"The biggest risk for an investor is the people turnover. We are now invested in the business and that gives an increased level of confidence," Novaport portfolio manager Sinclair Currie said.
"There is also a better alignment of interest. For example, with capacity constraints, you can get more clients or you can make your clients a lot of money. As an equity owner in the business, it is better to make your clients a lot of money."
But even though the strategy has been around for over a decade, Currie said it was still early days for the fund as a boutique, which meant many asset consultants were still assessing the firm.
"Many of the gatekeepers are still in the process of getting to know us," he said.
Novaport was formed in 2010 when Challenger spun off its small-cap operations and sold 51 per cent to Alex Milton and Currie, who left ING Investment Management to take part in the buyout.
Milton and Currie each own 25.5 per cent of the business.
The fund currently has about $260 million in its small-cap fund and $30 million in its micro-cap strategy.
Traditionally, the small-cap sector has been a relatively under-researched area, but Currie said the space was becoming increasingly more crowded.
"Especially companies with a market cap between $500 million to $700 million are pretty well covered. But coverage is quickly dropping off towards the smaller end of the market," he said.
He also said the small-cap sector had become increasingly more sensitive towards market movements over the past 10 years as more resource stocks entered the sector index.
"It is true that small caps are higher beta, especially in resources, which are leveraged to macro issues, such as commodity prices," he said.
But he said the ASX Small Ordinaries Index, which is the benchmark for most small-cap funds, was a poor way of investing in the sector.
"What is the Small Ordinaries Index? You basically take the market minus that ASX 100 and whatever you have left over is small caps," he said.
"That is not why or how people invest in small caps; they invest in small caps because they believe that one day these companies will be large caps."
Novaport has a relatively concentrated portfolio of 25 to 45 stocks and has a substantial underweight to resources companies.
"The best way to invest in the sector is to find a handful of companies that are really well priced," Currie said.
The firm targets companies that, based on an estimation of a company's fair value, show a 50 per cent upside potential.
But Currie said that approach did restrict the capacity of the fund.
He said that, across the two strategies, the firm had a maximum capacity of about $800 million.