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Our philosophy is grounded in long-term, fundamental research. The team aims to deliver investors a 8%-12% p.a. return after all fees by investing in a concentrated portfolio of attractively priced, wealth generating businesses based exclusively in international markets. We believe a portfolio of the highest quality businesses, purchased with valuation discipline, will outperform over the long-term while preserving our clients' capital in times of economic stress.
Fairlight is a global small and mid cap (SMID) specialist. Global SMID is an asset class that has traditionally been ignored by Australian investors despite the sector being 40 times the size of the Australian SMID market.
Historical data shows us that smaller companies have outperformed larger companies over the long term; this is intuitive as smaller companies can grow faster, have a longer runway to compound growth, and are frequently acquired by larger companies. There are also fewer analysts focussed on smaller companies, providing more opportunities for Fairlight to uncover hidden and underappreciated quality.
Historical data indicates that small caps tend to be more volatile than their large cap counterparts – the Australian small cap market is synonymous with risk and volatility. Despite this, an allocation to global SMID can reduce the risk of an investor's overall portfolio due to three reasons:
Our quality focussed investment philosophy is especially well suited to the small and mid cap sector. By choosing only the highest quality companies from within the SMID sector, we have historically been able to deliver less volatility than the index and protect capital during periods of market stress.
Traditionally, the investment performance of quality and small cap investing styles has been negatively correlated. In practice this means that when small caps underperform it is likely that quality companies will outperform (and vice versa). The blending of these two investment styles has been a key driver of Fairlight's ability to historically outperfom the market despite exhibiting lower risk^.
We believe Australian investors can access higher-quality businesses at more reasonable valuations by investing in international markets.
In our analysis of the Australian market, we only identified a handful of businesses that pass both our quantitative and qualitative requirements. This relative scarcity of high-quality companies means they are often more expensive when compared to international peers.
By investing internationally, investors can not only diversify Australian-biased portfolios, but access a richer opportunity set at more attractive valuations.
Our investment strategy is executed with an ethical mindset, with hard screens against industries such as tobacco, armaments, gambling, alcohol, and mining.
Fairlight is a signatory to the UN Principles for Responsible Investment and is committed to actively avoiding companies that unequivocally cause harm to people and the environment.
"Investing offshore provides a risk mitigation benefit as a result of owning companies denominated in foreign currency. In the event of economic or financial market downturns that aren’t idiosyncratic to a particular country, the Australian dollar has a tendency to depreciate relative to a basket of developed market currencies. This depreciation provides a partial hedge to a falling portfolio value at a time when it is most valuable. Figure 21 highlights the historical inverse correlation between the USD and the S&P 500 over the past twenty years.
The ultimate barometer of the risk characteristics of an asset class was the realised performance during the 2008 financial crisis. During this difficult period, global SMID exhibited better risk control for unhedged Australian investors than both Australian large cap and Australian small cap equities (see Figure 22). This relative defensiveness comes from the tendency of the Australian dollar to depreciate relative to other developed world currencies in periods of economic stress, providing a buffer to unhedged AUD returns."