A highly specialised fund investing in very small, growing companies capitalised at less than £50m. Think of this as our “nursery”! This fund aims to deliver progressive long-term capital growth with no income.
Of the four funds that we manage, two have an income bias and two a growth orientation. Chelverton Growth Trust is by far the smallest at just £5m and is all about seeking out growth opportunities. Its area of operation is the very smallest companies in the market, with a capitalisation of less than £50m, so called “micro caps”. Not surprisingly, given the inherent risks, very few other fund managers operate in this area, which provides ample opportunity. The portfolio is very concentrated with the top six holdings representing 60% of the total, and more than half of the fund is held in unquoted stocks.
All our funds share the belief that the market pays scant attention to smaller companies, for reasons of economic viability within brokerage houses, and that it is, therefore, possible to find good investments at the wrong price, which have been overlooked.
We like sensible, pragmatic management teams who share a long-term vision of what the company can reasonably achieve, and we are prepared to be patient. Being an investment trust, it is not subject to daily inflows and withdrawals, so we are not forced to sell any of the investments. This freedom allows us take meaningful stakes in these very small companies.
All Chelverton managed funds share the same quantitative screening process which has been designed to identify certain characteristics which we deem desirable in any company. These include the ability to convert 75% of operating profit in to free cash flow, from gross margins which are higher than 20%. We also favour companies that have little debt or working capital requirement.
Where this fund differs from our others is its ability to invest in unquoted stocks. Lead Fund Manager, David Horner, has 30 years’ experience of investing in very small quoted and unquoted companies. He established Chelverton in 1998 to concentrate on this part of the market.
We run the same tests on these companies as we do on quoted ones, but the key to success in this part of the market is the strength and experience of the management teams. We engage with them and provide experience support and advice to help them achieve their objectives. Whilst this is time consuming, the potential rewards justify this detailed work.