White Paper

Bell Asset Management finds hidden "gems" in small and mid-cap market

Adrian Martuccio
Co-Portfolio Manager
June 2018
Adrian Martuccio
Co-Portfolio Manager


Research Coverage

Primary: Energy, Financials, Information Technology and Utilities 
Secondary: Telecommunications


Bell Asset Management finds hidden "gems" in small and mid-cap market

June 2018

Bell Asset Management has over 15 years’ experience in researching and managing global small and mid-cap (SMID) companies.

At Bell Asset Management we have long advocated for clients to consider an allocation to global SMID cap companies to complement and diversify existing exposure to mega and large cap companies and reduce exposure to potential crowding risk related to heightened passive flows.

Why Invest in Global SMID?

1.  Global SMID holds superior risk-adjusted return characteristics to broad global benchmarks.

2.  Strong potential growth option - historically growth in global SMID has outpaced that in other sectors

3.  Lack of analyst coverage can create opportunity via stock price inefficiencies.

4.  Portfolio construction benefits – diversify and complement large and mega cap exposures

5.  ‘Sweet Spot’ – The SMID companies business cycle may show greater prospects for growth and earnings

This paper outlines how Bell Asset Management’s extensive 15 year track record in managing global SMID in conjunction with our quality at a reasonable price framework has led to the creation of a dedicated SMID product for access across our client base including Institutions, High Net Worth Individuals and retail investors.

Global SMID holds superior risk-adjusted return characteristics to broad global benchmarks

This sector has been one of the best performing global equity asset classes over 20 years. Historically, growth in Global SMID has outperformed MSCI World on a cumulative basis by +136%:


Cumulative Return



MSCI World Quality-ND


MSCI World-ND     


MSCI World Growth-ND 


MSCI World Value-ND


Source: eVestment, in AUD and to March 2018


An Asset Class with Opportunity for Strong Growth: 

Analysis of growth in each equity bucket over the last 5 and 7 years, has shown that small and mid-cap stocks have grown sales faster than other segments. We believe one of the key reasons for superior growth is that many SMID companies are in the sweet spot of their business cycle. The graphs below illustrate that superior growth in sales has been matched by strong earnings growth. In addition, the SMID index has also grown earnings faster than other segments.




How does Bell Asset Management find the “hidden gems” amongst global small and mid-cap companies?

Moving down the market cap spectrum to invest in global SMID companies doesn’t mean you have to compromise quality – however, a consistent investment approach is key. We believe a key differentiator for Bell Asset Management is our investment team’s extensive expertise researching and investing these types of companies for well over a decade.

Bell Asset Management’s approach to global SMID offers much better liquidity than a traditional small caps approach because we only invest in companies with market capitalisation between US$1bn and US$28bn. We also want companies with a track record of high profitability, so additionally, they must have three years of return on equity above 15%. This establishes our starting universe of around 700 companies.

As bottom-up stock pickers, our rigorous and consistent investment approach results in around 150 companies that pass our quality test. We apply a very high bar when analysing whether we consider a company ‘Quality’, which is determined by our investment team undertaking detailed fundamental research and modelling, in conjunction with 500+ company meetings per year. Over the past 15 years, we have accumulated a library of over 10,000 internal research notes and company thesis.



Finally, when constructing the portfolio, wwe believe that high quality businesses with low levels of debt have the potential not only to provide superior risk-adjusted returns, but may also exhibit defensive characteristics in times of market volatility.

Global SMID Companies with Global Franchises

Being bottom up investors with a long-term investment horizon, there is no better way to understand our approach to investing than to provide tangible examples of portfolio companies that have passed our rigorous research process and extensive valuation work.

Below we detail two companies that we are currently investing in across our strategies; WD-40 and Croda. They both have durable and sustainable franchises, wide competitive moats, solid balance sheets and ample opportunity to reinvest their cash stream into high return investment opportunities. The proven track record of the respective management teams is why we believe both companies are well positioned for continued consistent earnings growth and great examples of the quality SMID cap companies we love to invest in.



WD-40 is a well know household name, but its initial product was developed in the 1950’s and first used to protect the metal skin of the Atlas space mission. Today WD-40 is a $1.9bn company and its flagship blue and yellow WD-40 can is found in around 80% of U.S. households and used for myriad of purposes including loosening rusted bolts, removing chewing gum from hair and shining the leaves of artificial plants.



The company has an extensive distribution footprint in 180 countries selling through more than 60 different trade channels including mass retail like supermarkets, home stores like Bunnings and Home Depot and bike repair shops. And also in industrial applications such as the aviation sector, farming and auto repair.

Comparing it to other major brands, it is in more households than Lay’s chips, Coca-Cola or Colgate toothpaste. Looking at its customers from a value perspective highlights the importance of industrial customers who use around $70 of product per year in workshops, on farms and in aviation, versus household consumer use of approximately 40 cents.

So WD-40 is a great brand, but why do we think it’s a great franchise?

Much like Coca-Cola, WD-40 has myriad of patents and trademarks, but its core franchise is underpinned by keeping the base formula for the Multi-Use product an in-house company secret.

In addition, they have an intimate knowledge of their customer built through their extensive global distribution footprint. This assists in R&D and innovation which keeps WD-40 ahead of any competition. A strong brand with market leading distribution and innovation are key reasons why there is very little competition on the shelves of retailers and their product is in 80% of U.S. households.

From a financial perspective, what do we like about WD-40?

The increasing strength of WD-40’s market position has driven continuous improvement in margins, with a gross margin of 56% (+8pp last decade) and EBITDA margin near 22% (+6pp last decade).



Capital discipline is a key factor we consider. They have a pristine balance sheet with current leverage well under 1x net debt to EBITDA. The business is also not very capital intensive with capex in the range of 1-2% of sales, and this capital light business model results in an ROIC above 20% and an ROE above 30%.

What is our view on management?

The CEO Garry Ridge is a 30 year veteran of WD-40 and has been a key driving force behind the success of the company, helping to build an accountable and high performance culture. The brand strength and impressive financial results are key reasons as to why we rate the management team very highly, their philosophy can be reconciled back to quantifiable results which we think is a key attribute when investing in SMID companies

We have met members of the management team and are impressed with the steadfast focus on strong returns and high cash generation which has resulted in excellent returns for shareholders.

Do you still see upside for WD-40?

At only US$1.9 billion market cap, we think WD-40 has a long way to grow. As long term investors, we have a good level of comfort in our forecasts due to the company’s proven track record and the pillars they have in place to continue to be a consistent compounder.

We believe the company can deliver on its 2025 vision of $700 million of revenue which represents a compound growth rate of almost 8%p.a. They have also identified more operational efficiencies that will lift its ROIC and potentially grow EBITDA margin to 25%.

On our calculations, this puts WD-40 on a trajectory for $10 EPS by 2025. If the company can achieve compound EPS growth of 13% p.a., then we expect there is a lot more opportunity for share price upside.


image 6 smid June 18 


Croda is a £6.1 billion world leader in manufacturing oleochemicals, which are produced from plant or animal based oils or fats. The interesting thing is that oleochemicals are in multiple products that all of us use every day including sun cream, salad dressing, fabric softener and pharmaceutical products. It is also used in industrial processes supplying speciality additives for polymer applications for scratch resistant plastic or anti-static fabrics.



Why is a chemical company such a great franchise?

Croda’s heavy focus on innovation, R&D and customer intimacy to create high value-added niche products while keeping product churn low is a key competitive advantage and why they have become a dominant player and such a great franchise. We consider the current CEO Stephen Foots and his predecessor to be brilliant thinkers, through divestitures and careful M&A, like Uniquema (from ICI) and agricultural tech company IncoTech, they have been instrumental in transforming Croda into the company it is today. Croda now has operating margin in the mid-20%’s and incremental margins above 40%, this is 3x-4x higher than traditional bulk chemical suppliers.


The goal of the company is to stay on this path of growing earnings faster than revenue, hence, continue to expand margins. This trajectory is helped by structural tailwinds such trends in health and wellness, beauty and ageing, especially in emerging markets which is now around 17% of sales. Croda’s focus on naturally derived products and sustainable practices is a further advantage. Its plant and animal based oleochemicals are a replacement for existing oil based petrochemicals. Therefore, its customers striving to increase their use of sustainable ingredients are willing to pay for Croda’s innovation. It has very strong ESG characteristics and has been a member of the FTSE4Good Index since 2008.

How does this play out from a financial perspective?

The business’s first priority for cash use is capital expenditures which helps turn their R&D into revenue generating products, however, it has a much lower capital intensity than most chemical companies. Overall management are good stewards of capital, investing for growth but keeping very low levels of debt on the balance sheet, currently under 1x net debt to EBITDA, with interest cover and debt service extremely strong currently at 20-30x.

Their lean balance sheet and strong and improving margins, well ahead of peers, result in Croda generating over 20% ROIC and over 30% ROE. This is a very attractive combination and highlights why Croda is not just a chemicals company, but is a fantastic franchise.

As investors taking a long term view, the company’s multi-year track record of strong execution, positive secular trends and disciplined approach should result in continued growth in profits and good returns for shareholders.


The Bell Asset Management Difference – Global SMID expertise

Moving down the market cap spectrum to invest in SMID companies, doesn’t mean you have to compromise quality. Bell Asset Management’s methodology and rigorous investment process steers us to the highest quality companies in this segment of the market, additionally they represent a significant portion of the approximate 500 company research meetings we undertake each year. Our bottom up analysis and long term investment horizon means that there is no shortage of quality franchises to invest in.

Bell Asset Management’s current portfolio of global SMID stocks have lower levels of leverage and higher profitability than the index. Why is this important? In the current market environment of rising interest rates and increased volatility, investors must be acutely aware of having a portfolio of favourable and strong fundamentals which is highly profitable, high quality franchises, low levels of leverage and a conservative approach to valuation.


What does Global Small and Mid-Cap and Bell Asset Management offer investors?

  • SMID asset class offers the potential for strong growth
  • Investing in proven franchises
  • SMID diversification is complimentary to traditional portfolio construction
  • Extensive experience in SMID
  • Our broad and deep definition of ‘Quality’ targets consistence


Bell Asset Management is a leading Australian boutique investment manager specialising in global equities. The Melbourne based investment team have been managing global equities of behalf of clients for over 16 years and have a long track record of investing in global small and mid-cap companies. Our clients advise us that one of our key differentiating features is our small and mid-cap bias to global investing.

Investors can access our Global SMID strategy either via a retail fund (Bell Global Emerging Companies Fund ARSN 160 079 541  - BGEC) available via ASX mFund (code: BLM01) and various investment wraps and platforms or for institutional investors, by segregated account.



Important information: This has been produced by Bell Asset Management Limited (BAM) ABN 84 092 278 647, AFSL 231091. This has been prepared by BAM for information purposes only and does not take into consideration the investment objectives, financial circumstances or needs of any particular recipient – it contains general information only. Before making any investment decision, you should consider your needs and objectives, consult with a licensed financial adviser and obtain a copy of the relevant offering document. No representation or warranty, express or implied, is made as to the accuracy, completeness or reasonableness of any assumption contained herein. To the maximum extent permitted by law, none of BAM and its directors, employees or agents accepts any liability for any loss arising, including from negligence, from the use of this document or its contents. This document shall not constitute an offer to sell or a solicitation of an offer to purchase or advice in relation to any securities within or of units in any investment fund or other investment product described herein. Any such offer shall only be made pursuant to an appropriate offer document. This presentation contains forward looking projections that are based on assumptions BAM holds as reasonable, however no guarantee or assurance is given that estimates or targets will be achieved. Past performance is not necessarily indicative of expected future performance.

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