Terra Philosophy

Terra Capital’s investment philosophy incorporates a high conviction, high concentration approach that aims to invest in early stage companies who meet our rigorous investment criteria. From a company perspective we are looking for those companies who own potentially world class assets, have globally scalable ideas or who have a business that can generate near term cash flow with growth potential. The company must also possess high calibre, proven management teams who have the skill set to develop their business.

The rise of the on-line broker has rewarded investors with lower brokerage costs, but at the cost of little or no investment advice. Full service brokers who historically did prepare research on small and emerging companies have suffered with lower corporate and brokerage income, which has meant culls to research departments and an increase in informational inefficiency. This is part of our advantage.

Investing in small companies is challenging for a range of reasons; sheer volume of opportunities, technical complexity and informational transparency to name a few. Often the focus of company promotion is on company attractions and upside, not the barriers to the company proceeding. Investors in emerging companies have to sort through promoter rhetoric to separate those companies with a prince from those merely courting a frog.

The key to investing in this subsector is the combination of specialist knowledge, coupled with an extensive network of financial and industry experts to provide access to unique information and high quality deal flow. With the Managers having worked in the small and emerging companies sector in both Australia and Overseas, the Fund is well positioned to take advantage of new opportunities. The nature of these contacts also ensures that the Fund will be investing at the ‘ground’ level, thus helping to protect the downside of the investment as well as providing a platform for substantial upside.

Another crucial consideration when investing in the small and micro-cap sectors is the quality of the management of any potential investment target. We continue to maintain strong relationships with the management of the companies in which we invest. The cultivation of these relationships over a number of years has in a number of cases led to management with proven track records co-investing in the fund and jointly assessing companies and concepts. We meet with management teams on a regular basis, as well as conducting extensive visitation and attending related conferences. This allows the Manager not only to gain a deeper understanding of specific companies, but also to establish specific themes for investment.

The relatively small size of the Funds ensures they remain nimble and dynamic. A study of other investment funds in Australia indicates that although many were very successful in their earlier stages, this performance deteriorated as the funds’ size grew and they became less flexible. This expansion of the size of these funds was a logical development of their flat management fee structure, where the only avenue of fund managers to increase their earnings was to increase the amount of money under management. In contrast, the Managers of the Terra Capital Funds expect to be predominantly paid on performance.

The investment philosophy of most Australian equity funds incorporates strategies to perform broadly in line with, or marginally above the All Ordinaries Accumulation Index. There is an opportunity for a manager of a smaller fund, which is not constrained by such a benchmark, to invest based on different parameters. The Fund will be focussed solely on the generation of absolute returns. There will be no necessity to hold stocks which mimic index returns and instead every stock will be held due to a conviction that it will generate a significant absolute return.

Lastly, the size and lack of liquidity in small stocks dictates that larger institutions must take significant positions and invest with a long-term view. With these constraints, it is difficult for the large institutions to effectively manage a portfolio of smaller stocks. Given the size of the fund, it is unlikely that the Fund will ever own more than 5% of any Company, thus allowing the Fund to move in and out of stocks with relative ease.