Eiger Capital’s Stephen Wood shares his investment process
This article was originally published on Reach Markets.
Eiger Capital has existed in its current form for a little over two years, but co-founder Stephen Wood and his team are no strangers to small cap funds management.
Mr Wood launched the business in 2019 alongside Victor Gomes and David Haddad – all three alumni of Swiss multinational investment bank UBS, where Mr Wood ran the $400 million Australian Small Companies fund from 2006 until his departure in April 2019.
Despite striking out on their own, Mr Wood said the three portfolio managers still run their new fund in a very similar manner to the fund they formerly managed for UBS.
Over the past decade and a half, Mr Wood and his team have refined their investment process and believe that investors need to be forward-thinking when choosing which companies to put their hard-earned money into.
The Eiger team includes two key stages in their investment process:
The first is the valuation system. Eiger uses a discounted cash flow model where a business’ performance is forecast out to the medium term (six years).
Mr Wood noted this is because longer forecasts become increasingly unreliable.
“[Six years is] long enough for you to start thinking about structural change and the development of the business. It’s not too long that it just becomes completely farcical,” he said.
“It really is all about an anchor to get you to think about what the business could be. We don’t kid ourselves that we know what’s going to happen in half a decade, but it’s about thinking about what a business could be, and is the management good enough to get it there.”
The second is a series of nine ‘small cap commandments’ – a series of rules developed by the team to help them better understand the potential of their prospective investments.
“They are – if you like – our qualitative experience factors,” Mr Wood said.
“The very best businesses, the ones that have formed the core of our portfolio over a long period of time score not only very highly on growth and their ability to generate excess returns, but if you run through those nine commandments they score incredibly well on those factors as well.”
Mr Wood pointed to commandment number 7 – Watch what management and board are doing, especially when they sell – as an example.
When senior management in a company begin selling off sizable portions of their shares in the business, it’s regularly followed a few months later by disappointing performance.
While this is not a guaranteed outcome Mr Wood said it can be a useful bellwether for investors, and worth considering when managing a portfolio.
Most of these commandments have been used by the team since their time with UBS, but Mr Wood noted the team is constantly seeking to improve their process and added the commandment relating to inside selling in 2019.
Mr Wood also noted that it will be “interesting to see” whether the exit from COVID will create the right combination of economic forces to trigger a return to inflationary conditions. “Governments and businesses could begin to focus on localisation and self-sufficiency following the pandemic’s exposure of the risks of globalisation. This combined with aggressive fiscal policy may cause prices to continue to rise”.