying the TAMIM Australian Equity
Small Cap IMA (DMX Capital Partners) has a correlation (R squared) since launch (in April
2015) 17 months ago of only 17% with the All Ordinaries Index, and we expect it to remain
low looking forward. The portfolio performs particularly strongly on a relative basis in weak
market conditions for the reasons mentioned.
4. Simpler to analyse
Smaller companies are often simpler to analyse due to the focused nature of their
business models. For example, when analysing SDI Ltd (ASX: SDI) investors need to be
aware of the developments in one industry, the dental industry, and only need to model the
company’s geographic segment analysis and the shift from amalgam to non-amalgam
products. The depth of modelling required to understand a small company like SDI is of a
completely different level to the intricate modelling required to understand a large and
complex business like Telstra with its numerous operating divisions. We believe there is less
room for error when working on relatively simple smaller company models.
5. Greater upside leverage given their generally lower starting market shares and
lower cost structures
Most smaller companies we work on are aiming to increase their market shares from a
relatively low starting position. Successful market share growth for smaller companies
generally creates significant earnings and valuation upside over the long term. For
©TAMIM Asset Management 2017 8
example, a company starting with a market share of 1% with the objective of reaching a 5%
market share in a growing market offers enormous growth potential. However, a larger
company which already has a 40% market share will often be aiming to defend its market
share from newcomers with the objective of growing in line with the market. In our
experience the management psychology behind these two very different strategies is often at
two ends of the spectrum. We would prefer to be investing in the aggressor rather than
the defender. In addition, smaller companies, due to being capital constrained, are usually
particularly focused on cost control and adopting a low cost operating structure. As their
revenues grow there is an opportunity for significant operating leverage to drive strong
bottom line growth.
“Smaller companies are often run by their founders or a small group of managers who are
more motivated to increase shareholder value.” - First Wilshire
6. Focused investment cases which often provide direct exposure to a potent
investment theme
As mentioned, smaller companies are generally far simpler business models than their larger
cap peers which are often conglomerates with complex and sometimes contradictory stories.
If you are factoring an investment theme into an investment decision, we believe it is a lot
easier to get clean exposure to most themes in the smaller companies universe. For
example, one investment theme we are aware of is the strong growth ahead for
superannuation funds given Australia’s ageing society and dependence on future fund under
management growth. Fiducian (ASX: FID) provides clean exposure to this theme given the
company’s focused and simple business model. However, a larger cap peer like AMP does
provide exposure to this theme but it is massively diluted by the company’s vast array of
other businesses.
7. A larger investible universe
The maths of smaller company investing is interesting. If we look at the ASX, there are some
2,200 listed companies but most investors tend to regard the ASX100 or the ASX200 as the
definition of the larger company universe. This means 80-90% of the listed universe are
smaller companies. With such a large hunting ground for new ideas we believe the
chances of success for disciplined smaller companies investors are higher.
8. More powerful investment risk management controls
Ultimately having better understanding of a business than the rest of the market is the
strongest and most controllable risk control for any equity investment. As mentioned,
gaining a deeper understanding of publicly available information on smaller companies than
the rest of the market is generally achievable in our experience, and maintaining it requires
consistent work, research, etc. Large cap investors generally don’t have this luxury due to the
large number of competing analysts, and thus tend to control risk by focusing upon the
standard deviations of returns, value at risk, etc. In our experience these risk controls are
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often backward-looking and involve far less direct control on the part of the investment
manager. We believe smaller company investors have the clear advantage of being more
in the driver’s seat when controlling stock specific and portfolio risk.
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WHAT MAKES A SUCCESFULL SMALL CAP INVESTOR: Given these compelling reasons for long term smaller company out-performance, it seems
natural to ask: what makes a successful small cap investor? Achieving out-sized returns in
this sector are clearly not a given.
We believe there are 4 key attributes required to achieve long term investment success as a
small cap investor:
1. Quality screening
In the 2000+ universe of ASX listed smaller companies we believe the vast majority do not
qualify as high quality businesses. This means the first step to successful smaller company
investing is to filter the high quality businesses into an invest-able bucket. This process takes
many years of disciplined analysis of each business. At TAMIM our Small Cap teams
definition of quality means we are looking for companies with: high quality management,
strong balance sheets, positive cash flows, good visibility around future earnings,
defendable and growing competitive moats, and well defined long term strategies. This
may sound like a simple list but the reality is most companies do not tick all of these
boxes. We believe less than 100 of the 2000+ universe of smaller companies actually
meet our definition of high quality. This may sound surprisingly low but we would suggest
this low hit rate is absolutely essential for the TAMIM Australian Equity Small Cap IMA’s
long term success.
2. A love of in-depth research
In our experience the key to understanding a business well is to “kick the tyres”, and really
become aware of where the cashflows come from, why customers deal with this company,
how management are thinking, etc. It takes a long time to properly understand a business and
we believe this is key to maintaining a long term information edge versus the rest of the
market.
3. Thinking long term
Successful smaller company investing requires a long term investment horizon in our
experience. It is only by thinking about where these businesses will be in 5 years+ that
the investment opportunities become clear. And it is only by remaining invested in these
businesses for 5 years+ that our investors will benefit from our analysis. It takes time to
build a small business into a larger business and it is this process which creates significant
value for investors.
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4. A focus on the fundamentals
Most investors who have been exposed to financial markets for many years would agree that
there is a lot of noise in the markets. The media, other investors, etc. will always present
opposing viewpoints, and will look to create stories which sell or support their opinions.
However, in our experience most of this is just noise which is best ignored. Successful
smaller company investing requires an ability to filter the fundamental information
from this noise.
CONCLUSION: The performance of the portfolio underlying the TAMIM Australian Equity Small Cap IMA
since launch is testimony to the attractions of smaller company investing. We believe the
application of a disciplined value investing strategy to a filtered universe of high quality
smaller companies provides a potent combination for long term out-performance. We will
continue to exploit the significant market inefficiencies in the smaller company universe to
our investors’ advantage.
References
http://www.afr.com/markets/equity-markets/two-thirds-of-australian-large-cap-funds-fail-to-
outperform-the-benchmark-20160919-grjafc
http://econompicdata.blogspot.com.au
http://www.firstwilshire.com/firstwilshireway2.html
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
©TAMIM Asset Management 2017 12
PART 2 - Our Approach to Value Investing
SUMMARY:
Value investing requires discipline and an ability to see through the noise so as to buy when
others are fearful. With a good degree of self-awareness and an open mind we strongly
believe it remains a superior investment strategy, and one which can lead to substantial
outperformance. This article addresses key value investing terminology and strategies as an
introduction to this lucrative investment approach.
INTRODUCTION: Key Terminology
The Intelligent Investor by Benjamin Graham remains the value investors’ key reference
work 67 years after it was first published in 1949. Warren Buffett has long been a devotee of
the principles in this book. The majority of value investing terminology we use today came
from this book, such as:
• “Investment operation” - “An investment operation is
one which, upon thorough analysis, promises safety of
principle and an adequate return”.
• “Mr. Market”: Investors should think of the market as
a person, Mr. Market, who is usually reasonable and
offers you a price for your securities close to your
view of fair value, but sometimes Mr. Market becomes
emotional and volatile, and becomes overly optimistic
or pessimistic.
• “Margin of safety” - A key tenet of value investing is
the idea of factoring in a margin of safety to take into
account the fact you may be wrong in your assessment
of fair value. e.g. If you think a stock is worth $10,
with a margin of safety you may be prepared to pay up
to $7 for it. As Mr. Graham explains, “The margin of
safety is the difference between the percentage rate of
the earnings on the stock at the price you pay for it and the rate of interest on bonds,
and that is to absorb unsatisfactory developments”.
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OUR APPROACH TO VALUE INVESTING:
At TAMIM Asset Management, we are passionate about value investing within our Small
cap and value teams and believe a disciplined value investing strategy will significantly
outperform the market over the long term. We search for companies where the conservatively
estimated intrinsic value exceeds the share price by a sufficiently large margin that it affords
a margin of safety which maximises the chance of long term outperformance.
Our value investing approach in our small cap team is based upon fourteen investment
beliefs:
1 - Knowledge and expertise are more important than diversification. We believe it is
more important to know a small number of companies intimately than to know very little
about a lot of companies. Risk increase the more diversified you become. As a result, the
TAMIM Australian Equity Small Cap IMA holds only up to 20 high conviction positions we
know extremely well.
2 - The key valuation measure is cash flow, after allowance for the required capital
expenditure to keep the business going over the long term. The intrinsic value will vary
over time as cash-flow certainty and the discount rate change.
3 - We reject the idea that risk is the standard deviation of historic returns, and believe
that risk is the probabilistic assessment of something bad happening (i.e. the distribution
has a single tail and is forward looking).
4 - The share market can wildly mis-price companies relative to their intrinsic value but
over time we believe shares prices will move towards fair value. In the short term, the share
market is effectively a popularity contest, but over the long term share prices will reflect
economic fundamentals. As a result, we are only focused on the long term.
5 - We think of ourselves are part owners of businesses. This helps us understand each
business better and allows us to take the long term view required.
6 - “Mr. Market” should be your friend. Bi-polar “Mr. Market” provides prices every day
– sometimes high and sometimes low. We believe investors should exploit his moods – buy
when he is down and sell when he is high. The TAMIM Australian Equity Small Cap IMA
has a long term investment horizon which allows us to opportunistically profit from these
mood swings.
"Have the courage of your knowledge and experience. If you have formed a conclusion from the
facts and if you know your judgement is sound, act on it- even though others may hesitate or differ.
You are neither right nor wrong because the crowd disagrees with you. You are right because your
data and reasoning are right. Similarly, in the world of securities, courage becomes the supreme
virtue after adequate knowledge and a tested judgment are at hand.” – Benjamin Graham
7 - We will only invest when we have a sufficient margin of safety. This means there
should be a large gap between the intrinsic value and the current share price to allow for any
inaccuracies in the assessment of the intrinsic value.
8 - We believe management should be invested in their businesses to ensure their interests
are aligned with shareholders, and that they treat other shareholders as partners.
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9 - Investment opinions should be based upon a considered appraisal of a business/
investment case against all known facts with the expectation that on average a superior return
can be achieved. This contrasts with speculation which is short term and more akin to
gambling.
“By speculating instead of investing you lower your own odds of building wealth and raise
someone else’s” - Jason Zweig
10 - Value investing can be applied to both low and high growth businesses; the key is to
invest when the intrinsic value is well above the current share price.
11 - The distinction between price, book value and intrinsic value: price is the current share
price; the book value is the value of the assets minus liabilities as reported in the accounts;
and the intrinsic value is the true underlying worth of the business.
12 - Macroeconomic factors are very hard to forecast accurately and, given the long term
nature of value investing, frequently of only limited relevance.
"The buyer of bargain issues places particular emphasis on the ability of the investment to
withstand adverse developments.” - Benjamin Graham
13 - Non income producing assets have no value in the value investing framework.
14 - Often family companies perform well because decisions are generally made with a
longer time horizon and higher level of engagement in mind.
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VALUE INVESTING EXAMPLES:
1 - Buying stocks with a strong asset backing. e.g. We bought into EZA Corp (ASX:EZA)
when it was trading at a 25% discount to its net cash value. This may seem surprising but is
illustrative of the inefficiencies of the smaller company universe. The stock has since been
suspended from the ASX whilst management decide on an acquisition. When the stock re-
lists, if a sensible acquisition is announced, we believe the stock will move to a premium to
its net cash value which implies significant share appreciation from the acquisition price.
2 - Keeping the portfolio less than fully invested (20% cash on average) in order to keep
our powder dry for a market calamity, or to cover any outflows. This has served us well thus
far as it allows us to profit whilst others are fearful. We expect to out-perform in falling
markets as a result.
3 - Focusing on stocks with a long history of trading so we can effectively analyse and
value the businesses. We do not invest in start-ups; we only invest in well established
businesses.
For example, one of the underlying
fund’s top 5 positions (at June, 2016) is
Fiducian Financial Services (ASX: FID),
a leading fund management and financial
planning group. The company listed in
2000 (and was established in 1996) which provides a significant amount of data to analyse
and thus value the business. As a result, we have high conviction that this is an excellent long
term investment.
4 - Focusing on low PE stocks - The majority of the IMA’s holding are trading on a single
digit PE based upon FY16 earnings which represents a significant discount to the market
average. e.g. Dental supplier, SDI (ASX: SDI), is currently trading at 8x ’16 earnings, which
appears deeply under-valued for a quality
international business with solid growth
prospects. Investing in such low p/e stocks is
a typical deep value investment strategy.
5 - Take a long term investment horizon at the time of investment - Over the past year the
underlying portfolio has only sold 2 of its positions. We do what we say we do in terms of
taking a long term view at the time of investment.
6 - We do not set out to replicate the market in any way; we are aiming for significant
positive absolute returns - We are completely benchmark unaware as we are looking for the
most compelling smaller company opportunities across all sectors. This is how the portfolio
underlying the TAMIM Australian Equity Small Cap IMA out-performed the ASX All Ords
by 31.95% in the year to August 2016. We remain confident regarding future returns.
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CONCLUSION:
We view true value investing as one of the most potent sources of investment out-
performance available. While it is a remarkably simple investment style, it requires immense
discipline, patience and dedication. We believe our investors are well placed to benefit.
References:
http://www.finsia.com/news/news-article/2016/04/21/how-short-termism-eats-away-returns
©TAMIM Asset Management 2017 17
PART 3 – Intrinsic Value Explained
SUMMARY:
Intrinsic value is a core value investing concept which is simple and yet often misunderstood.
In the TAMIM Australian Equity Small Cap IMA we always compare a stock’s intrinsic
value with its current market value when making investment decisions. Our objective is to
invest when intrinsic value is far in excess of the current market value; i.e. when there is a
significant margin of safety.
INTRODUCTION:
We have noticed that the term “intrinsic value” gets used a lot in the investment industry. It
seems to be one of those terms which investment professionals pull out to show that they
know what they are doing. However, we think it is often mis-quoted and misunderstood.
So what is intrinsic value? On a basic level, intrinsic value is the value of a company, stock,
currency or product based upon fundamental analysis and without reference to its market
value.
And what is intrinsic value not? It is not a static value; it changes and evolves over time.
As Warren Buffet wrote to shareholders in his 1994 Berkshire Hathaway letter,
“Intrinsic value is a highly subjective figure that will change both as estimates of future cash
flows are revised and as interest rates move. Despite its fuzziness, however, intrinsic value is
all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.”
So in a simple formula:
Intrinsic value = the present value (discounted by the risk-free rate of return plus an
equity risk premium) of all future cashflows an asset is expected to generate adjusted
for all known risks and uncertainties.
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THE TWO DRIVERS OF INTRINSIC VALUE:
1 – Business Fundamentals
All businesses are evolving, ever-changing entities. When valuing a business investors are
simply aiming to capture a snapshot of future cashflows at that point in time, factoring in all
known opportunities and risks. However, this snapshot of future cashflows is likely to change
over time. Diligent value investors must be prepared to test and adjust their cashflows
assumptions over time.
The inherent difficulty here is reliably estimating future cash flows. Judging by the number of
companies that fail to meet their profit guidance numbers, it is difficult enough for company
insiders to accurately forecast their current year earnings. For ‘outsiders’ or analysts to
accurately forecast cashflows for a company 5 or 10 years away, the difficulty is magnified.
At TAMIM we look to overcome this issue by investing in companies with a solid track
record of generating cashflows, and use the historical cash flows to help support our
estimates of the future cash flows. We look for companies where there is good visibility
around the fundamentals of the company, and thus the cash flows the investment will
deliver over time.
For example, one of our core holdings (August, 2016) is Konekt
Limited (ASX: KKT), a provider of workplace health solutions.
When we started buying into the stock, the stock was trading at
less than half its current stock price at 20c. Konekt’s reported
cash flows were increasing, and the outlook for the business was positive. At the time we
believed that the future cash flows of the business supported an intrinsic value far higher than
the market value at around 40c. An intrinsic value of twice the market value for a high
quality business was a compelling investment opportunity in our eyes and we bought a
position in our TAMIM Australian Equity Small Cap IMA portfolios.
The stock has performed strongly over the past year, out-performing the All Ords by around
100%. And of course Konekt has evolved somewhat as a business during this time. The
company has made a number of acquisitions and has been growing at a faster organic rate
than we originally expected. These acquisitions have cemented its market leading position.
Now when we value Konekt’s future cashflows we derive an intrinsic value well above the
current market value, and far
above our original intrinsic value
expectation. At the current share
price of 48c the stock is still
trading on a low p/e of around
12x FY17 earnings, and our
intrinsic value for the stock is
currently 60c. All being well we
expect our intrinsic value for the
stock to continue trending
upwards over time. This is the
beauty of high quality
©TAMIM Asset Management 2017 19
businesses; over time they create shareholder value. This is why taking a long term
investment view on high quality stocks makes a lot of sense to us.
2 – Interest Rates
Interest rate changes also impact on future cashflow assumptions because the risk free
rate of return is a key input in the discount rate used to derive a present value of future
cashflows. As a result, future cashflows are worth more in a low interest rate environment
than in a high interest rate environment.
With the 10 year US Treasury yield currently at a record low of only 1.4% and Government
interest rates all around the world at similar record lows, global asset valuations have been
pushed upwards in recent years. The competition for yield has intensified as it has become
scarcer.
“Everything is expensive because this thing at the heart of the system has gone to all-time lows,” - Antti Ilmanen.
When adjusting future cashflow assumptions to take into account changing interest rates,
in our opinion it is important to also bear in mind how current and future interest
rates will impact upon future economic growth rates. This is particularly relevant now
because interest rates were much higher over the past 5 years than they are at present.
This means that global economic growth was able to withstand higher interest rates in the
past which reflected higher underlying global economic growth. It would be a mistake
to simply extrapolate the growth most companies have reported over the past 5
years looking forward since interest rates are telling us that future economic growth
will be far lower than past economic growth. And yet, this is exactly what the vast
majority of analysts are currently assuming. The temptation to simply extrapolate is too
strong for most. In our opinion, this makes most analysts’ current DCF assumptions too
high and thus essentially invalid. A well thought out intrinsic value analysis will take
the underlying economic growth rate into consideration.
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APPLYING INTRINSIC VALUES TO SMALL CAP INVESTING:
In the TAMIM Australian Equity Small Cap IMA we like to invest in companies where
the intrinsic value is far in excess of the current market value; i.e. when there is a
significant margin of safety – the larger the margin of safety, the lower the risk of
investing in our view.
In small and micro-cap companies we often come across a number of factors that
depress the market price of a company on the stock exchange (e.g. low liquidity, no
broker research, lack of profile in the investment community) but that do NOT
change the intrinsic value of the business. This presents us with unique investment
opportunities where there can be very large differences between the observable ASX
market price and our calculated intrinsic value – and thus a large margin of safety.
For example, Joyce Corporation Limited (ASX: JYC) is a high conviction holding in the
TAMIM Australian Equity Small Cap IMA. Some background on JYC is available on our
website.
Before purchasing the stock, we concluded an in-depth analysis of the business and
concluded it was a growing company trading on very low multiples. We then calculated an
intrinsic value according to our analysis of the risks and opportunities faced by the business.
The intrinsic value was calculated as the sum of:
- JYC’s cash balance;
- JYC’s property holdings;
- The discounted after-tax future cash flows from JYC’s growing operating
businesses.
The sum of these components generated an intrinsic value in excess of $2.20 which was
more than twice our average entry price. We expect this intrinsic value to continue to
increase over time. An opportunity like this is unlikely to be available among larger higher
profile companies.
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CONCLUSION:
Intrinsic value in all businesses is a constantly moving target and requires in-depth analysis
of the underlying business. We view it as core to our investment process and will only invest
in a stock when the margin of safety between the intrinsic value and market value is
significant, often above 50%. This is the case for all the stocks in the TAMIM Australian
Equity Small Cap IMA including the examples mentioned, Konekt and Joyce Corporation.
We believe our investors will benefit over the long term.
References:
http://www.investopedia.com/terms/i/intrinsicvalue.asp
http://blogs.wsj.com/moneybeat/2016/06/17/everything-is-more-expensive-than-it-looks/
©TAMIM Asset Management 2017 22
PART 4 – Low Liquidity: Friend or Foe?
SUMMARY:
Smaller companies generally trade with lower liquidity than larger companies reflecting their
smaller market following and large founder stakes. Contrary to popular opinion we view
lower liquidity as core to the smaller company investment opportunity since smaller
companies only trade at low liquidity levels when they are under-researched and
undiscovered, and their valuations generally reflect this. This creates significant opportunities
for investors who are prepared to find the high quality smaller companies trading at a
significant discount to intrinsic fair value.
THE IMPACT OF LOW LIQUIDITY:
Smaller companies are generally perceived to be higher risk investments than larger
companies, largely due to the higher liquidity risk prevalent amongst smaller companies.
These smaller companies often remain tightly held by a founding family and/or lack the
institutional interest and ownership required to generate a sufficient level of stock liquidity.
The market is generally biased against higher liquidity risk because no one wants to be stuck
in a poor investment they can’t sell. However, as with most aspects of investing, we believe
the reality is far from this simple. We view low liquidity as a double-edged sword which can
also create opportunity.
The market believes what the market believes. We have learnt to respect the market but at the
same time understand that the market is not always right. Quite the contrary, the market can
be incredibly inefficient, particularly at the smaller company end of the market where
investors tend to be less informed. The effect of the market’s perception that higher liquidity
risk makes smaller companies riskier than larger companies, is that many retail and
institutional investors either stay away from illiquid stocks altogether, or are only happy to
buy an illiquid stock at a much lower price than they would pay for an equivalent liquid
stock. As a result, many smaller illiquid companies trade at much larger discounts to their
intrinsic value to reflect this perceived risk. In many cases, the discount can be extreme.
“Lack of market liquidity can sometimes be of benefit to small-cap investors who already own
shares. If large numbers of buyers suddenly seek to buy a less liquid stock, this can drive up the price further than in the case of a more liquid market.” - Investopedia.
We would go so far as to say that low liquidity is core to successful smaller companies
investing. Our objective is to find undiscovered gems and to buy them when they are under-
valued and illiquid, and before they are properly researched and understood by the market.
Once they become liquid, these stocks will generally trade at significantly higher levels. The
journey from illiquidity to liquidity is synonymous with the journey from undervalued to fair
value and thus should be celebrated by experienced smaller company investors.
©TAMIM Asset Management 2017 23
EXAMPLE: FIDUCIAN GROUP LIMITED (ASX: FID):
Fiducian, a leading fund manager and financial planning
operator, remains one of our core holdings. We view the
company as one of the highest quality micro caps on the ASX
due to its excellent management team, clear growth strategy,
strong competitive advantages and enviable track record of recent earnings growth.
Fiducian’s earnings are expected to continue growing at double digit rates over the medium
term and yet the stock is currently trading at only 11x FY16 underlying earnings and on a 5%
fully franked dividend yield. This may seem strikingly cheap to large cap investors but this
reflects the smaller company investment opportunity.
Recent trading in Fiducian provides an interesting insight into smaller company liquidity. As
the chart below shows, the stock fell from $2.70 in January to $1.98 at the end of April. At
$1.98, the stock was trading at only 9x FY16 earnings and on a fully franked yield of over
6% despite the company’s high quality business model, strong first half result and excellent
growth prospects. While the volatile equity markets of early 2016 no doubt impacted
sentiment towards Fiducian, the share price fall was accentuated by the stock’s low liquidity.
If this was a large cap reporting excellent results it is very unlikely the stock would have
fallen so dramatically.
In our minds this spelt
opportunity so we bought more
Fiducian stock into weakness at
around the $2 mark. We viewed
the selloff as a great opportunity
to top up our shareholding in a
high quality business on a very
low valuation. Low liquidity
once again presented a
compelling opportunity which
aligned with our disciplined
value investing style and we
were able to take advantage.
CONCLUSION: The reality is that liquidity risk can either play to your advantage or disadvantage as an
investor. We believe many investors are missing a trick by viewing all smaller companies as
riskier than larger companies. The fact that so many people view liquidity risk as a
disadvantage provides an explanation as to why smaller companies often trade at such low
valuations and therefore are attractive investment propositions.
In our opinion, the key to using liquidity risk to your advantage is to ensure you are investing
in under-valued, high quality smaller companies where you have an information advantage.
This is clearly easier to do in the smaller companies universe than amongst large caps where
you may be competing with 20+ highly intelligent analysts who have followed the stocks for
©TAMIM Asset Management 2017 24
many years. When investing in smaller companies there may be no analysts at all following
the stock so it is a far less competitive investment environment.
However, successful smaller company investing does require a disciplined filtering process
since there are numerous listed smaller companies which will never reach profitability or a
credible business model. We focus only on high quality companies which for us means
having a diversified customer base, strong competitive advantages, a sensible growth
strategy, a strong track record of earnings growth and good visibility around future earnings
growth, and importantly, capable management who we are confident can execute on their
growth initiatives. While illiquidity can offer great value buying opportunities, we do not
want to be holding an illiquid company forever. Therefore, it is important that the investment
has a clear pathway to growing earnings or growing its market capitalisation in order to
attract a broader range of investor interest in the company. Fiducian is a great example of the
type of company we will invest in, and one that we expect will attract greater broker and
investor interest as it grows.
We are confident that applying a disciplined value investing strategy to this select universe of
smaller companies will lead to significant long term outperformance. We will continue to use
smaller company illiquidity to our clients’ advantage.
References:
http://www.investopedia.com/ask/answers/032615/how-do-risks-large-cap-stocks-differ-
risks-small-cap-stocks.asp
http://www.moneycrashers.com/small-micro-cap-stock-investing-definition-benefits-risks/
http://www.stern.nyu.edu/sites/default/files/assets/documents/con_043253.pdf
©TAMIM Asset Management 2017 25
PART 5 – Mitigating Risk in Small Cap Investing SUMMARY: The portfolio underlying the TAMIM Australian Equity Small Cap IMA's 75% out-
performance of the All Ords after fees since launch 18 months ago has been achieved by
investing in high quality, small, growing businesses trading at a significant discount to fair
value. In the interests of lifting the hood on the engine for the benefit of investors, we have
taken the opportunity to compile an analysis of the portfolio's risk profile by looking at the
portfolio's composition based upon stage in the business cycle, debt profile, fund cash levels
and industry exposures. We believe the results emphatically show the TAMIM Australian
Equity Small Cap IMA and underlying portfolio's performance has been achieved with a
relatively low risk profile, and both remain well positioned looking forward for the same
reasons.
TAMIM Australian Equity Small Cap IMA's Risk Analysis: (October, 2016)
Firstly, it is worth highlighting the key characteristics of the companies within the TAMIM
Australian Equity Small Cap IMA's investable universe of micro/small cap companies listed
on the ASX:
These numbers may be sobering for some: a massive 81% of ASX-listed micro caps
(market cap below $100m) are currently loss-making and 90% don’t pay a
dividend. The smaller companies’ universe is clearly dominated by unprofitable, non-
dividend paying companies with a strong weighting towards the resource and technology
companies – companies that we consider to be at the higher end of the risk spectrum.
The challenge for the TAMIM Australian Equity Small Cap IMA is to find, research and
ultimately invest in the relatively small number of small and micro-cap stocks which have
lower risk profiles. In our opinion, companies which are profitable with good visibility
around future earnings growth, and which also have strong balance sheets, offer a
significant opportunity for long term out-performance, particularly when you invest
whilst broader market awareness of these businesses is low or non-existent.
©TAMIM Asset Management 2017 26
As a result, despite the fact that the ASX small and micro-cap universe is dominated by high
risk, unprofitable companies, the TAMIM Australian Equity Small Cap IMA portfolio has
been constructed such that these risks have been substantially mitigated.
The following 4 analyses of portfolio risk should provide valuable insight into the TAMIM
Australian Equity Small Cap Individually Managed Account from a risk perspective:
1 - Cash Weighting
Why? Cash weighting is a clear portfolio risk input – a higher cash weighting indicates lower
risk and vice versa.
Observations: The TAMIM Australian Equity Small Cap Individually Managed Account will
generally carry a higher cash weighting than most funds reflecting our deep-held belief that
our clients will benefit if we are positioned to take advantage of future periods of stock price
volatility. There will be periods when “Mr Market” becomes overly emotional and will offer
our high conviction holdings at significant discounts to our opinion of fair value. We want to
be ready for this periods of volatility ahead of time. As a result, the IMA currently
(October, 2016) has a cash weighting of 22%. In terms of assessing the portfolio’s risk, this
relatively large cash weighting provides a risk buffer but we would argue this high cash
weighting is more important to generate performance upside than as a risk control.
Selecting the right stocks is a far more efficient risk control in our experience.
2 - Portfolio Categorised By Company Life Cycle
Why? We have divided the underlying portfolio into a number of categories to reflect where
each business is in the company life cycle, which in turn gives a guide (albeit subjective)
regarding the portfolio's risk profile at a stock level. The life cycle categories we have used
are:
1. Cash,
2. Dividend paying, growing profits,
3. Asset play,
4. Profitable, not dividend paying,
5. Loss-making, emerging, fully funded, and
6. Loss-making, emerging, not fully funded.
The risk profile of these different types of investments starts at very low (Cash) and
incrementally increases to very high (Loss-making, emerging, not fully funded). While
simplistic, we believe a company that has committed to paying dividends and which has high
visibility around future earnings can be classified as the most mature on the company life
cycle scale, and among the lowest risk of listed equity investments. Conversely, a loss
making, early stage business without sufficient funds to execute on its strategic initiatives is
among the highest risk of listed equity investments.
©TAMIM Asset Management 2017 27
TAMIM Australian Equity Small Cap IMA model – By Stage In The Business Cycle Profile:
Observations: With 61.6% of the underlying portfolio invested in dividend paying
companies which are growing their earnings and 22.4% in cash, 84.0% of the portfolio
can be categorised as low risk. Given our strategy is to invest in high quality businesses
which are under-valued, it is pleasing to see that the data confirms we are doing what we say
we are doing. The 61.6% exposure to companies which are paying dividends on the back of a
growing earnings base, and which have been purchased at low earnings multiples, is the
portfolio's core engine. These are the types of businesses we aim to get to know better than
the market, and this in depth stock knowledge is core to our risk control. We are always
questioning our assumptions and understanding of these businesses to ensure our conviction
levels are warranted.
The portfolio has 5% invested in asset based opportunities. These are businesses which we
also view as relatively low risk since we believe the value of their assets is significantly
higher than the current market cap. Having said that, asset plays often don’t have the benefit
of consistently positive earnings news-flow and are often dependent upon one large pay-off
asset sale scenario. These stocks are arguably higher risk than the earnings growth, dividend
payers as a result.
The underlying portfolio also has 11% invested in companies that are profitable but are not
yet paying dividends. We expect a significant portion of this 11% to migrate across to
become dividend paying in the coming year or so at which time the portfolio's risk profile
will further decrease.
The underlying portfolio has no exposure to loss-making companies whether they be
funded or unfunded. This implies the fund is actively avoiding the 81% of the sub
$100m market cap universe which is currently loss-making and thus arguably higher
risk. We believe this shows that the portfolio remains conservatively positioned in
companies at the low risk end of the spectrum and will remain so looking forward.
©TAMIM Asset Management 2017 28
3 - Portfolio Categorised By Debt Profile
Why? In our opinion a company’s balance sheet is a key input when assessing risk.
Companies with strong balance sheets carry far lower financial risk profiles than companies
with weak balance sheets. The reason is clear: debt-holders rank ahead of equity holders in
the event of financial distress; so the larger the queue of debt-holders, the less likely equity
holders will receive their funds in a worst case scenario. In addition, less debt means greater
financial flexibility and less exposure to interest rate cycles.
TAMIM Australian Equity Small Cap IMA model – By Debt Profile:
Observations: 48% of the underlying portfolio is invested in stocks with net cash surpluses
which is consistent with our objective of investing in high quality companies with strong
balance sheets. These companies carry far lower financial risk than highly geared companies.
30% of the underlying portfolio is invested in stocks with modest gearing levels.
And 22% of the portfolio is in cash as mentioned above.
The underlying portfolio has no positions in highly leveraged businesses. We view the
portfolio's overall financial risk as low and far lower than the broader smaller
companies’ universe.
4 - Portfolio Exposure By Industry Exposure
©TAMIM Asset Management 2017 29
Why? We believe looking at a fund’s sector weightings is another worthwhile way to make
sense of any industry related risks which may only become clear from a top-down
perspective.
TAMIM Australian Equity Small Cap IMA model – By Industry:
Observations: The portfolio’s sector exposures are: Healthcare 24%, Cash 22%,
Financials 21%, Consumer 10%, Property Services 8%, Manufacturing 6%,
Investment 5% and Technology 6%.
We view this as a well-diversified portfolio with a tilt towards defensive businesses.
It is worth noting that within each sector the stocks are generally quite different from one
another so it is sometimes misleading to generalise based upon sector classifications. For
example, Reverse Corp (ASX:REF) is classified as an Investment company whereas in reality
the company is building its position in the online contact lens market which is ultimately a
healthcare related activity.
CONCLUSION: The TAMIM Australian Equity Small Cap IMA’s risk profile is arguably lower than many
may assume reflecting the underlying fund’s focus on high quality businesses with strong
balance sheets, as well as our disciplined value investing approach. The portfolio remains
very heavily weighted to high quality businesses which are growing their earnings and paying
dividends, yet are trading on low multiples and often with net cash surpluses and excellent
management. We believe these conservative investment foundations put the portfolio in good
stead to continue its track record looking forward.
©TAMIM Asset Management 2017 30
PART 6 – The Correlation Beauty of Microcaps
SUMMARY:
We are often asked why micro cap funds tend to trade at such low correlations to the broader
market. With market correlations as low as 0.1 (or less), some micro cap funds could be
questioned regarding potential correlation data errors. However, the correlation data does not
lie. In our experience, market inefficiencies are widespread in the micro cap universe
reflecting low analyst research coverage, which in turn reflects the low commissions on offer
for trading in these relatively illiquid stocks. Correlations this low mean the vast majority of
stock movements in the micro cap universe are explained by stock specific factors rather than
market movements. This is great news from a micro cap investors’ perspective. It means you
can do the research on smaller companies knowing that if your investment case is correct, the
stock price is likely to move dramatically in your favour as new information is digested and
new investors are attracted to the stock. As long as you have an information advantage, the
risk- reward equation is decidedly in your favour.
INTRODUCTION: The quest for high returns with minimal correlation to the broader equity market leads many
investors to ask us why micro cap funds tend to trade at very low correlations to the broader
market. Equity investors are often heavily weighted towards the larger listed companies
where market correlations are generally on the high side, with most long only, large cap
funds having market correlations of between 0.5 and 1.0. When these same investors see
market correlations of under 0.1 for select Australian micro cap funds, they often wonder if
the data is correct. It is.
What does correlation data mean?
Many industry professionals tend to look at the R squared of the relationship between two
sets of data - in this case the performance of an investment fund and the performance of the
All Ords. The R squared number gives you the explanatory power of the relationship between
the two variables. For example, a large cap fund with a correlation (R squared) of 0.9 with
the All Ords means that the fund generally tracks the broader market up and down – 90% of
that fund’s historical performance can be explained by movements in the All Ords. Equally, a
micro cap fund with a correlation (R squared) of 0.1 with the All Ords means that the fund
performs independently of what the broader market is doing – only 10% of that fund’s
historical performance can be explained by All Ords movements. The reason so many
investors focus on correlation data is to gain an understanding of their exposure to equity
market movements, a key piece of information, particularly in volatile or falling markets. In
our experience, fund investors’ generally like to see good performance combined with low
market correlation.
©TAMIM Asset Management 2017 31
Low Analyst Coverage
Micro cap investing is a very different game from investing in large cap companies. In our
experience, market inefficiencies are widespread in the micro cap universe reflecting very
low analyst coverage, which in turn reflects the low commissions on offer for trading in these
relatively illiquid stocks:
As a result, we often meet with the management teams of fascinating, high quality micro cap
companies which the market is currently largely ignoring. In many cases there are no analysts
at all following these stocks. In our minds this spells opportunity.
This brings us to the correlation data. As the table below shows, the correlation of (global)
micro caps with the broader (relevant country) equity markets is far lower for micro caps than
it is for small caps or mid caps. The relationship between market cap and market efficiency is
clear. And interestingly, the data show there has been an increase in the correlation of micro
caps with the broader market over the past 20 years, albeit from a very low base. Small and
mid cap correlations have been more stable throughout this period.
Stock Specific Factors
Correlations this low mean the vast majority of stock movements in the micro cap universe
can be explained by stock specific factors rather than market movements. This is great news
from a micro cap investors’ perspective. It means you can do the research on smaller
©TAMIM Asset Management 2017 32
companies knowing that if your investment case is correct, the stock price is likely to move
dramatically in your favour as new information is digested and new investors are attracted to
the stock.
A recent example of this information advantage at play was seen in Intecq Limited
(ASX:ITQ), a micro cap gaming systems supplier which recently reported a half yearly result
well ahead of market expectations. The stock has since rallied by some 60%. When so few
people are watching, stock price movements following positive news-flow in illiquid, under-
followed companies can be significant. The picture is very different in the world of larger
company investing where there may be 10-20 or more analysts following a company. With
this level of scrutiny all the information released by the company will have been analysed
intensively by many intelligent and qualified analysts. The chances of this many analysts
missing something of real importance is far lower, and thus the market is far more likely to
be efficient at pricing in all the relevant information. This leaves larger companies more
exposed to market movements as the primary driver of stock performance.
The portfolio underlying the TAMIM Australian Equity Small Cap IMA (DMX Capital
Partners) has a correlation since launch (in April 2015) 17 months ago of only 0.17 with the
All Ordinaries Index (17% of performance to date can be explained by All Ords movements).
We expect it to remain on the low side since we focus on investing in cheap, undiscovered
stocks. Over the long term it seems prudent to assume that more investors will become
interested in micro cap investing given the superior risk-reward dynamic on offer at present.
However, it will be many decades before the considerable information advantage available to
micro cap investors is significantly eroded. In the meantime, we will continue to enjoy the
opportunities on offer.
©TAMIM Asset Management 2017 33
PART 7 – Investing in Family Companies
SUMMARY: Investing in family owned and run companies has been a lucrative strategy at TAMIM. In
this article we investigate why family companies on average tend to out-perform over the
long term.
INTRODUCTION:
In our experience there is no one magic formula which guarantees out-performance in every
scenario. However, over many years of working as a professional investor you notice clear
similarities and trends which generally hold true. One of these themes is that the share price
performance of family companies often seems to out-perform the broader market. And when
we had a look at the empirical evidence it emphatically supported our long-held belief….
“Founding families, kept in check
by an independent board, tend to exert a positive influence on
companies, particularly when the
founder remains actively involved in setting strategic direction.
Family-controlled groups are more inclined to have a long-
term perspective, a strong
corporate culture and conservative financial
management, all attributes conducive to long-term share
outperformance.”
- Financial Times,
1/12/13
“When we looked across business cycles from 1997 to 2009, we found that the average
long-term financial performance was higher for family businesses than for non-family
businesses in every country we examined.”
- Harvard Business Review
©TAMIM Asset Management 2017 34
WHY FAMILY COMPANIES TEND TO OUT-PERFORM:
“A CEO of a family-controlled firm may have financial incentives similar to those of chief
executives of nonfamily firms, but the familial obligation he or she feels will lead to very different
strategic choices. Executives of family businesses often invest with a 10- or 20-year horizon,
concentrating on what they can do now to benefit the next generation. They also tend to manage
their downside more than their upside, in contrast with most CEOs, who try to make their mark through outperformance.”
- Harvard Business Review
In our opinion, there are a number of clear reasons why family companies tend to out-
perform over the long term:
1. Family companies view each dollar as their own and are thus focused upon controlling
costs throughout the economic cycle.
“We do not spend more than we earn.” - Harvard Business Review, CEO interview
2. The same applies to capex budgets; family companies tend to be focused upon return
on investment and thus generate higher than average returns on investment over the long
term.
3. Family companies tend to like cash and dislike debt. By taking a very long term view
on their business and thinking about future generations’ wealth, these management teams
tend to be financially conservative which generally serves shareholders well over the long
term. It is very common to see family companies carry net cash surpluses on their balance
sheets.
4. Family companies tend to prioritise organic growth over acquisitive growth which
reduces the risk of large value destructive acquisitions.
“We don’t like big acquisitions—they represent too much integration risk, you may get the timing
wrong and invest just before a downturn, and more importantly, you may alter the culture and fabric of the corporation.”
- Harvard Business Review, CEO interview
5. Family companies think about long term, through the cycle returns which means they are
often involved in defensive, diversified business models, and are thus less exposed to
economic fluctuations.
6. Family companies tend to look after their staff and thus retain them far better than
competitors over the long term. By treating their employees like individuals rather than
numbers family companies offer significant non-monetary benefits for employees. It is
common to see family companies invest significantly in their employees through training
which highlights to employees that they are highly valued members of the team.
“Interestingly, family businesses generally don’t rely on financial incentives to increase retention.
Instead, they focus on creating a culture of commitment and purpose, avoiding layoffs during
downturns, promoting from within, and investing in people.”
- Harvard Business Review
©TAMIM Asset Management 2017 35
7. Family companies tend to have good track records of international expansion. This is
consistent with their preference for long term, organic growth; they are happy to start small in
new markets and to gradually build new geographic revenues step by step. This is a very
different approach to the large value-destructive acquisitions often attempted by non-family
management teams.
AND THE CHALLENGES OF INVESTING IN FAMILY COMPANIES: Being a minority shareholder in a family run company is however not without its challenges:
1. The founding family often exerts strong inter-generational management control. For
example, Westfield Corporation, 55 years after it was founded by Frank Lowy, continues to
be led by Frank’s sons, Steven and Peter. Rightly or wrongly there can be a perception of
nepotism in family companies - that family members are in these management positions due
to their surname rather than their ability.
2. Family companies are often also associated with a large number of related party
transactions – whether that be the leasing of properties owned by family members,
supply/purchase agreements with other family companies, and/or consultancy agreements
with certain family members. There can be a perception that the controlling family is
favoured in these transactions at the expense of non-family shareholders.
A strong board with genuinely independent directors is important to ensure that the
position of minority shareholders is appropriately considered. The combination of a
strong independent board and an experienced, driven family management team can
represent a powerful investment proposition.
AN EXAMPLE WITHIN THE TAMIM AUSTRALIAN EQUITY SMALL CAP IMA: We recently wrote about SDI (ASX: SDI) in
our emerging global leader series, and this is a
great example of a family company which is
well placed to out-perform by virtue of ticking
many of the above-mentioned family company
attributes:
- The company had been run by its founder Jeffrey Cheetham for some 40 years, whilst his
daughter Samantha Cheetham has been working as the Sales and Marketing Director in
recent years. Jeffrey retired on 30th June 2016 with Samantha taking over the CEO role. This
multi-year succession plan and CEO training path is common amongst family businesses and
often makes for a smooth transition between the family ranks.
©TAMIM Asset Management 2017 36
“SDI commenced operations in Jeffrey Cheetham’s garage, producing amalgam fillings
and selling the products direct to dentists. By 1975, the company had operations in New
Zealand, United States and Greece.”
- The Cheetham family have a 43% stake in the business
- SDI has a very strong balance sheet with almost no debt (3% gearing) and fully owns its
large manufacturing facility in Melbourne
- SDI is cautious when it comes to making acquisitions and has a track record of focusing
upon organic growth. There have been no large equity raisings or share issues that would
otherwise dilute the holding of the Cheetham family.
- SDI is involved in a relatively defensive market, dental products, where margins are high
and costs are well controlled.
- SDI has a strong track record of international expansion and in our opinion is an emerging
global leader in its market.
SDI is a well run, growing family-run company with strong fundamentals and attractive
valuation metrics, however its seven person board is very much controlled by Cheetham
family members and directors that are close to the company and/or family. Our view is
that there is an opportunity for SDI to become an even more compelling investment
through the appointment of strong, independent directors.
CONCLUSION:
Investing in family companies aligns with our strategy of investing in long term
overachieving companies which are largely unknown in the broader market. There are
compelling reasons why family companies tend to out-perform and we expect to see similar
out-performance on average looking forward.
References:
http://www.bain.com/publications/articles/founder-led-companies-outperform-the-rest-heres-
why-hbr.aspx
http://dmxcorporation.com.au/Investment_approach.html
https://www.ft.com/content/cd98f8a4-5756-11e3-b615-00144feabdc0
https://hbr.org/2012/11/what-you-can-learn-from-family-business
©TAMIM Asset Management 2017 37
Disclaimer:
The information provided should not be considered financial or investment advice and is general information intended only
for wholesale clients (as defined in the Corporations Act). The information presented does not take into account the
investment objectives, financial situation and advisory needs of any particular person nor does the information provided
constitute investment advice. Under no circumstances should investments be based solely on the information herein. You
should seek personal financial advice before making any financial or investment decisions. The value of an investment may
rise or fall with the changes in the market. Past performance is no guarantee of future returns. Investment returns are not
guaranteed as all investments carry risk. This statement relates to any claims made regarding past performance of any
TAMIM (or associated companies) products. TAMIM does not guarantee the accuracy of any information in this booklet,
including information provided by third parties. Information can change without notice and TAMIM will endeavour to
update this booklet as soon as practicable after changes. TAMIM Funds Management Pty Limited and CTSP Funds
Management Pty Ltd trading as TAMIM Asset Management and its related entities do not accept responsibility for any
inaccuracy or any actions taken in reliance upon this advice. All information provided in this booklet is correct at the time of
writing and is subject to change due to changes in legislation. Please contact TAMIM if you wish to confirm the currency of
any information in the booklet.