Ten questions with QVG Capital portfolio manager Chris Prunty:
What’s your company name and job title?
QVG Capital. Portfolio Manager. I run the QVG Opportunities Fund – a best ideas small companies fund – with my colleague and QVG co-founder Tony Waters.
How would you explain your job to someone who knows nothing about markets or investing?
A successful fund manager is part accountant, part detective and part psychic. You need to understand the language of business – numbers – but to make money you really need have insights that other people don’t have, the Detective part, and be able to use that information to make accurate predictions, the Psychic part, about the future success or otherwise of individual companies.
What skills and personality traits make a good portfolio manager?
The best fund managers are competitive, obsessive, curious and analytical. The best blokes have these qualities but are also humble (every decision is a mistake; even if it goes up you should have bought more and if it goes down you shouldn’t have bought any!) and understand there are no short-cuts; it takes years to build a reputation and only one decision to tarnish it. John Murray at Perennial Value once told a younger, more handsome version of me that Funds Management is a marathon not a sprint. He’s right but I’d say it’s a marathon where you’re sprinting the whole way!
Which stock market trend are you following closely, and why?
The carnage in retail and fears around the Amazon monster has thrown up a few opportunities. I also think the increase in passive flows tracking, say the ASX200, has thrown up a few distortions in pricing. Midcap growth stocks look very frothy for example.
Which ASX sector is most likely to boom and why?
Technology is a perennial favourite of ours but I’d be spending a bit of time on sectors that are hated but where you can find individual stocks that are bucking the trend. Retail and traditional media are two examples.
What three things do you look for when investing in a company?
The hint’s in our name; Quality, Value and Growth! Most top 100 stocks are either value or growth but it’s rare to find a growth stock at a value price. We think that’s less true the further down the market cap spectrum you go; it’s one of the reason we love small caps.
What’s an important lesson you’ve learned when investing in small cap companies?
Cut your losses. When the fundamentals and the share price deteriorate together that’s as good a signal as any to get out and reinvest your capital in to something that’s working.
What small cap stock picks are you most proud of?
Altium has been our biggest winner through time. The trick was holding it for several years and not getting off the story too early; easier said than done.
Did you ever make a bad investment or stock pick? What happened and what did you learn?
The biggest mistakes were missing the ones that were in our sweet spot and met our QVG framework. We should have owned Dominos and Magellan but they always looked too expensive to us. The lesson there was you need to look at the valuation relative to the growth and not just make one decision on a stock; keep revisiting it if it’s working.
What’s a common mistake among investors when investing in small cap stocks?
Punting! People treat smaller listed companies as an alternative form of gambling but buying explorers, biotechs and concept stocks doesn’t work. I encourage to do exactly what they do when they look at large cap stocks just apply the same disciplines to smaller companies.
Typically you can still find real businesses, i.e. those making money, at lower multiples of earnings with higher returns on capital, better balance sheets and higher growth in the smaller space. The payoff for these superior characteristics is the volatility caused by lower liquidity – which investors in this space need to fortify themselves against – and more business model risk as smaller companies are less durable due to lack of revenue diversity. These risks are best mitigated via diversification or leaving it to the professionals.
Which book should everyone read, and why?
I find it hard to mention just one. My wife is waging a war on ‘physical media’ in our house so she wants me to throw out the wall of investment books I have. I think anything by Joel Greenblatt is a must read and if you can get a hold of his Columbia Business School class notes they’re gold.
QVG Capital is a boutique investment management company specialising in Australian smaller companies managing funds on behalf of high net worth individuals and institutions.
QVG Capital was established in June 2017 by Tony Waters and Chris Prunty. QVG is the culmination of Tony and Chris’s decades of experience specialising small company equities having worked with one another on three previous occasions.
They first met as analysts at institutional stockbroker CCZ Equities, then were part of the Small Companies team at Investors Mutual Limited before running the Ausbil Micro Cap Fund from 2010 to April 2017.
More information: www.qvgcapital.com.au
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.