Cleveland, who manages the Renaissance US Growth Investment Trust, said that companies run by CEOs with large ownership positions, usually 10 per cent or more, perform infinitely better than companies run by CEOs with low ownership positions or companies run by CEOs with middle of the road ownership positions.
"Entrepreneurs are driving world economic growth. To participate in growth, investors need an asset allocation in entrepreneurial class. By these I do not mean a venture capital trust, but companies where the owner/founder and still significant owners of the company," he said.
"In the last ten years the Russell 2000 Index, which we use as our benchmark and which has been the best performing average index over the last 15 years, has returned 44 per cent. In comparison those investing in entrepreneurial ownership would have seen returns of 183 per cent.
Cleveland said he is finding growth opportunity from entrepreneurial companies not only in the US/Canada but also in Asia, in particular China.
"Most entrepreneurs are located in these two areas. We have started looking at India but there are very few companies out there which trade in the US," he said.
"Growth in the US does look set to continue, we are muddling along at the moment, it’s not great growth but it is definitely there."
Looking at China, Cleveland said he mitigates risk by investing only in US-listed companies, of which there are approximately 300. These companies have US GAAP financials and comply with Sarbanes-Oxley.
"CEO ownership of median US-listed Chinese companies is 29.6 per cent and median US-listed Chinese companies trade at a price to earnings ratio of 9.63 per cent," he said.
At 31 March, 2010 Cleveland said that 50 per cent of the portfolio comprised of US traded Chinese companies, which include leading landscape company China Greenscape and leading colour printing processor Duoyuan Printing.
The Renaissance US Growth Investment Trust uses a disciplined check list to filter down the companies it wishes to invest in, however Cleveland says there are 850 companies which currently meet this criteria.
The check list consists of ensuring the CEO and management have a major stake in the business and that they have a vision to build a substantial company that can be clearly articulated. The trust also looks at profitability and makes sure that it is selling for a reasonable price.
Since its launch in January 1996, the trust has outperformed the Russell 2000 by 84.90 per cent, returning 191.14 per cent to investors. It has also outperformed its sector and the S&P 500 index as the
chart below shows.
Source: Financial Express Analytics
The largest holding in the portfolio is to Anchor Free, Inc an internet security company.
"Anchor is a totally entrepreneurial situation and has been an enormous success in a small amount of time," said Cleveland.
The trust sits in the IT North American Smaller Companies sector and Cleveland said he is definitely seeing more opportunities in the small caps area at the moment and believes these companies offer more return, and despite general consensus, less risk.
"Size does not always equate to safety, General Motors, Lehman Brothers etc these were all large established companies, but their CEOs had no skin in the game," he explained.
"Ironically smaller companies have less debt. The biggest benefit is that you make more money and take on less risk so they give you more gain, less risk," he concluded.