There’s always a bull market somewhere

**James Marlay** (0:05)
Today, on the Rules of Investing podcast, I'm speaking with Joel Fleming, Portfolio Manager at Yarra Capital.
And we're gonna go foraging in the unexplored part of the Australian market. We're talking micro caps. And while there is a broad perception that bigger equals safer, it might surprise investors to know that the Emerging Companies Index has delivered 36% returns over the past 12 months, easily outpacing the ASX 200 Now Joel's been investing in this part of the market since 2014 and the UBS Micro Cap Fund, which he manages, has delivered over 14% per annum over that time.
My name is James Marlay and this podcast is brought to you by Livewire Markets. Joel, welcome to The Rules of Investing and great to catch up.

**Joel Fleming** (0:49)
Good to be here.

**James Marlay** (0:50)
Alrighty. Now when we talk small cap and micro cap investing, there is a world of different perceptions amongst our audience and readerships around what's small, what's big. So define for us, what is a micro cap and what does the universe of stocks look like for people here in Australia?

**Joel Fleming** (1:09)
Absolutely. And I mean, people define it differently. The way that we look at it, sub $250 million market cap, not free float, just pure market cap. And the reason we did that, I've worked with a lot of fantastic small cap investors in my time, but that's become a pretty crowded sandpit in terms of a lot of people chasing that really attractive part of the market. And for us, that idea of sitting next to a small cap fund, but looking at a different part of the market, smaller part of the market, potentially less liquidity and things is the trade off.
That's why it's attractive to us, because you're fishing in a very, very different basket from the well understood small cap part of the market. Why is it interesting? It's that inefficiency, right? These stocks exist, there's not that professional lens on them, there's not that level of reporting through the business press.
And there is just so much choice within that. So businesses of all types, all industries, they span the whole spectrum of the economy. And it's one where there's just not a lot of other people looking at this. So for us, inefficiency, so much potential. And if you bring that lens, that long term view, you can really start to identify that great business of tomorrow that's really sitting there and is right in front of us today.

**James Marlay** (2:24)
You mentioned 250 mil at the top end of the range. How small will you go?

**Joel Fleming** (2:31)
About 30 mil is about...

**James Marlay** (2:33)
It's pretty spicy, 30 mil.

**Joel Fleming** (2:34)
Pretty spicy. And again, when we think about it, and it goes into the portfolio, it's going to be a pretty small position. And at 30 million, it looks really interesting. You know, we see a lot of interesting things, but you're constantly looking at that risk return trade off. So if we really like the people, we really like the plan, and we think if we have a small position that we can continue to monitor, then that's really helpful for our portfolio through the long term.
I like a lot of other people, if I see something early and then it doubles or triples, sometimes it can be a little bit harder to get your head around. By having these kind of incubation positions, you know, that can be really helpful through the longer term.

**James Marlay** (3:12)
Yeah.
One of the things you mentioned there is the lack of coverage from broking houses, lack of media coverage in the mainstream press. I was looking at some of your stock holdings beforehand. We run a database of broker consensus, earnings forecast, and I couldn't find coverage on any of the stocks in your portfolio, which there might be some that we're missing in our coverage, but I imagine a lot of it you have to do yourself.

**Joel Fleming** (3:40)
Yeah. And that's what's so attractive about this, right? Like, you know, the way I always look at things, the more people looking at things, the deeper the analysis, the harder to find that edge. And we think we've got a really good process, but it requires a lot of work. And we like to say, you know, we go a mile wide in terms of looking and talking to companies. And then once you find something interesting, it's about going really deep to understand the industry, the opportunity, what the risks are, and all of those kinds of things. So from that perspective, you know, the idea of doing the work yourself can be frustrating because it can take time for the market to realize. But at the same time, when you're running a portfolio, you can take that longer term view.