Everyone needs a small cap in their portfolio says expert Michael Glennon
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Don’t bet the house, but everyone should have some money in Aussie small caps, says Michael Glennon, founder of Glennon Capital.
What is the appeal of ASX small caps?
There has always been a lot of people doing small caps, people might say that interest has piqued more recently but it is really that there are now more companies in the area.
Honestly, I think small caps are sexy – I think looking at the likes of BHP or NAB for 20 years doesn’t really have much appeal.
On the contrary, small caps are constantly changing, they either get bigger or they go broke and then get relisted. Over time, you end up with huge IP of companies and the stories of where they have come from.
There is a trend to have international shares in your portfolio but everyone needs a small cap.
Australians in particular are quite entrepreneurial – historically we have the likes of Domino’s and CSL which have grown incredibly large from small beginnings. If you don’t have those in your portfolio you are missing out.
I’d rather have my money here in Aussie small caps and think that it speaks more than someone who says they have the competitive advantage overseas but is sitting on Macquarie St in Sydney.
What factors make a good small cap investment?
The biggest thing we look for is the quality of management – people are what drives the business after all. Once we have a level of satisfaction with that, then we can move forward.
I like always to know that the people running the show have some kind of skin in the game. I want them to be incentivised in the right way and passionate about the success of the company, not just there to take home a salary.
What do you look out for?
There are a number of mining services companies who have recently had profit downgrades which are really attractive and can provide opportunities for investors. The short term negative sentiment has seen some trading at half they were trading 12 months ago, but all that has changed is the investor sentiment.
We are always on the lookout for fallen angels, the companies that have had small profit downgrades that have made for disproportionate downgrades in the market. Now is the best time to buy them at a good price even though it might take a couple of years to come through.
I think National Vet Care (ASX: NVL) is going to grow significantly over the next couple of years and businesses like Alliance Aviation (ASX: AQZ) and (ASX: CGR) are well poise.
If you are looking for something a bit riskier, the cash flow in Shine Corporate (ASX: SHJ) is attractive.
Any tips for investors looking to move into small caps?
Michael founded Glennon Capital to offer specialist small company investment management to high net worth individuals and family offices, as well as through selective platforms for clients with less than $1 million to invest in our portfolios.
GC1’s Initial Public Offering was completed in August 2015 and is now a listed investment company that is traded on the Australian Stock Exchange (ASX). We are proud to be recognised for co-investing with clients in all portfolios – an important feature which ensures that our values and principles are aligned with those of our clients.