Datt Capital said that the market is well placed to uncover alpha in the small cap sector, with the new fund set to launch in July.
Emanuel Datt, chief investment officer at Datt Capital, said: “Listed small caps were sold down heavily in calendar 2022, falling more than 20 per cent. So, we believe there now are good opportunities to acquire sustainable businesses across various industry sectors where the upside potential far outweighs the downside risk”.
“Many of these small caps, which offer investors access to earlier-stage, higher-growth businesses, are currently trading on single-digit earnings multiples, and, as such, present a compelling investment story.
“It is significant that the Future Fund has publicly declared it is increasing its exposure to small-caps exposure via active managers.”
He said that although small-cap investments carry more risks than large-cap stocks, research supports the idea that a small-cap premium can offer outsized alpha.
“The small-cap market is often less efficient than its large-cap counterpart, providing a higher probability of uncovering alpha due to limited analyst and investor attention,” Mr Datt said.
He added that an end to the low interest rate environment has demonstrated the value of active managers.
“In this investment environment, active investment managers come to the fore by making decisions based on fundamental analysis, aiming to add value by identifying undervalued or overvalued securities,” Mr Datt said.
“This approach emphasises the importance of investor skill and the opportunities presented by market volatility and varied returns.”
The CIO said that Datt Capital’s new small cap fund will target early-stage investors and build on the track record of its Absolute Return Fund.
“To maximise the chances of capturing alpha, we consider diversification, risk management, trading costs, the benefits of active management, research and monitoring,” Mr Datt said.
“Diversification applies various investment strategies, including value, growth, momentum, and quality-based approaches. It also continually evaluates the market to identify promising growth sectors or those facing challenges. Risk management ensures an awareness of stocks with higher volatility, lower liquidity, and greater delisting probability.
“We place a premium on reducing trading costs, adopt an active management approach to exploit mispricing opportunities, while our research and monitoring ensures we remain informed about industry trends, market developments, and individual company performance.”