Episode 3: Part 2: Portfolio construction, position sizing and a typical “Paradice stock”

Portfolio construction and stock selection strategies vary significantly across market capitalizations, with small-cap funds requiring higher diversification—typically around 60 stocks—to mitigate the heightened gap risk and earnings volatility inherent in smaller companies. David Paradice, founder of Paradice Investment Management, emphasizes that position sizing is a blend of art and science, where higher conviction in earnings visibility and valuation upside justifies larger allocations of up to 5% or 6%. The investment philosophy centers on identifying companies with strong competitive moats, high-quality management, and the potential for "multiple expansion," where a stock re-rates from a low to high P/E ratio as the market gains confidence in its growth. Ideal targets include businesses benefiting from structural industry shifts rather than cyclical economic trends, supported by robust cash flows and conservative management teams that prioritize staff and community welfare.