Transcription of Finance News Network Interview with Fairview Equity Partners Executive Director and Portfolio Manager, Leigh Cronin Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Fairview Equity Partners is Executive Director and Portfolio Manager, Leigh Cronin. Leigh, welcome back to FNN.
Leigh Cronin: Thank you, thanks for having me.
Lelde Smits: The March quarter has been strong for small cap equities. What factors do you believe have fuelled performance?
Leigh Cronin: The March quarter was a strong one for small cap equities. The Small Ordinaries Accumulation Index was up around 7.3 per cent, for the quarter and we tracked a little bit ahead of that, which was pleasing. Probably the main driver was the fact that contrary to some of the expectations going into it, the February half year reporting season was broadly in line with expectations.
There’re always a few surprises at an individual company level, but the broader tone was one of modest improvement. And on the back of that earnings expectations and the forward outlook, was left broadly unchanged.
Lelde Smits: What have been some of the Fund’s positive contributors this year?
Leigh Cronin: Over the 12 months to March, two of the stronger positive contributors have been Beacon Lighting Group Limited
(ASX:BLX), which is an IPO over the last 12 months. It’s been strongly rerated on the back of very strong, like for like sales growth, as well as margin improvement. And global asset manager Magellan Financial Group Limited
(ASX:MFG), has also been a strong contributor. Still growing its Fund very strongly, with solid returns and continued strong fund flows.
Lelde Smits: Which companies detracted from performance and are you still holding them?
Leigh Cronin: Over that same 12 months to March, the two stocks that have most negatively impacted our performance, have been G8 Education Limited
(ASX:GEM) and Sundance Energy Australia Limited
(ASX:SEA), which has been negatively impacted by the declining oil price environment. In terms of G8, which is a top ten position within our Fund, we’re still very attracted to the childcare sector. The recent budget has provided some certainty in terms of the funding environment, for the sector and we’re positively disposed towards its acquisition strategy.
It’s shown an ability to acquire these assets at four times EBIT (earnings before interest & tax), which is providing very strong returns on capital and to improve the operations of those childcare assets. So we think there’s far less, rather than more reasons to be concerned about the sustainability of that business model, over the near term.
Then the other stock that’s detracted from our relative performance, if you like, has been Domino’s Pizza Enterprises Limited
(ASX:DMP), which has performed very strongly and we have not held that within the Fund over this period.
Lelde Smits:The Fund’s benchmark is the S&P/ASX Small Ordinaries Accumulation Index. What has the Fund’s performance been relative to the benchmark?
Leigh Cronin: As I mentioned, over the three months to the end of March, the Small Ordinaries has performed strongly, up about 7.3 per cent and we tracked slightly ahead of that. Over longer term time periods, over the three years to March, our Fund has returned 6.7 per cent net of all fees, which is about eight per cent above benchmark. And since inception, which was back in October 2008, our Fund has delivered 13.3 per cent per annum net of fees, which is around 10 per cent ahead of the benchmark.
Lelde Smits: Finally Leigh, what is your outlook for the smaller companies market?
Leigh Cronin: Well being bottom up stock pickers, it’s more about the individual stock selection. More about finding those companies that are less well researched, less earlier stages of maturity, or have growth options available to them that give them a growth rate that’s above that of the normal economy, if you like. Having said that, the small industrials is trading on around 15.5 times 2016, which whilst not cheap is not overly stretched, in our view.
The broader environment that we’re in, we’ve got record low interest rates, significant reductions in energy prices, buoyant housing market. So they should all be conducive to an improving consumer outlook, which would hopefully flow through to spending and the broader economy.
IPO activity remains very strong at the moment, now the quality of what’s coming to the market remains variable. And the return hurdles need to be higher given the time constraints and the lack of, I guess, visible history for those companies. But it’s certainly expanding the available investment opportunities.
So if we wrap all that up together, we’re spending a lot of time out there visiting companies at the moment. We’re seeing a lot of new opportunities and we’re really encouraged by the outlook.
Lelde Smits: Leigh Cronin, thank you for the update from Fairview Equity Partners.
Leigh Cronin: Thank you.
Ends
