Duncan Evered's fund became number one on Wall Street just 2 years after its founding. He shares his secrets for finding small- and mid-sized companies other businesses can't live without.
- Brown Capital Management's International Small Company Fund quickly became tops in its category by picking companies with less than $500 million in annual revenue.
- Co-manager Duncan Evered explained his firm's process of finding companies who are vital to their customers, which positions them for years of strong growth.
- He told Business Insider how those themes tie together many of his fund's most important and successful investments.
- Visit Business Insider's homepage for more stories.
Many of the world's most successful investors talk about using gradual approaches to achieve long-term goals - but immediate success still has to be very satisfying.
That's been the story for the Brown Capital Management International Small Company Fund, which debuted in late 2015. It's already bringing in some the best returns of any international fund investing in small- and mid-sized companies, and its returns tower above those of its benchmark and rival funds.
Kiplinger ranks it as the number-one fund in its category over the three years ending January 31, and it also makes the top ten over the last 12 months. It invests in companies with less than $500 million in annual revenue and aims for those with the most long-term growth potential.
"We're really looking for companies that have a combination of management, franchise characteristics and financials necessary to grow sustainably over the long term," co-manager Duncan Evered told Business Insider in an exclusive interview.
Evered said the key to that process is finding companies whose customers will stick with them because their services are absolutely vital.
"We like to have a company that is doing something mission critical, something that is not easily replicated, something that their customers can't do without, and can't replace easily," he said. "We're looking for companies that help customers save headaches, time, money, or lives, or provide an exceptional consumer experience."
Evered, who runs the fund along with Maurice Haywood, Kabir Goyal, and Daniel Boston, says his group identifies investments by examining each company's relationship with its consumers, looking for signs of "stickiness" like high levels of recurring revenue, new product lines, and expanding business once they land a new client.
Looking for years of growth
The relationships those companies have with their customers can power years of growth. For example, one of the fund's biggest investments is in a British company called Abcam, which makes antibodies used in experiments. Clients need it because in order to replicate experiments by their peers, they have to use the antibodies Abcam makes.
Meanwhile, he says the company is almost becoming an equivalent to Amazon for certain life science researchers because of its e-commerce and delivery capabilities.
"They have a kind of a model of being able to deliver antibodies virtually all over the world, mostly within 48 hours," he said. He estimates that its revenue could grow from about 260 million pounds ($333 million) to 450 million pounds ($577 million) in the next five years.
He sees global trade as another investment opportunity because companies need more help than ever in dealing with logistical issues and barriers like tariffs. Evered says growing trade tensions are a major reason for some of the fund's biggest biggest investments, including supply chain and logistics firms like Descartes Systems and Kinaxis.
"We live in a world of more uncertainty and more complexity for people who want to move goods across international borders," he said. "If there is a solution that can simplify those changes and have current and updated information, goods aren't stuck at a border or you're not fined or penalized for not having applied the right tariff rate."
Lastly, Evered says the fund's unique criteria are a huge asset and picking companies based on revenue has been a big contributor to its success because it reveals something definitive about the company's performance.
Market cap - the most common criterion used in defining small- and mid-caps - can reflect investor sentiment more than it reflects company fundamentals. He thinks that will still be the case in the years ahead.
"When we find an exceptional small growth company that can grow sustainably for 10 years, we're not pigeonholed by a market cap cutoff," he said. "We are conspicuously long term."