We believe that Australian small companies offer attractive opportunities to generate long-term wealth. We look to identify these companies through a rigorous investment process.
The small companies sector is often under researched and can provide a high number of investment opportunities. In addition, it can offer:
- growth rates that are generally more attractive than larger companies
- industry exposures that are often not available in the large cap space, and
- attractive valuation fundamentals compared to larger companies
Equity markets do a reasonable job of estimating the underlying value of a company over the medium-to-long term, however there are times when share prices do not accurately reflect the inherent worth of a business. We look to take advantage of these valuation anomalies through a structured investment process that has a history of generating attractive long term tax effective returns.
The investment process emphasises intensive research of each company in which we invest. Celeste has an extensive company visitation program, with hundreds of company interactions annually. Our fundamental assessment process is focussed on:
- business model – considering durability, predictability, complexity, return history
- people – specifically board and management, understanding their track record as stewards of capital
- accounting quality – whether the accounts best reflect the inherent economics of the business and if they are stated in an aggressive or conservative manner
- valuation – using the most appropriate valuation methodology to understand what is it’s worth if we are right, and how much is at risk
The investment process is applied with a view to generating returns over the medium to longer term. We will make investments only once the downside risk is understood, and the potential for positive returns is defined and meaningful.