A Unique Approach to Small-Cap Investing: Quality Over Quantity

A distinctive strategy has emerged in small-cap stock picking, challenging conventional norms and delivering noteworthy success. Unlike many others, this approach combines a conservative allocation strategy with an absolute-return mindset.

Key Highlights:

1. Conservative Allocation: Bucking the trend, this strategy involves holding a substantial portion in short-term Treasury bills, reflecting a cautious stance on market conditions. Despite market fluctuations, the allocation of stocks has typically ranged from 10% to 20%.
2. Absolute-Return Focus: Prioritising the return on capital over the return on capital, the strategy places a premium on preserving capital and strategically holding cash until opportune investment moments arise.
3. Stock-Picking Prowess: Surprisingly, despite a conservative allocation, the approach’s stock picks consistently outperform small-cap indexes. Notably, the stocks achieved a 33% return in 2023, doubling the performance of small-cap benchmarks.
4. Quality Matters: A cautionary note is sounded against excessive bullishness on small caps overall. Emphasis is placed on quality over quantity, recognising that many small-cap stocks in indexes may be low-quality or high-risk.
5. Long-Term Performance: Since April 2019, the approach has delivered a total return of 41%, outshining the Russell 2000 small-cap index, which recorded a 31% increase over the same period.

Intriguingly, this unconventional approach challenges the separation of asset allocation and stock picking, harkening back to an era when absolute-return strategies were more commonplace. The success of this strategy suggests that, even in the volatile landscape of small-cap investing, an emphasis on quality and astute stock picking can yield significant returns.

Investors considering such an unconventional strategy should carefully assess their risk tolerance and align it with their long-term investment objectives. The focus on quality and adept stock-picking skills may be appealing, especially in managing market volatility and risks.