Idea Brunch with Luke Winchester of Merewether Capital

Welcome to Sunday’s Idea Brunch, your interview series with great off-the-beaten-path investors. We are very excited to interview Luke Winchester!

Luke is currently the Portfolio Manager of the Merewether Capital Inception Fund, a Newcastle, Australia-based equity fund he founded in August 2021. Before launching Merewether Capital, Luke was an analyst and later a portfolio manager at Oracle Investment Management. The Inception Fund aims to make concentrated investments in the leading micro-cap companies in Australia.

(Editor’s note: Our sister publication, The Bear Cave, recently published a list of resources for professional investors, featuring new tools, government databases, emerging managers, and underfollowed accounts for idea generation. Check it out here.)

Luke, thanks for doing Sunday’s Idea Brunch! Can you please tell readers a little more about your background and why you decided to launch Merewether Capital?

Of course, mate! I came into investing through a slightly different path than most, originally starting my career in industrial relations, providing advice to small businesses on matters such as pay and conditions, union negotiations, and employee dismissals. It was a valuable experience, exposing me to the many issues that businesses face and provided a deep appreciation for how businesses must manage the expectations of so many different stakeholders.

My investing journey started as a small private investor in 2012, depositing a small slice of my savings into a brokerage account and buying the minimum parcel sizes of some very speculative mining companies on a hot tip from a friend. Naturally, those investments blew up (which served as a valuable lesson!), but I had caught the investing bug and became very interested in understanding more about businesses and how their performance was reflected in share prices.

Can you tell us about your research and investment process?

My process starts with understanding exactly what a business does. Like the idea of a circle of competence, I believe certain businesses and industries simply resonate better with different investors so I quickly filter down new ideas to ones I know I would be comfortable owning.

From there I will dig deeper into the business model, management, and competitors. The main question I am trying to answer at this point is “Do I believe this can be a significantly bigger business in the future?” The Fund is primarily invested in micro-cap companies, so I need to have a confident view the business can grow.

Finally, I will build a crude financial/valuation model. I have never been a big believer in hyper-detailed models, but rather ascribing more to the “napkin” method where the value proposition should be obvious with just a few key data points. Really, my models are more of a sense check to make sure the financials match what I would expect from the business model.

Three years into running your fund how has the launch been? What have been some of the positive surprises or unexpected challenges so far?

Challenging. We launched the Fund in late 2021 just as global markets peaked, and central banks embarked on the tightening cycle through 2022. It was quite humbling as an investor who had successfully invested for over a decade to experience a long, drawn-out bear market (particularly for micro-cap stocks) and realize that even in the face of good stock picking you can be at the mercy of the broader macroeconomic environment.

Nonetheless, I made it clear to my investors that we wouldn’t look to change our philosophy or process and after suffering a couple of tough years at the launch of the Fund we have recovered very well in 2024 and I’m optimistic it can continue with plenty of value on offer in the Australian micro-cap market.

Many Idea Brunch readers are based in the United States. Can you share insight into the Australian markets and why Australia is an attractive place for small-cap investing?

The Australian market has a very different composition to the US, though if readers are familiar with the Canadian market they would have a feel what to expect. The top end of the market is dominated by banks and diversified miners, and there is a very long tail of mining explorers looking to have the winning lottery ticket and strike it rich.

But underneath all that is a very well-supported small and mid-cap market that can trade at some eye-watering valuation multiples due to the scarcity premium they attract. The Australian market is small, and if you are a manager with a quality and growth tilt your investable universe is even smaller. I like to operate at the level below those companies and try and find the micro-cap stocks that can grow into the small and mid-cap space and entice those same lofty valuations.

What are some interesting ideas on your radar now?

One of the most fruitful hunting grounds I have found recently is companies that IPO’d in 2020-21 in the very loose financial conditions of the time which then subsequently got hammered as conditions tightened through 2022. Without the longer listed operating history, investors have been very slow to come back to these businesses, even as their operations have strengthened in the face of declining share prices.

Let me share two examples.