Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Capital H Management founder and chief executive Harley Grosser reveals a pair of small-cap ASX shares his funds are loving at the moment.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Harley Grosser: Capital H is a small- and micro-cap specialist. We have two funds at Capital H, both of which are small-cap focused.
Inception Fund is our flagship fund. The focus is on investing in undervalued quality growing companies with good quality management teams. And we take high-conviction positions in that fund and generated comfortably north of 30% per annum after fees now for the almost 4 years it's been running.
The active fund is our second fund. We started that in March of last year and the strategy there is to focus on finding companies that we can add value to i.e. being active in. So there's various ways we can do that, but generally, it's in a friendly activist style. That's our fund that we allocate any investment positions that we think we can be active in the company to add value for shareholders.
Biggest convictions
MF: What are your two biggest holdings?
HG: I thought I'd give you one of each — largest holding in each fund.
So Inception Fund's largest holding is Environmental Group Ltd (ASX: EGL). It's actually been listed on the ASX since the 1970s, so it's been around for a long time.
We just think that its time has come. A bit of a cliche, but we think that's true.
So EGL's portfolio businesses are involved in, basically, protection of the environment — things like improving air quality, reducing carbon emissions and removing waste. So of those core businesses, we think they'll do around $4 million of EBIT this year, which we think is positive.
It is a growing cash flow positive business, but what's most exciting for EGL is their PFAS removal technology.
We actually got out to visit their plant in Melbourne earlier this year. They released their first order of trial results late last year in December, which the market viewed as very positive. And on the site visit, I think we were most impressed just by the simplicity of the technology, which we think improves their odds of successful commercialisation.
Then most importantly, the management team is A grade. They've done it before at Tox Free — a lot of the institutional fund managers know of [chief executive] Jason [Dixon] and his team, and the stock looks good value to us. So we'd expect it to do well this year.
MF: It was listed in the 1970s?
HG: It actually listed in 1977. It was founded, I think, in the 1920s.
It's funny how often that happens in micro caps though. Companies list a long time ago, then they reinvent themselves. They go nowhere then it's sort of their time.
For a company that focuses on improving the quality of the environment in a number of different ways, it's pretty easy to see that now is kind of their time.
MF: And the biggest holding in the active fund?
HG: So the biggest position in the active fund is a company called ARC Funds Ltd (ASX: ARC). For this one, I do need to disclose I'm the managing director. We sit on the board.
So ARC Funds are a listed multi-affiliate boutique funds management group. So think like Pinnacle Investment Management Group Ltd (ASX: PNI), but a smaller version.
We take equity stakes in emerging funds management talent, and then we provide them with the infrastructure, the services and the distribution that they need to succeed to build these successful growing profitable funds management businesses.
We actually released on the ASX this morning an update that Magnum Funds, which our fixed income manager had secured $35 million of commitments for, it's soon to be launched [as an] active ETF.
And our other manager, Merewether, launched their fund in November last year. [It] has raised about $5 million of funds and has performed very strongly over the last few months, which was a pretty rough few months for equity investors.
We've got an exciting pipeline there of new managers and products — and we think it should be, if we do our job right, it should be a good year.
