Finding profit among the world’s smaller entrepreneurs

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For Scott Douglas, co-
manager of the Premier RENN US Emerging Growth fund, the best hedge available is backing smaller entrepreneurial companies, wherever they may be.

The $29m (£14.9m, €18.7m) fund targets micro-cap companies and takes a pure bottom-up approach. “We would never look at a sector such as mining and think: ‘That looks hot, let’s get in there’,” he says. “We’re just not that type of fund.”

Instead Mr Douglas prefers to identify upwardly moving companies that are reasonably priced at entry point, saying this is the “best way to mitigate your risk and increase the chances of success.

“You can’t buy entrepreneurs; you can only join them. We like to partner the ones with their own money in the game.”

He explains: “Five thousand stocks in the world probably represent 95 per cent of the market capitalisation – that’s where most of the big funds play. We’re playing in the other 5 per cent.”

Mr Douglas works as part of a team of four whom he describes as all being analysts and portfolio managers.

He says companies call up all the time looking for investment and the team has to make a quick decision on a business after what can often be a short conversation. Mr Douglas adds the companies respect this as they do not have their time wasted.

While the fund looks for growth wherever it can be found, the manager sees China as a particularly fertile hunting ground.

“One of the reasons we like China is it has everything we look for: young entrepreneurs, many of them western-educated. The capital markets are not really developed in China yet, and these young guys come to England and the States to raise money for their companies,” Mr Douglas says.

The fund’s largest of 55 holdings is the public A-Power Energy Generation Systems, the leading provider of locally distributed power generation and micro power networks in China.

The company, which began trading on Nasdaq in January, opens a 1,100 mega-watt annual capacity
wind generator plant in Shenyang this July, which Mr Douglas expects will “be huge”.

The fund can invest up to 10 per cent of its assets in private companies, including Chinese holding HeySpace, a fast-growing social networking website with 25m users that may soon be listed.

Mr Douglas says: “It could be a big winner for us. It’s going to be a hard one to know when to sell. In China you can’t rely on advertising revenues like you can in the States so this company has done it differently – selling lottery tickets on cell phones and letting musicians upload their videos has proved very popular.

“If it does what we hope it will it could be worth three times what the portfolio is currently valued at.”

According to Lipper, the fund, which launched in April 2006, has suffered over one year, declining by 2.08 per cent while its Russell 2000 benchmark has fallen 10.45 per cent.

However, Mr Douglas is untroubled by these figures, taking a longer-term view.

“No one should buy this fund unless they have at least a three-year profit
horizon.”


Julian Vickers is an editor at Investment Adviser

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