Background

The US is the world’s largest and deepest source of micro cap stocks, yet in 2012 Australian investors remained fascinated with local micro caps. Moreover, US micro caps offered the prospect of a far more scalable investment, with great scope for active managers to add value and the prospect of outsized returns.

Intrigued by this, Brookvine undertook a full market study to identify a top-tier US micro cap manager with whom to partner.

Challenge

Few, if any, Australian institutional or private wealth investors had an investment in US micro caps, even though the universe consisted of about half of all the publicly traded companies in the US. Critical to our success was: advocacy for the investment opportunity in US micro caps, identification of a strategy likely to provide a core (first step) exposure to the sub-asset class, and selection of a top tier manager who was both committed to the Australian and New Zealand markets and had sufficient capacity.

What Brookvine did

We sought a single strategy specialist with a dedicated team of at least 2 portfolio managers (to mitigate key person risk) and a team of analysts. The manager had to have at least 10-15 years’ experience investing across market cycles with a top-decile track record. Independent ownership, with adequate but not excessive AUM, was mandatory.

We sought a portfolio with breadth (75+ names) to mitigate heightened single company risk and an investment process that was attuned to the special challenges of micro cap investing. A stable and aligned base of existing family office and institutional clients was also key.

Thomson Horstmann & Bryant, Inc. (THB) ticked all the boxes. The firm had been investing in micro caps for more than 35 years. It was (and still is) 100% owned by staff, with a client base of 40% public pension funds, 30% endowment and 30% high net worth and retail investors. More than half of the current client assets have been with THB for more than 10 years.

THB offers a well-diversified exposure to c. 100 US micro cap stocks. It has a disciplined, market-tested investment strategy. It also has an active investment approach best designed to exploit the opportunity in micro caps. The firm is led by Christopher Cuesta, with the support of founding partner William Bryant Jr.. Christopher has been one of the lead Portfolio Managers since 2002.

THB and Brookvine agreed to partner in late 2013, and by February 2014 we had prepared detailed due diligence information, marketing collateral and a distribution plan in advance of THB’s first marketing trip to Australia. Many meetings and discussions with investors and their advisors preceded the first trip, and we soon identified leading candidates to seed the THB US Micro-Cap Fund, an Australian-registered Managed Investments Scheme.

The Outcome

In September 2014, Brookvine and THB launched the first Australian-domiciled US micro cap fund, THB US Micro Cap Fund. Brookvine secured an institutional seed investor, with Catholic Superannuation Fund awarding $90 million as the Fund’s first investment. Today the Fund has over A$275 million FUM.

Leveraging THB’s investment philosophy and approach, and its now 20-year track record in US micro cap, Brookvine and THB are now planning to launch the THB International Micro Cap Fund to Australian investors in September 2018. We have recently secured institutional and family office seed capital for the new fund.

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