Look at quality before valuation

Chris Prunty

When we started the Ausbil MicroCap Fund in February 2010, we missed the bottom by about 12 months but in hindsight, it was still a fantastic time to start a smaller companies fund. Valuation multiples ranged from 8-12x PE and earnings were recovering so growth looked better than it does today. Fast-forward six years and earnings multiples are now in the high teens with growth as scarce as any time in the recent past. With the cash rate under 2%, it’s not hard to argue there’s plenty of scope to pay more for assets. Despite this, when approaching a new opportunity, we tend to think valuation should be one of the final, not first, steps in the investment process. First, you have to decide whether it’s a good business, whether management is capable, honest and aligned and what the future looks like for this business. If it’s a bad business with C-grade management or has a challenging outlook, we’d rather not play regardless of price.


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