Our strategy is to focus on identifying 20-40 high quality investment opportunities taking a ‘bottom-up’ approach. With more than 1300 Australian listed companies with a market capitalisation between $5m and $500m, the hunting ground for absolute return focused and bottom-up investors is considerable. Due to their size and relatively low liquidity, these small companies often fall outside the investment universe of many investors, and are therefore more likely to be inefficiently priced. As a result of this mispricing, these small companies often represent compelling investment opportunities with attractive risk / reward characteristics.
To identify the most compelling of these opportunities for investment, we screen and continually monitor our investment universe, seeking to consolidate the opportunity set down to a broad watchlist of around 200 companies. Across the various attributes of business quality, management quality, growth potential, economic position, balance sheet strength, and durable competitive position, we seek to construct and manage a portfolio of the most compelling 20-40 ideas from our watchlist. In essence, our research-intensive process seeks to provide an attractive portfolio exposure to a carefully selected group of the most compelling opportunities in the smaller company universe.
We also believe an informational advantage may be obtained in the smaller company universe through conducting thorough due diligence and seeking greater understanding of these companies’ business models and market potential. This depth of research, together with our ability to take a long term perspective on a company’s prospects, gives us the confidence to invest in small companies where others may be reluctant.
We believe high quality smaller growing companies offer interesting potential as often-times their valuations can be quite undemanding. The impact on returns from the combination of strong growth in earnings, together with multiple expansion as others become aware of an emerging growth story, can be powerful. Whilst there is a strong focus on profitable, growing companies within the universe of interesting smaller companies that we assess and invest in, we consider a range of opportunities.
These can be broadly categorised thematically as:
Sometimes, an opportunity will exhibit attributes across the various thematic baskets, and our absolute return focused strategy and approach allows for all prospective opportunities to be considered.
Individual stock selection is a key part of our Investment Strategy. Equally important is how these individual opportunities are brought together in a portfolio context. We are acutely aware of risk and as part of its active risk management process continually monitor each holding and prospective holding for key risk and sensitivity variables. Through the portfolio construction and ongoing management process due consideration is given to the various correlations between fortunes of various portfolio components, and the need for appropriate portfolio diversification is emphasised. Bringing together a portfolio of companies with idiosyncratic risk profiles helps mitigate overall risk profile. And from an end client perspective, the team at DMX Asset Management are proud to deliver to clients a genuinely differentiated and unique portfolio exposure.