What Makes a Great MicroCap Investor: Q&A with Chris Tessin, Partner and CIO at Acuitas Investments
[Originally published in the Planet MicroCap Review Magazine Summer 2023 Issue]
Can you provide a quick overview of Acuitas’ multi-manager strategy?
Acuitas is a boutique multi-manager investment firm based in Seattle, WA. The firm is focused on small and microcap markets. We believe this exclusive focus on the inefficient corners of the market offers the greatest opportunity for absolute and excess returns. Aggressive idea generation and deep manager research are hallmarks of our investment process and we aim to find and evaluate investment managers before they hit the institutional radar. We then draw from this pool of high confidence investment managers to build portfolios where we seek to maximize excess returns. In the end we try to utilize our highest conviction managers and pair them in complementary ways to build custom portfolios for our clients.
What makes a great Microcap investor?
I think that great microcap investors employ a disciplined process and combine that with an exceptional focus on investing within a high-performance team. We are looking for investment managers that can win through stock selection and we don’t believe it is as simple as “knowing the names”. Acuitas formally evaluates dozens of aspects of an investment manager’s process from portfolio construction to sell discipline and in the end, it is important the investment manager can articulate the keys to the success of the investment process. If there is one characteristic that is common from the investment managers that we employ it is a passion for investing that manifests within a disciplined process. This passion or competitive fire is really key to generating powerful returns over time. That said, it isn’t enough on its own. It has to exist within the proper framework. Idea generation is important to us so we are always looking to find great microcap investors and we look to form a view on them over time based on many conversations and a deep review of analytics.
We’re about half-way through 2023, I’ve had multiple conversations with buy-side managers that have been facing redemption issues from their investors. In your opinion, why is this a real concern for buy-side managers? Especially, when considering I chat with other investors who have a ton of dry powder and too many quality MicroCap ideas to look at.
Active investment managers who focus on small and microcap stocks have come through a very challenging period. Prior to the pandemic, from 2009 to 2020, steadily rising markets made it easy for plan sponsors and individual investors to favor passive products. Just gaining market exposure seemed like enough for many. The characteristics of leadership also didn’t help. Large and growthy stocks led the market. While the smallest stocks showed a return advantage over the very long-term, it was easy for investors to ride the wave of mega cap dominance. The pandemic brought a wave of volatility to the market which brought some investors back to appreciating active management. This volatility can mean opportunity for stock pickers and we have seen a better overall active environment recently. Rising interest rates put a degree of pause on the growthiest non-earners and brought back an environment where valuation and quality mattered. This has been good for long-only active managers. Finally, equity microcap investors have had to face headwinds from the rush toward private investments. We believe at some point there are challenges for the private equity/venture capital space due to higher rates, increased competition and tempered returns from these strategies. In the end, many investors chase returns and rush toward what has worked. That said there are always informed allocators that appreciate the valuation opportunity present within the small and microcap space. While stock opportunities may be abundant for fund managers, it may take a shift toward small cap leadership for plan sponsors to appreciate broader opportunity in microcap and allocate directly to the space.
Why is it so difficult right now for buy-side managers to raise capital?
The combination of large cap leadership and the perceived success of private investments has clearly affected the ability of small investment managers to raise capital. There always seems to be a headline highlighting the latest offshoot from a giant hedge fund, but raising capital is hard work. Of course raising assets is also only one part of building an outstanding investment organization, but it is a necessary one. Larger allocators often have hurdles before allocating to small managers such as a five-year track record or wanting a critical mass of assets. They may want long tenure from a product or firm as well before they allocate. Of course it results in a chicken and an egg problem for the investment managers. That said, there are allocators like Acuitas. We pride ourselves on being early adopters and are willing to evaluate strategies at the beginning of their life-cycle. In fact, we believe that there is a tangible positive impact to investing early with managers that have a smaller asset base and are best able to implement their strategy.
It is no secret that investors buy brand so I would encourage any buy-side manager to carefully build their brand by working hard to generate strong returns, networking and learning to communicate effectively about the strategy they employ. Historically we have seen some of the most lucrative environments for active management come after extremely challenging periods and it takes diligent and sustained outreach to find allocators willing to take advantage of valuation opportunities and market dislocations like we are seeing today.
How can Acuitas help MicroCap buy-side fund managers?
Acuitas can help by acting as a potential source of funds for microcap managers. Our firm is unique in that we seek out early-stage, low asset base products that we feel have the potential to generate excess returns for our clients. Our process is lengthy, and it is a high bar to reach funded status, but we are proud of our investment results and we continue to believe that deep fundamental research on this inefficient corner of the market has the potential to benefit clients. Our multi-manager offering creates an efficiency for large plan sponsors and a source of capital for smaller investment managers. We believe that there is currently a unique opportunity for the asset class as microcap remains cheap relative to other cap tiers, most notably large cap. These types of dislocations often provide lucrative opportunities for strong active microcap managers and we are always looking to identify the next generation of great investors.
For more information about Acuitas Investments, please visit: www.acuitasinvestments.com
Upcoming Events
Planet MicroCap Showcase: VEGAS - April 30-May 2, 2024
Planet MicroCap Review Magazine - Summer 2023 Issue
Disclaimer:
1. We are not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. We are neither licensed nor qualified to provide investment advice.
2. The information contained in the Planet MicroCap Newsletter should be viewed as commercial advertisement and is not intended to be investment advice. The Planet MicroCap Newsletter is not provided to any particular individual with a view toward their individual circumstances.
3. The information contained in The Planet MicroCap Newsletter is not an offer to buy or sell securities. We distribute opinions, comments, and information free of charge to any individuals who wish to receive them.
4. The Planet MicroCap Newsletter has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular investment, security, company, or industry. An individual should never invest in any securities based solely on information contained in The Planet MicroCap Newsletter. Individuals should perform their own independent research and seek advice from their professional advisers.
5. Any individual who chooses to invest in any securities should do so with caution. Investing in securities is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Always research your own investments and consult with a registered investment advisor or licensed stock broker before investing.
6. The Planet MicroCap Newsletter is a service of SNN Network, a financial information publishing company.
7. SNN Network and/or its affiliates may hold, buy, and sell the securities discussed. This constitutes a conflict of interest as to our ability to remain objective in our communications.
8. Information contained in The Planet MicroCap Newsletter may contain “forward looking statements.” Subscribers are cautioned not to place undue reliance upon these forward looking statements. These forward looking statements are subject to a number of known and unknown risks and uncertainties that could cause actual operations or results to differ materially from those anticipated. Factors that could affect performance include, but are not limited to, those factors that are discussed in each security’s most recent reports or registration statements filed with the SEC.
9. We are committed to providing factual information on the industries, companies, and securities discussed. However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by sources which we believe to be reliable.
10. To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in The MicroCap Newsletter, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information).
11. We encourage you to invest carefully and read investment information available at the web sites of the SEC at http://www.sec.gov and the Financial Industry Regulatory Authority (FINRA) at http://www.finra.org.