With strong returns over the past 12 months, it’s easy to be drawn toward microcaps with the potential of overlooking the risks. Mason Willoughby-Thomas, Portfolio Manager of the Ausbil MicroCap Fund, shares three checks that he runs to reduce the risk of investing in potential portfolio bombs.
"One of the key issues for us is capital structure … For companies that have excessive levels of gearing we would see that as an initial red flag, particularly if the level of gearing was inappropriate for the nature of the business."
The impact is a reduction in the company's financial flexibility, which can mean even small disruptions can become major issues for the stock. In this short video he expands on this points and highlights two more red flags investors should have on their checklists.
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Good stuff Mason! I'd describe your list as Tier 1 criteria. When it comes to Micro's I also like to keep an eye on the composition and depth of the register as a whole for two reasons: external positioning in the business i.e. material accumulation or divestment and the potential for liquidity constraints to amplify price movement, which can be pronounced at this end of the market: both up and down.