The Eley Griffiths guide to investing in ASX small cap stocks

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The small-cap sector is known for its combination of heady highs and crushing lows – and we’ve seen the latter in recent times. The ASX Small Ords is down approximately 20% since last January and the Industrials segment of the ASX ex-200 segment has seen a 50% derate and is now below its pre-COVID level, says Nick Guidera, portfolio manager of the Eley Griffiths Emerging Companies Fund.Speaking with me from a busy airport (something that wouldn’t have happened during the pandemic), he delved into ASX small-cap investing and the process his team follows. Guidera discussed the effect of macro forces and why investors have probably missed the boat on buying defensives. He also touched on some of his favourite themes for the next 12 to 18 months – including one on which Guidera has done a 180-degree turn since last January.Among some of the hot-button topics he explored are:The outlook for small-cap lithium stocksWhat’s happening in consumer discretionary amid inflationary pressures, andWhether IPO activity is likely to recover in the short term.Nick Guidera, portfolio manager, Eley Griffiths Emerging Companies FundAnd getting into the nuts and bolts of investing, Guidera explained how his team selects stocks, including the overarching “style-agnostic” approach and the groundwork required to determine which stocks make it into the portfolio. Just as important, he explains how and why they exit positions.The conversation culminates in Guidera revealing a handful of his preferred plays and two of his highest-conviction picks from disparate sectors.Edited TranscriptWhat are some of the key elements of your investment process and how do they contribute to your performance?Guidera: We're a style-agnostic fund manager, which means we can own both growth and value stocks at any one time during the cycle. It's been particularly helpful over the last 15 months as the market has corrected with no one style outperforming for more than a couple of months at a time.We've had a tried-and-tested in-house investment process known as SCOPE, which we've used across our strategies for the past 20 years. Fundamentally, it equally weights qualitative factors such as the track record of management, alignment of interests at the stock ownership level, as well as considering things like the strategic plan of the business and the market opportunity.We complement those qualitative fac...

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