Arden Jennings and Andrew Peros, Portfolio Managers for the Ausbil Australian SmallCap Fund, discuss the performance and objective of the fund, top holdings, investment thematics, and the outlook for small caps going forward.Tim McGowen: We're talking today with Mr Arden Jennings and Andrew Peros, who are the Portfolio Managers for the Ausbil Australian SmallCap Fund. Gentlemen, welcome to the network. Thanks for your time. Arden, let's start with you, if you don't mind. Can you give us an introduction to the fund?
Arden Jennings: Yeah. So, the Ausbil Australian SmallCap Fund is an actively managed fund focusing on small companies outside the ASX100. At Ausbil, we adopt a core approach. So, we're style indifferent, which means we can be tilted towards growth or value stocks at any one point in time. The fund adopts a similar four-stage process to the broader suite of Ausbil funds, including an investment-grade filter, where we focus on those companies that are profitable and liquid, that have really strong balance sheets and high return on investor capital. And we also integrate ESG into our process. So, for us, the fund really leverages the broader Ausbil group, but also the successful long-term track records of the Ausbil microcap strategy, and also the Ausbil Emerging Leaders Fund, which is predominantly mid-cap-focused.
Tim McGowen: Andrew, over to you. What's the fund aiming to achieve for investors?
Andrew Peros: The objective of the fund is to outperform the small ordinaries benchmark over the medium term. We think markets are relatively efficient, but not perfect, and it's that imperfection that we really like to capitalise on as active managers and continue to add outperformance through all periods of time.
Tim McGowen: Now, Arden, turning towards performance, can you give us a brief overview of the fund's performance?
Arden Jennings: Yeah. So, we're pleased with the performance, with the fund now passing two years since inception on 30 April 2020. And the fund has returned 33 per cent compound per annum net of fees. And that compares to the benchmark return of 12 per cent compound per annum. So, outperforming by 21 per cent compound per annum, and that's to 31 August 2022. But, most pleasingly, has really been the downside protection within the fund. So, when the market has fallen, we've fallen by less. And we really put that down to the quality companies that we own in the portfolio, but also obviously our robust investment process that's adopted.
Tim McGowen: Andrew, what's one of the portfolio's top holdings?
Andrew Peros: AUB Group
(ASX:AUB) is one of our core portfolio holdings. In fact, it's our largest position in the fund at the moment. It's an insurance broker, capitalising on the tailwinds of a hardening rate cycle, similar to what the general insurers are enjoying at this present time. However, from AUB's perspective, they don't take any insurance risk. They just clip the ticket along the way. So, it's capital-light, generates really high returns, which we love. It's continuing to grow, irrespective of cyclical conditions. And, perhaps most importantly, they've just undertaken a recent transformational acquisition, the Tysers acquisition. Some market analysts have taken a relatively glass-half empty approach to that. We're more than happy to take the other side of that. We've done some deep-dive work. We really understand the business, we're comfortable with the business, and we think in the fullness of time it will prove to be a highly accretive deal for them.
Tim McGowen: And, Arden, can you give us another example of a stock held within the portfolio?
Arden Jennings: Yeah. Lovisa
(ASX:LOV), which is a fast-fashion jewellery retailer, is a company that we know well because we have been invested since 2017 in the Ausbil MicroCap Fund. So, we've been able to establish a position for the small cap fund very early, and that's one of the advantages we have. They're a fast-fashion jewellery retailer that have fantastic store economics and a global rollout opportunity under a new CEO. We really like the sustainability of the business model, given its cookie-cutter approach and store-unit economics, and see the store rollout program globally accelerating from here significantly, which should generate consensus upgrades.
Tim McGowen: And, of course, Andrew, markets have been really volatile. How do valuations look from a small cap perspective?
Andrew Peros: Markets certainly have been volatile, and particularly in that small cap space of the market. We're always mindful of market valuations. We use a number of different metrics. We often look at market multiples in an absolute sense, relative to history, relative to peers. And while we're always mindful of that, we still prefer to prioritise earnings and earnings revisions, which is at the core of the Ausbil philosophy. So, that said, we do see plenty of opportunities in the market. We do see a number of high-growth businesses growing irrespective of market conditions. They're the type of companies that we love, and they're the type of companies that we like to populate the portfolio with.
Tim McGowen: And, Arden, of course, small cap companies are always looking to raise capital. It's a difficult market at the moment. What do you see? What industries are vulnerable in terms of having to raise capital at the moment?
Arden Jennings: Yeah. So, for us, the sustainability of the business model is critical in small and micro caps. So, those companies that don't have sustainable business models and rely on external capital markets to fund their growth we see as being vulnerable. So, the cost of capital is rising as interest rates rise, and that means companies that are unprofitable, particularly those in the IT space, we see as being vulnerable. And that's why we've got an investment-grade filter, focusing on profitable and liquid companies.
Tim McGowen: And, Andrew, what sort of investment thematics represent the best opportunities moving forward?
Andrew Peros: The decarbonisation of the planet is without a doubt the strongest long-term thematic that we see across markets. That involves the move towards lower carbon power sources and renewable energy as the world readjusts to this more sustainable way of living. From an investment perspective, there'll be many companies that benefit from this thematic, whether it be companies required to support the capital investment, the commodities required to support the energy transition, the electrification of motor vehicles. And then perhaps finally, the move away from fossil fuels to cheap energy alternatives could in time really supercharge corporate profits.
Tim McGowen: And, gentlemen, just to finish, and a question for both of you, what's Ausbil's outlook for small caps moving forward? We'll start with you, Andrew.
Andrew Peros: We've certainly seen a number of different cycles and market gyrations over the past 12 months, and we think the volatility will continue as the world readjusts to the normalisation of rates and removal of excess liquidity from the system. To some degree we'd look forward to volatile markets, because it gives us the opportunity to add to existing positions and introduce new positions into the portfolio.
Tim McGowen: And, Arden, your thoughts in terms of Ausbil's outlook?
Arden Jennings: Yeah. So, as active managers, we're always on the hunt for the undiscovered, under-researched and under-owned companies. And we have a very thorough investment process to be able to navigate any volatility that may come about. And, with that strategy, we're confident that we can continue to outperform across all market conditions.
Tim McGowen: Gentlemen, thank you for your time.
Andrew Peros: Thank you very much for having us.
Arden Jennings: Thank you, Tim.
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