This article is intended as a follow up to my recent article covering the 5 main criteria I consider when choosing an ASX small-cap fund. The funds I’ve selected for this article are focussed on small and micro sized ASX companies. Over the long term, I believe mis-pricing is greater amongst smaller stocks, so a good active fund manager has more potential to outperform if they can focus on smaller companies.
While I encourage you to read my 5 rules for selecting a managed fund, the key takeaways are that as an investor you are backing a human fund manager, not a funds management company. We must consider the amount of capital they have to manage and also the incentive structure they operate under. There are many good funds that are not on this list. In some instances, that’s simply because I was unable to get a good sense of whether the quantum of funds under management they have today is sufficiently similar to the quantum with which they have achieved strong past performance. If my knowledge increases, I might add new funds to this list.
I have no way of knowing which ASX Small-Cap Funds will outperform in the future. There are other fund managers I like that are not on this list. This selection is not the result of an exhaustive review of all the options. Rather, I have simply come to trust these teams as a result of my own winding path through life, and trust is of the utmost importance to me.
DMX Asset Management
DMX Asset Management has two funds; DMX Capital Partners Limited (DMXCP) and the DMX Australian Shares Fund (DMXASF).
DMXCP has returned 15.1% per annum since inception approximately 9 years ago and 17.3% per annum over the last 5 years. This is a stellar track record.
The much younger DMXASF has returned 6.3% per annum since inception, being March 2021.
Steven McCarthy runs DMXCP, Michael Haddad runs DMXAF, and Chris Steptoe assists both funds. I have very high confidence in the integrity of these guys, having known them for many years. They are very open to having their views tested, and the team shares detailed thoughts on its investments in its regular monthly updates. By way of disclosure, I have a small interest in DMX Asset Management.
DMX are small-cap and microcap specialists, and the two funds both have less than $25m total assets for a total of under $50m. On top of that they report their FUM every month to all investors which is best practice, in my view.
DMXCP has a low performance fee of 15%, but its benchmark is also (generally) lower than the other funds, being the 30 day BBSW Swap Rate. The management fee is 1% and the admin expenses are capped at 0.5%. DMXASF has slightly higher fees (capped at 1.5%) and a benchmark being the RBA Cash Rate plus 5%.
My family has an interest in both the DMXCP and DMXASF.
Maven Funds Management
The Maven Smaller Companies Fund is run by Matt Joass, a friend whom I often join on The “Baby Giants” podcast about ASX small-caps. I have had many discussions about investing with Matt, and have great admiration for his process, integrity and intentions.
The Maven fund has returned 9.2% per annum since inception in June 2020, solidly outperforming its benchmark, which is the ASX Small Ordinaries Accumulation Index.
Management fees and administration fees are low at 1.3% and performance fees are below industry standard at just under 18.96%.
The fund is currently below $100m in size leaving it room to grow before liquidity constraints would concern me.
As with DMX, Maven provides detailed transparency about the investments in the fund and also regularly discloses total funds under management, thus also achieving best practice in my view.
My family has an interest in the Maven Smaller Companies Fund.
MX Capital
The Millex Ethical Fund is run by Weimin Xie. I have had many chats about investing with Weimin and have full confidence in his integrity and process.
The fund has returned 13.3% per annum since inception in January 2018 and 10.3% per annum in the last 5 years.
Management and admin fees sit at 1.48% while performance fees are 20.5%. The benchmark is a 6% p.a. hurdle over the high water mark.
The fund is currently below $100m in size leaving it room to grow before liquidity constraints would concern me.
The Millex fund provides detailed transparency about the investments in the fund, and Weimin is always willing to update investors on the FUM, upon request.
My family has an interest in the Millex Ethical Fund.
Merewether Capital
The Merewether Capital Inception Fund is run by Luke Winchester, a fellow investor I have known for years and who uses a fundamental approach to selecting undervalued microcap stocks. I have full confidence in Luke’s integrity and process.
The fund has returned about -13.7% p.a. since inception in November 2021. While this might seem bad, it must be recalled that November 2021 was pretty much the peak of the market, and micro-cap stocks have simply not rebounded anywhere near as strongly as larger stocks, in the last year. While Luke’s style has been hampered by this reality, I have zero problem with a manager refraining from style drift, and his Strawman profile demonstrates how well that style can perform when capital starts flowing into the smallest companies.
Merewether management and admin fees are on the high side at 1.5% plus up to 0.5%, however this is to be expected while FUM is low. The performance fee is 20% over a hurdle rate that is 6% p.a. plus accrued management fees.
The fund is currently well under $20m in size, leaving ample room to grow, despite the liquidity limitations at the microcap end of the market, and Luke is happy to update investors on FUM at any time.
My family has an interest in the Merewether Capital Inception Fund.
Hayborough Investment Partners
The Hayborough Opportunities fund is the odd one out in this list because I don’t yet have any exposure to this fund. However, it is currently next on the list for when I have money available to allocate to a managed fund.
The fund is run by George Capozzi and Ben Rundle. Again, the fund is the odd one out because I don’t know much about Mr Rundle beyond his public publications. However, I have known George for quite a few years and had various exchanges with him about investing, including challenging his ideas. I have full confidence in his integrity and process.
The Hayborough Opportunities fund has returned 12.6% p.a. since inception in March 2021, and still has under $100m in funds under management, implying plenty of room to grow. The management fee is low at 1.25% and the performance fee is 20% above the benchmark S&P/ASX Small Ordinaries Accumulation Index.
While the fund does not regularly disclose FUM they are happy to keep investors updated on request.
A Reminder That Small Caps Are More Volatile
At the end of the day, these funds all have one thing in common which is that they focus on the smaller end of the market. Market pricing inefficiencies are generally more exaggerated at the smaller end of the market, meaning that an active manager who is ahead of the curve has more potential for outperformance. However, if they make too many mistakes, there is also more potential for underperformance. Furthermore, all of these funds are only suited to long term investors. I therefore only invest with the expectation returns could be volatile. In accordance with the long-term focussed style of the funds, I will largely judge performance over periods of at least 5 years.
Important note: the author has a direct or indirect interest in DMXCP, DMXASF, DMX Corporation, the Merewether Inception Fund, Millex Ethical Fund and Maven Smaller Companies Fund. Before making any investments read the Product Disclosure Statement (PDS) carefully and consult a financial adviser. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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