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In addition, we believed, as we always have, that volatility is not a good measure of risk over the long term within the small cap equity market, regardless of which direction prices are trending. Volatility tends to distract investors and entice them to deviate from a long-term investment discipline. As a result, we try not to focus on it as a measure of risk, although that was incredibly difficult to do in a year like 2022. As we have done in the past and will continue to do in the future, we look at fundamental measures of risk, both qualitatively (e.g., sustainable competitive advantages) as well as quantitatively (e.g., size and health of balance sheets, free cash flow characteristics, etc.), to drive our investment process. These measurements of risk paint a much clearer picture of the risk we are taking versus stock price volatility.
BenWP said:I agree with what others have said here. What struck me in the letter was another GP mea culpa and that somehow the extreme drops in the funds could have been mitigated in 2022. The solutions, which sound to me like creating more committees, do not make much sense.
I agree with what others have said here. What struck me in the letter was another GP mea culpa and that somehow the extreme drops in the funds could have been mitigated in 2022. The solutions, which sound to me like creating more committees, do not make much sense.
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Oversea smaller caps tend to get hit harder than the larger caps during drawdown such as 2022. Other than the Contrarian fund, all Grandeur Peak funds are growth-oriented, thus likely to suffer even more.
In other words, these funds will offer little downside protection in bear markets, but likely more upside in bulls. Because volatility isn’t a concern I would expect them to fall as much as the broad market if not more so during downturns because though they invest in high quality businesses, most are small and micro cap businesses. When downturns occur investors tend to sell such tiny illiquid stocks indiscriminately—an opportunity for the long-term investor but terrible for the short-term one.
A couple of things that make small cap funds more defensive in downturns are cash obviously, put options, holding dividend-paying stocks with a strong track record of paying them, strong balance sheets, low valuation but high quality companies with the aforementioned strong balance sheets. RYSEX for instance holds cash and seeks companies with low valuations and rock solid balance sheets. QRSVX on the value side is similar.
Show me a sign, Derf