How I find small-cap gems, and three favourite shares

TL;DR

Paul Marriage shares insights on how his team narrows down potential UK investments, the qualities they look for in businesses for their portfolio, and the impact of inflation and rising interest rates on smaller companies.

Transcript

hello and welcome to the latest in our insider interview video series today i have with me paul marriage who is manager of the telwave uk smaller companies fund paul thanks for joining us today well thanks for having me cole so paul there are thousands of uk companies for you to potentially invest in how do you narrow that down to an investable uni... Read More

Key Insights

• *️⃣ Paul Marriage's team narrows down potential investments by removing difficult and high-risk sectors, excluding non-UK companies, and avoiding micro caps.
• 👥 They use quant screens and meet with company management teams to select 60 stocks for their portfolio.
• 👀 Value-add products and effective management of inflationary costs are important qualities they look for in businesses.
• 😮 Rising interest rates have a minimal impact on smaller companies with healthier balance sheets.

Questions & Answers

Q: How does Paul Marriage's team narrow down potential investments in the UK market?

Paul Marriage's team narrows down their investment options by removing high-risk sectors, excluding non-UK companies listed in London, and avoiding micro caps. They also conduct quant screens and meet with company management teams to make final selections.

Q: What are the qualities and attributes Paul Marriage looks for in businesses to include in their portfolio?

Paul Marriage looks for two types of stocks: P3M stocks and value opportunity stocks. P3M stocks should have management ownership, market leadership in a niche, a differentiated product, and growth margins. Value opportunity stocks are established companies with good management that may need adjustments but have potential for growth.

Q: How does inflation influence Paul Marriage's investment decisions, and can you provide examples of stocks that can weather inflation?

Paul Marriage acknowledges that inflation affects all companies to some extent. They prefer companies with products that have high value to customers and can pass on inflationary costs through pricing. AB Dynamics is an example of a company that can weather inflation due to its ability to pass on costs and its value-added product. However, companies with thin margins may struggle with inflation.

Q: How do rising interest rates impact smaller companies, and have there been any changes to the portfolio in response?

Rising interest rates are less of an issue for small caps today compared to previous cycles because balance sheets are generally in better condition. Paul Marriage's team focuses on companies with low levels of debt compared to EBITDA. They have not made any significant changes to their portfolio in response to rising interest rates.

Summary & Key Takeaways

• Paul Marriage explains how his team narrows down potential investments, removing sectors that are difficult to understand and high risk.

• They focus on UK companies listed in London, preferably within reach for company visits, and exclude micro caps.

• The team screens for quant data and meets with company management teams to select 60 stocks for their portfolio.