“I am very bottom-up. What I get excited about is companies and the investment, that’s what I value,” says Bullas. “All through my 17 years’ experience, where I’ve been able to add the value, and what I think is advantageous for clients, is getting out on the road, doing the work trying to find companies rather than taking a macro view.
“We are macro aware but I am not an economic forecaster, so I’m not sat there trying to work out what interest rates are going to do. I try to be more productive and believe that, whatever the conditions, I can find between 40 and 50 good small caps trading on reasonable ratings that should be able to deliver outperformance.”
Bullas is wary of investing in anything too small and avoids the early-stage companies that depend on seed funding or those which return “cap in hand” every six to 12 months asking for more cash.
“I like companies that are primarily profitable; I don’t have any companies in the fund that are not making money at all,” he says. “I like to wait for them to develop a track record, get some one- or two-year accounts under their belt and demonstrate that the business has scale and longevity. I wait for the risk curve to tip in our favour.”
Bullas admits that adopting this approach does mean sometimes the fund misses out on very strong returns early on. However, he adds, that is the riskier phase so he would rather wait, miss a bit of the upside and be more sure of it in the end.
“The company has to have a strong balance sheet. We spend a lot of time looking at balance sheets and in small cap you meet an array of businesses that are too over-leveraged and have too much debt,” he says.
“In all my years of dealing with small cap, I believe that is one of the killers of a business. Too much leverage going into a downturn can destroy a business as there is a risk of permanent loss of capital. You can lose an awful lot, hence why we stay away from over-leveraged companies and focus on those with an appropriate capital structure.”
While the uncertain macro environment, “perpetuated by Brexit”, means Bullas has concerns about a drop-off in confidence, his passion for small-cap investing has not waned.
“I think small caps should be a part of most people’s portfolios. Longer term, small caps outperform the market because of the growth potential,” he says.
“If you are seeking outperformance you should be looking at small caps. People sometimes think a bit too short term but investing in small caps means you are investing in companies with a three to five-year view, and you have to be patient.”
Patience is indeed a virtue and if anyone should know, it’s Bullas.
