The fund principally invests in the equities of Australian and New Zealand companies listed on the ASX or NZX that reside outside the S&P/ASX 200 index and some cash. The cash weight may range from 0-50% of the portfolio valuation at different points in time.
The Eley Griffiths Group philosophy centres around a belief in stock picking through a disciplined stock selection process and using the experience of its investment team to help identify information inefficiencies.
The manager employs risk controls at the company analysis level (via detailed modeling of publically available accounts and management discussions) as well as at the portfolio level. At the portfolio construction stage a number of limits apply to any given investment or allocation. A practical minimum and safe maximum bet size are adhered to as are limits on the % of a company’s issued capital that can be held. This addresses the importance of tradable liquidity when investing in this class of equity.
Investee companies must be quit within 3 months of their inclusion in the S&P/ASX 200 index, ensuring the portfolio is recycled and focused on the next emergent story. The allocated cash weighting will also reflect the managers view of prevailing valuations and market health.
Existing investors in the EGG Small Companies Fund will instantly recognize that similar elements of their investment process have been incorporated in the EGG Emerging Companies Fund. This is intentional, with several important refinements being made to reflect the nascent stage of these companies.
The investment process involves a stock scoring system across the emerging companies universe, with the highest scoring stocks entering the portfolio.
The stock scoring process incorporates quantitative inputs, using EGG’s traditional ‘growth-at-a-reasonable-price’ metric for assessing earnings per share/PE relativities. Additionally, the emerging company screening incorporates an ‘enterprise-value/Revenue’ ratio to augment the scoring of companies that are growing revenues but are yet to report positive earnings.
The qualitative process involves assessing company management, their alignment with shareholders, the industry structure in which they operate and our assessment of the TAM, or total addressable market. Additionally, the emerging companies fund seeks to derive whether the aspiring investment candidate is cashflow positive and whether its growth trajectory is organically sourced or simply one driven by ‘roll-ups’ or acquisitions.
The total score is then used to determine whether a stock is to be included in the portfolio and if so, what weighting it receives. The manager also has discretion to apply a limited tactical shift to the core portfolio position to generate value from factors that cannot be easily incorporated in the investment process.
The EGG Emerging Companies Fund’s modus operandi is to identify and invest in companies most likely smaller (in market cap, P&L and balance sheet terms) and at an earlier stage of development than the EGG Small Companies Fund. From time to time there will be shareholdings common to both investment funds.