Ausbil MicroCap Fund Portfolio Manager Mason Willoughby-Thomas and Equities Analyst Arden Jennings talk portfolio positioning, fund activity and market sentiment.
Jessica Amir: Hi I’m Jessica Amir for the Finance News Network. Joining me from Ausbil MicroCap Fund is Portfolio Manager, Mason Willoughby-Thomas and Equities Analyst, Arden Jennings. Welcome.
Mason Willoughby-Thomas: Thank you.
Arden Jennings: Thanks for having us.
Jessica Amir: First up can you give us an introduction to the Fund and its performance?
Mason Willoughby-Thomas: The Ausbil MicroCap Fund is a fund that focuses on companies that sit outside the ASX 200. It has a long-term investment objective of exceeding the emerging companies index, by five per cent per annum, over a rolling three-year basis. For the most recent quarter, the September quarter, the Fund delivered a return after fees of 11.2 per cent, which exceeded the benchmark return of 8.8 per cent, which exceeded the benchmark by 2.3 per cent.
In terms of the positioning in the portfolio, so the key changes we’ve made since reporting season have been to reduce our weighting, to the consumer discretionary space, where we’re seeing a combination of both cyclical and structural pressures. At the same time, we’ve up weighted our exposure to the materials and mining services sectors.
Arden Jennings: And just on the mining services sectors, part of that move was at the beginning of the financial year, we had cautious optimism that the mining contractors and infrastructure space, was gathering steam. And following two recent trips to Perth that confirmed our conviction, that order books and pipelines were strong.
Mason Willoughby-Thomas: From a bottom up perspective, the mining services contract is particularly well placed to benefit from the uptick in investment, in the mining and infrastructure space. Their business models are leveraged to activity levels in these different sectors. As well as that they have been raising capital and using growing levels of internally generated cash flow, to pay down debt and deleverage their balance sheets.In response, we’ve invested in a number of the names, in particular Emeco Holdings Limited (ASX:EMH), an equipment hire company. As well as NRW Holdings Limited (ASX:NWH), which is a mining services contractor with exposure to both mining and infrastructure, on the east coast of Australia.
Jessica Amir: A more general question now. Can you tell us about the performance of small caps?
Arden Jennings: Following a subdued period of underperformance by small caps. In the last three months, we’ve seen small caps outperform large caps. And this has primarily been driven by the resource segment of the market, outperforming industrials.
Mason Willoughby-Thomas: Small caps are particularly well placed to benefit from improving global growth, given they offer more leverage, due to relatively immature business models and a superior growth profiles.
Jessica Amir: Can you tell us about your largest positions and if you’ve made any changes?
Mason Willoughby-Thomas: One of the more exciting parts of the portfolio has been the electric vehicle fanatic. We’ve been investing in a number of ways to get exposure to this new and exciting thematic. We’ve been building our exposure to lithium. Lithium is a key component in the development of batteries for electric vehicles. As well as Lynus Corporation (ASX:LYC), which is a large producer of rare earths minerals, which go into the production of motors for electric vehicles.We’ve also been building our exposure to other important commodities, such as nickel and copper.
Arden Jennings: Another longstanding position in the portfolio in the industrial space is Smartgroup. This is a salary packaging and novated lease provider. It’s an industry leader providing services to governments, institutions and also charities. We like the business because it’s capital light, it is highly cash flow generative and the balance sheet is in good shape. The stock is appropriately priced; it’s on 11 times EBITDA with roughly 15 per cent EPS growth. So we find it hard to fault.
Mason Willoughby-Thomas: We’re cautiously optimistic that the current conditions can continue. Our top down work internally suggests that the strong global growth is set to continue. And we believe that small cap companies are particularly well placed to benefit from that. Mining services, as we’ve discussed, have good pipelines and order books, giving them visibility over the next three to five years, which we expect will continue to be a strong thematic. Synchronised growth globally should be supportive for metals prices and then, therefore, supportive of resources.
We continue to be cautious on the consumer, on the domestic consumer and domestic cyclicals generally,given where the Australian economy is at, at the moment. We have a focus on high quality industrials, which have strong sustainable business models. We also remain cautious on the outlook for so-called bond proxies, which are particularly sensitive to moves in interest rates, as bond yields in the US start to rise. These sectors include real estate investment trusts and utilities, and large telecom communications companies.
Jessica Amir: Mason Willoughby-Thomas, Arden Jennings thank you so much for the update.
Mason Willoughby-Thomas: You’re welcome, thank you.
Arden Jennings: Thank you.