IFSL Marlborough Global SmallCap

The managers believe that successful investing comes from identifying companies whose future growth is not yet fully recognised by the market. They call this “unrecognised growth” and believe that, over the long term, share prices ultimately follow earnings. Their investment philosophy is built around four key pillars: quality management teams; liquidity; ESG considerations and valuation. While they consider the wider economic backdrop when constructing the portfolio, they believe the greatest opportunity to add value comes from selecting individual companies.

To achieve this, they follow a disciplined four-step investment process:

1. Macroeconomic analysis
The team starts by assessing the global economic backdrop, considering factors such as economic growth, inflation and interest rates. They focus exclusively on developed markets, believing these offer stronger governance, greater transparency and more reliable access to company information than emerging markets. This helps them understand where different countries and sectors sit within the economic cycle and provides context for portfolio construction.

2. Regional and sector analysis
Using Ausbil's proprietary region and sector Matrix, the managers compare different regions and industries based on factors including valuations, growth prospects and quality. This helps shape the portfolio’s regional and sector exposure while highlighting areas where they believe conditions are more favourable. Together, these first two stages guide the fund's active regional and sector positioning.

3. Bottom-up stock selection
This is the most important part of the investment process and where the managers believe they can add the greatest value. Starting with a universe of around 4,500 developed market smaller companies, they use proprietary screening tools to identify businesses with attractive quality, growth and valuation characteristics. Detailed fundamental research then focuses on factors such as financial strength, management quality and long-term growth potential, with meetings with company management helping to build conviction. The managers are candid that getting to know management teams properly takes time, which is one reason name turnover is so low. ESG considerations are integrated throughout the research process.

4. Portfolio construction
The final portfolio typically holds between 50 and 80 companies. The managers combine their highest-conviction investment ideas with the broader regional and sector insights from the earlier stages to create a diversified portfolio. New holdings usually start as relatively small positions and are increased over time as conviction grows, while position sizes also reflect liquidity and systematic risk.

Smaller companies can offer attractive long-term growth opportunities but are generally more volatile than larger businesses. Their share prices can move more sharply during periods of market uncertainty and they can also be less liquid, making them harder to buy and sell quickly. Liquidity is therefore an important consideration for the managers, who limit the size of each holding based on its average daily trading volume over the previous three months. This helps ensure the fund can buy or sell positions efficiently while limiting the potential impact on the share price.

The fund typically invests in 50–80 companies across developed markets, providing diversification while remaining focused on the managers’ highest-conviction ideas. New positions are usually introduced at relatively small weights and increased gradually as conviction grows.

The managers also use a structured sell discipline for underperforming investments. If a new holding underperforms by 25% within six months of purchase, it is sold. Secondary, relative underperformance of 15% triggers a formal review of the investment case, while underperformance of 25% prompts a more comprehensive reassessment, helping ensure poor-performing investments are identified and addressed promptly.

The team believe that a company's understanding of and adherence to relevant ESG issues is an important indicator of its quality, durability and sustainability. Every company researched is assigned an ESG score, and companies falling below the team's minimum threshold are excluded from investment. All members of the team are responsible for ESG integration, supported by Ausbil's dedicated in-house ESG Research. Ausbil was one of the pioneers of ESG integration in the Australian market, and the framework applied here mirrors that used across the firm's domestic equity strategies. Proprietary analysis is supplemented by data from Bloomberg, FactSet, MSCI, company accounts and regulatory filings.