Building on small-caps growth

Aubrey Capital Management is planning to launch a new fund based on its European mandate, which has outperformed following the post crisis recovery.

Sharon Bentley-Hamlyn, Aubrey Capital Management’s head of Research and investment manager, began to run a European mandate for an Italian institution in March 2008, but the start did not go exactly as expected. The mandate launched just before the financial crisis and, over the following year, it experienced a sharp drawdown. However, after this initial pitfall, Bentley-Hamlyn and her team of fund managers developed a track record throughout the following eight years, outperforming the benchmark in the last three years.

Mid-cap focus
Since inception at the end of March 2008, the fund – with €126m in assets under management – has delivered a return of 93.1% versus 60.6% for the benchmark and to build on the European mandate, Aubrey is now planning to launch a new fund. The fund is intended to be managed in an identical way to the mandate, with the aim of opening up the strategy to European investors. “We would like to start our own fund, which will mirror the existing fund, or perhaps feed into it, so third party investors can invest in this strategy,” Bentley-Hamlyn says.

Aubrey’s new fund aims to attract institutional and retail investors with a long term investment commitment – minimum three years and ideally over seven years. Similarly to the existing European mandate, the strategy will target the mid-cap space to pick up growthstocks, providing diversification over, for instance, ETFs holding stocks of big industries, Bentley-Hamlyn explains.

The portfolio of Aubrey’s European mandate gives exposure predominantly to mid-caps in the range of €1bn to €10bn, focusing on high quality growth stocks with defensive characteristics – strong cash flow and self-financing. Following the so-called ‘Wealth Cycle’ investment philosophy, Aubrey’s team analyses the steps that a country goes through as its economy matures, in order to find the companies that will be at the sweet spot of the development of their country. In Europe, there are about 3,000 relevant quoted companies.

Once the ‘Wealth Cycle’ filters are applied and forecasts of financial metrics are completed, the mid-cap universe is reduced to a focus list of 150-200 stocks, of which a portfolio of 30-50 stocks are finally selected, BentleyHamlyn explains. “In the context of the European fund, we are typically much more biased towards innovation, and economic maturity segments,” she notes. One of the stocks held in the European fund is UK-based IT security provider Sophos which is growing at over twice the market rate – the company believes it can double sales over the next five years – and is taking share rapidly in the mid-market segment. Bentley-Hamlyn also highlights the attractiveness of infrastructure to offer higher yields.

“Global infrastructure is quite an important theme in the portfolio, and comprises both infrastructure in new countries and the development of existing infrastructure in the West,” she says. A UK-based niche infrastructure products manufacturer, Hill & Smith, is within the fund’s top 10 holdings. The firm’s appeal is in its strong position in the UK market, as well as its growing position in the fragmented US market, while it is pushing into emerging markets especially in India.

Growth stock investors
Bentley-Hamlyn highlights the team’s focus on picking stocks with robust growth and strong profitability and equity – selected stocks must be capable of delivering a return on equity of 15% per annum. “When I started my career in M&A, I could see that it was very much driven by the need to make deals but actually if you looked in later years how these M&A had gone, they didn’t really deliver much value for shareholders,” Bentley-Hamlyn says.

“It’s much better to find a business that can do something so clever that it can generate a high margin and it can grow through the cash it produces itself. We much prefer to invest in companies with a strong self-financed organic growth strategy rather than one’s financing acquired growth through debt.”

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