“The Broadcap Fund seeks to take meaningful positions in small and mid-caps, so really we wanted to limit capacity to what it would be for a small caps fund,” Ryland said. “There’s a lot of art and a little bit of science in the $1 billion figure, really we looked at how big other small caps managers had grown and how they had performed at different stages. Guys like ‘Para’ [David Paradice] are good enough to get away with a bit more, but we concluded a $1 billion limit made the most sense for our clients.” Small caps had provided some of the best outcomes for the Broadcap Fund, which has outperformed its ASX 300 benchmark by a net 6.47 per cent in the three years to September 30, so the ability to trade them without undue market impact was vital.
“In researching the large caps you talk to their competitors and suppliers, which might be small caps, but they end up becoming better investment ideas themselves,” Ryland said. A recent example was the big banks telling Greencape that attracting depositor accounts was their favoured way of dealing with dysfunctional credit markets, and the ATM networks would be increased to attract them. Greencape parlayed the information to a stake in Australia’s largest ATM owner, Customers Limited, one of their most additive positions over the last 12 months.
Greencape’s other fund, the High Conviction Fund, is concentrated with a mid-cap bias, and thus can safely double its existing $1 billion under management before capacity concerns arise, Ryland said. Contrary to popular belief, Ryland revealed only one of Greencape’s clients was a former Merrill Lynch IM client, and it was one of its smallest institutional clients at that. Challenger paid “seven figures” for a minority stake in Greencape four years ago, and seeded the manager through its retail funds. The boutique buys marketing and backoffice services from Chalenger.