Investing in microcap stocks can be a useful strategy as part of a well diversified portfolio, but it’s important to know what to look for. George Ensor, Fund Manager of River & Mercantile UK Micro Cap, shares his insights on what to keep in mind when investing in these stocks.
The R&M UK Micro Cap Investment Company was launched in 2014 and aims to achieve long term capital growth from investing in a diverse portfolio of companies which will typically have a free float market capitalisation of less than £100m.
Compound high growth and high return
The trust’s investment strategy is to find relatively early-stage growth businesses that are too small for institutional capital. The aim, Ensor says, is then to “own them and compound the high growth or high return on capital, and preferably both”.
As those businesses compound that revenue growth and returns, they can push through the £100m and then the £200 market cap thresholds. In time, their growth makes them more investable for the institutional small cap sector, which often results in a rerating of their shares.
Independent research in the micro cap sector is scarce. Ensor says micro caps typically have in-house brokers, who will write a couple of pages of research “focusing on the positives”. R&M’s conviction investing style is based on their own research, using a quant system and building models to generate ideas and select candidates for further investigation.
Podcast: Fund Manager George Ensor talks about Investing in Microcap Stocks
How to invest in the River & Mercantile UK Micro Cap Investment Trust
The River & Mercantile UK Micro Cap is available on the platforms of all major UK brokers. You can find a comprehensive list of brokers here.