Is investing in micro caps and small caps all about taking a risk? 

Sinclair Currie, Principal and Co-Portfolio Manager

Many financial planners and investors think about risk like concentric circles.  

No fund manager will get fired for buying BHP or a top 20 stock. Taking on more risk, for some investors, is pushing out to the top 50 ASX listed stocks, and beyond that, moving into small cap funds and ultimately micro-cap funds.  

That’s not how we see it. If anything, we think there should be a higher overlay of conservatism when it comes to microcap investing because of things like liquidity risk. In the NovaPort Microcap Fund, we invest in companies we’re comfortable going home at night owning without worrying how much the US market may fall overnight.

We’re not stock market traders. We find companies with a compelling investment thesis, at an attractive valuation and take a five-year view, a bit like private equity does. And that’s why we stick with companies. 

The NovaPort Microcap Fund, during the global financial crisis – had been running since 2005 – and had no distressed capital raisings. 

There were more distressed raisings in the so-called Blue Chip 100 than there were in our micro fund. Our companies could fund their own growth ambitions. 

Many companies on the market couldn’t do that when liquidity dried up, be that during the global financial crisis or COVID. There are companies today that did well over the past three years because of liquidity, that can’t now fund their growth ambitions. 

Understanding risk introduces the notion of short termism.   Accepting risk is part of investing, but it needs to be considered in the medium to long term, not just on a quarterly basis. 

Short termism has seeped into investing over the past decade. Maybe it’s because of regulatory benchmarking, but it has become more pervasive. And it’s put fund managers on edge. But it isn’t necessarily good for investing. 

Short termism, liquidity, active investing and risk are very serious topics. Fund managers like NovaPort are stewards of people’s life savings. We take that very seriously. We care about the responsibility we have to look after people’s savings. 

This material has been prepared by NovaPort Capital Pty Limited (ABN 88 140 833 656 AFSL 385 329) (NovaPort), the investment manager of the NovaPort Smaller Companies Fund and the NovaPort Microcap Fund (Funds). Fidante Partners Limited ABN 94 002 835 592 AFSL 234668 (Fidante) is a member of the Challenger Limited group of companies (Challenger Group) and is the responsible entity of the Funds. Other than information which is identified as sourced from Fidante in relation to the Funds, Fidante is not responsible for the information in this material, including any statements of opinion. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable to your circumstances. The Fund’s Target Market Determination and Product Disclosure Statement (PDS) available at www.fidante.com should be considered before making a decision about whether to buy or hold units in the Funds. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Any projections are based on assumptions which we believe are reasonable but are subject to change and should not be relied upon. NovaPort and Fidante have entered into arrangements in connection with the distribution and administration of financial products to which this material relates. In connection with those arrangements, NovaPort and Fidante may receive remuneration or other benefits in respect of financial services provided by the parties. Fidante is not an authorised deposit-taking institution (ADI) for the purpose of the Banking Act 1959 (Cth), and its obligations do not represent deposits or liabilities of an ADI in the Challenger Group (Challenger ADI) and no Challenger ADI provides a guarantee or otherwise provides assurance in respect of the obligations of Fidante. Investments in the Fund(s) are subject to investment risk, including possible delays in repayment and loss of income or principal invested. Accordingly, the performance, the repayment of capital or any particular rate of return on your investments are not guaranteed by any member of the Challenger Group.