The Boole Microcap Fund operates as a limited partnership that uses a specific investment strategy to beat the market over time. They invest in quantitatively attractive microcap stocks based on cheapness, improving fundamentals, high insider ownership, high ROE, low debt, and other criteria.
This combination, in a focused portfolio, should outperform the market over time, says fund founder Jason Bond. He has taught economics and investing at Seattle University. A registered investment advisor, Bond devoted several years to independent equity research. He has worked for Tortoise Investment Management in White Plains, New York, and spent one year as an analyst at a boutique strategy consulting firm in Seattle. Before that, he played professional basketball in Belgium for two years, according to his website.
For the last three years, his passion has been investing in microcap stocks. By most any objective measure, he’s done well at it.
Prospecting for gold
The mission of the Boole Microcap Fund is to outperform the S&P 500 Index by at least 8% per year (net of fees) over rolling five-year periods, Bond says. They also aim to outpace the Russell Microcap Index by at least 2% per year (net) over rolling five-year periods.
To assess the merits of a microcap fund’s investing strategy, including Boole’s, it’s worth comparing the fund to the benchmark performance of the Russell Microcap®/Russell 1000® Index.
The P/E for the Russell Microcap®/Russell 1000® Index has been nudging downward for nearly 13 years. Over that period since 2010, microcap stock valuations have fallen significantly, both on an absolute basis and when compared to their large-cap counterparts. The takeaway here is investors must be much more selective in picking microcaps than stocks in the broader market.
An analysis of microcap performance from 2009-2022 by Bloomberg shows companies with low debt consistently out-perform competitors carrying high debt loads, as would tend to be expected (Chart 2).
Then there are microcaps that fly under the radar. Until suddenly they don’t: The iShares Micro-Cap ETF outperformed the S&P 500 last summer, largely due to the phenomena of meme stocks such as GameStop, which took off like a bottle rocket and made many fortunes for retail investors who went for the ride and got out before GameStock shares sputtered back to earth. The catalyst behind much of the meme stock frenzy during the first half of last year was due not so much to the inherent under valuation of any particular microcap stock, but the liquidity available through multiple federal stimulus packages and pandemic-related financial aid programs. The Federal Reserve had not yet begun to goose interest rates. And millions of Americans sitting at home – with cash they could not go out and spend – flocked to stock trading apps. Call it the perfect storm for stirring up a retail investing stampede. Wall Street firms missed the boat on meme stocks, because these are companies that receive practically no attention from institutional investors and the major advisory firms that serve them.
Big institutional investors still tend to ignore the smallest companies. As a result, there are lots of microcap stocks that receive little-to-no coverage on Wall Street. These stocks may be trading at a sharp discount to their fundamental value. Such inefficiency creates opportunities for investors who can separate the poorly-run from the promising companies.
That’s Bond’s overarching strategy with his Boole fund.
Sifting through reports, news articles and even calling management can help the savvy investor identify one stock that is a high-growth company setting the pace in its industry, or it could be a formerly large-cap stock heading the way of the dinosaurs. Between them, only one is likely to be a superior investment.
From a retail investor’s standpoint, identifying potential penny stock winners takes work. Few companies classified as microcaps are the focus of any significant, ongoing analysis by Wall Street. Microcap investors have to roll up their sleeves and do their own research.
It takes time. An apt analogy might be the prospector panning patiently for gold in the Yukon – except it’s not as cold.
Once Bond has evaluated the fundamentals of a microcap company he is considering for investment, the next step involves a deep dive into the financial statements, making adjustments based on any non-recurring items or hidden liabilities. Stocks are then re-ranked on every measure using the updated data.
Finally, each stock receives a combined score based on the rankings. It’s a rigorous, data-driven approach.
The Boole Microcap Fund at any given time maintains roughly 10-20 positions in the portfolio. The size of each position is determined by its rank. Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost). Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error is discovered.
Bond in an interview offered some insight into his own investment strategies and why microcaps, chosen carefully, can out-perform the NYSE, Nasdaq and indexes such as the S&P 500.
State of play in microcaps broadly
“Microcap stocks have a relatively low correlation with the broader stock market. There are always some individual microcap stocks that can do well even during a bear market. (Last year, my fund increased 36.5% even though the S&P 500 index declined 20%.)”
Impact of the Fed raising interest rates
“Higher interest rates mean higher borrowing costs for microcap companies. If you focus on microcap companies with low debt — as I do (following Warren Buffett’s example) — then this is less of an issue.”
A general overview of the Boole Microcap Fund investment strategy
“I am a quantitative deep value investor following a strategy similar to that used by early Warren Buffett. We rank how cheap microcap stocks are based on P/E, P/B, P/CF, P/S, and EV/EBITDA. We then rank microcap stocks based on improving fundamentals. Finally, we rank them based on high shareholder yield, high insider ownership, insider buying, high ROE, low debt, and relative strength.”
At a Glance: Boole Microcap Fund Performance Since Inception (June 9, 2020):
Boole Microcap Fund/Russell Microcap/S&P 500
2022 net return 36.5% -22.9% -20.0%
2021 net return 42.0% 18.3% 28.8%
2020 net return from inception 12.7% 31.7% 16.3%
Compounded annual return (net) 29.7% 6.3% 6.2%
Overall gain (net) 118.4% 20.1% 19.9%.