In Hench’s view, investing in small caps is more about individuals making a difference than when investing up the cap scale.
“Unlike big companies where there can be lots of people qualified to move up and take open spots, if a small company loses a head of research or head of marketing, it is a big issue. When you meet these people you know you are getting a good sense of what the company is like. What we really like are people who have come through difficult cycles and achieved turnarounds at other places in the past.”
While individual stock picks are what really matters most, Hench does not shy away from talking about sector plays and the themes behind the make-up of his funds.
“Our most successful play right now in the fund is in the non-residential construction sector. A lot of it is work that had been delayed because of the financial crisis.
“If you look across the US both the public and private sectors are spending, non-residential building in smaller cities is pretty strong, not just the big cities and we finally have a highway bill. There are everything from companies that make cement and floor tiles to copper wire and steel companies.”
Hench notes that while some of the homebuilders look cheap, the real value is in the component companies rather than the actual construction companies.
“We love technology,” he adds. “We tend to have a heavy weighting to the sector. We like things like semiconductor manufacturers and chip makers for the auto industry.
“If you make things that go into cars you are dealing with much longer life cycles and lower volumes, so you get longer contracts versus things such as mobile phones. Component makers that benefit from unit volume are what we tend to focus on.”
“Cyber security is an area we have recently invested in,” Hench says. “Spending in this area is only going up regardless of who wins on the political side [in the US elections]. Other non-munitions defence companies are an interesting part of the market for us too,” he adds.
“We do not do biotech. We like companies that have a lot of revenue and low price to revenue, which few biotech companies offer. What we are really looking to do is buy things with a lot of sales but not much profit, so when they fix their operation they get a margin.”
Apart from biotech, another area Hench is avoiding is banking, having done well from the sector over recent years.
