Q&A with Robert Frost on the launch of the OC Micro-Cap Fund

Our investment process is similar to the successful and conservative approach we apply in our small-cap fund, OC Premium Small Companies. Put simply, we seek to invest in quality securities trading below their intrinsic value. We believe in the micro-cap space, where there is often a lot of 'noise', the market can be emotional, backward looking and inefficient. This provides us the opportunity to undertake detailed fundamental analysis with the goal of finding mispriced securities.

Risk management is key to our process. We consider 'risk' to be the risk of permanent loss of capital that can come about from investing in stocks we don't understand. To that end, we typically won't invest in a company unless we can understand, and therefore have an ability to forecast, the key drivers of its income statement, balance sheet and cash-flow statement. We attend many company meetings with management and competitors and kiss a lot of frogs in the process. Avoiding the poor performers and the companies that 'blow up' is critical to being a successful investor in the micro-cap space because there are plenty of companies that promise a lot and have a lot of so called 'blue sky', but ultimately fail to deliver.

The sell discipline is also critical in micro-caps and it's something many investors execute poorly. When a key part of our investment thesis is proven to be wrong or if there is a material operational earnings downgrade we are not anticipating, we will typically exit a position. In micro-caps, your first loss is usually your best loss. That means it's usually best to sell the position and redeploy the capital into another stock that is performing well rather than hang around and hope things will turn around. Downgrades tend to happen in twos and threes and when they do, liquidity can dry up and capital losses can be large and really hurt investment performance.

The OC Micro-Cap Fund doesn't chase fast returns and doesn't typically seek to speculate in the 'hot sectors'. We take a conservative approach to micro-cap investing and follow our tried and tested investment process that has generated our clients strong investment returns over many years.

That said, there is usually a sector that is running hard in the micro-cap space. Often it unwinds just as spectacularly as it goes up. Some of the commodity-based stocks have re-rated strongly in recent times given the ongoing strength in commodity prices. One of our key successes has been CleanTeq, which owns a world-class, shallow, high-grade scandium/nickel/cobalt deposit west of Parkes in outback NSW. The core elements within this deposit are critical 'future economy' minerals including:

* cobalt (for use in lithium-ion batteries) for which the world's rapidly evolving battery manufacturing industry has no reliable western world supplier, and
* scandium (for use in light-weight alloy strengthening such as in jet aircraft), with CLQ recently signing a collaboration agreement with French giant, Airbus.

The cobalt price has continued to soar recently and has been a key driver of the share price. We have lightened our position of late into the share price strength.

There have also been a lot of IPOs over the past 12 months from companies claiming to have disruptive technologies. Some of these have been 'hot floats'. One such IPO was Aurora Labs, which is seeking to develop the world's most affordable 3D metal printers and associated consumables. The stock raised capital at $0.20 in August 2016 and is currently trading around $2.75. The Fund didn't participate in the float.

When I was an analyst on the sell-side, I was working at the broker that covered the now infamous ABC Learning Centres - the boom-to-bust childcare provider that performed spectacularly well before imploding under a mountain of debt after its ill-fated US expansion. I was the house analyst on the stock in the early years when it was performing well from a share price perspective. The managing director, Eddy Groves, was a serial entrepreneur and quite a charismatic personality. ABC was a solid business before it grew too large, took on too much debt and expanded offshore. When I joined OC, we made quite a lot of money in the company for several years. Fortunately, we exited our holding before it completely imploded, although I certainly can't claim we picked the top as we left some dollars on the table. I learnt a lot from ABC about the perils of growing too fast too quickly, the dangers of offshore expansion without robust due diligence and of taking on too much debt. In hindsight, the company had too many related party transactions and questionable corporate governance and this is something I look to avoid in investments these days.

This may seem somewhat of an unusual answer given she passed away over 20 years ago, but it was my grandmother who piqued my interest in the stock market when I was in my early teens. She was a successful investor and she would often talk to me about her shares and preached the virtues of buying quality companies rather than chasing speculative fast returns. After some of my early speculative investments lost me most of my capital I quickly came around to the wisdom in her thinking.

My father owned a real-estate agency and my brother and I used to letter-box drop advertising pamphlets for him. It was thirsty work in the sun but my parents impressed upon me the importance of a strong work ethic from a young age.

I went to school in Mt Eliza on the Mornington Peninsula in Victoria. It was a fantastic place to grow up being close to the beach and I had an active childhood that largely revolved around playing sport.