Nick Dignam from Fortitude Investment Partners shares insights with Lachlan Maddock from Fortitude Investment Partners on how a diversified portfolio in mid-market private equity is structured. The Inside Adviser
The world of alternative investments is at a crossroads. As markets defy expectations and liquidity concerns take centre stage, investors find themselves forced to rethink how they deploy capital in an increasingly complex environment.
Franklin Templeton opens global small caps to Australian investors
Despite being among the top performing asset classes over the last 12 months, and longer term for that matter, the ability for financial advisers to access the global smaller companies’ sector has been limited at best.
The options are, however, beginning to improve, with the launch of New York-based Royce Investment Partners by Franklin Templeton, one of Australia’s leading investment managers. Royce Investment Partners is a rarity in that 99% of the US$17 billion in assets they manage are in small caps alone.
Comparatively, many smaller company strategies are borne out of existing global equity teams, potentially lacking the knowledge and expertise required to excel in this under researched sector. As expected, the Royce Global Small-Cap Premier Fund, is an actively managed, core strategy, that is driven by fundamental research.
Momentum has been among the most powerful drivers of returns in recent years, but with signs of this beginning to slow, quality is once again in focus; something that is core to the Royce investment philosophy. According to management, the group seeks to find high quality business with three key differentiators.
The first is ‘exceptional franchises’ or those companies with ‘durable competitive advantages operating in favourable industry ecosystems’. The use and allocation of shareholder capital is another key due diligence focus, with the Portfolio Managers, including Chuck Royce, seeking to invest in those companies with ‘histories of disciplined capital allocation’. Finally, it is those with ‘attractive reinvestment prospects’ that are able and willing to invest back into their own companies to generate higher returns.
Matthew Harrison, Managing Director, points to this focus as a reason behind the launch, noting “Royce has developed unparalleled knowledge and experience gained through more than four decades of investing”.
The fund will invest in a portfolio of between 60 and 85 companies, excluding those listed on the ASX, whilst targeting returns that exceed the MSCI All Country World Small Cap index. According to Royce “Small cap stocks have historically outperformed large caps over the long term and have often done particularly well when economies are expanding” suggesting today’s backdrop is a positive one.
For those wary of the incredible rally in smaller companies since the depths of 2020 he points to the associated strength in earnings “with a majority of companies reporting that they beat expectations and/or beat on the top line.” This is likely to be supported by ‘considerable pent up demand’ with little concern about the ‘inflation threat’ saying “small-cap businesses are generally nimbler than their larger peers and can adjust more easily to inflation.”
Founded in 1972, Royce Investment Partners is headquartered in New York. The firm employs 33 investment professionals and has US$17.6 billion in funds under management. In 2001, it became an affiliate of Legg Mason, which is now part of Franklin Templeton.
