Transcription of Finance News Network Interview with Ausbil Dexia Limited Fund Manager, Tony Waters
Clive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me from Fund Manager Ausbil to look at the mid to small cap segment of the market is Fund Manager, Tony Waters. Tony welcome back.
Tony Waters: Thank you Clive.
Clive Tompkins: You manage the Ausbil MicroCap Fund. How has the ex 200 section of the market performed over the last 12 months, and what have been the major themes?
Tony Waters: We’ve had a strong recovery at the start of this calendar year pulling from quite bearish market conditions that we had at the end of last year. What we’ve seen is during and post reporting season, you know, those companies that have come through with good earnings results, have rebounded strongly in the recovering market. The two speed economy has been very evident during that reporting season and mining services is one sector in particular, that has rebounded quite strongly. And we’ve also seen in the energy market, oil and gas junior stocks, there’ve been a number of names there that have rebounded quite strongly as well.
Clive Tompkins: Thanks Tony. And how’s the Fund performed during this period and since it started in February 2010?
Tony Waters: Well the good news for us is that we did well during that February reporting season and the Fund has rebounded strongly. Enough to have recouped the losses from the bear market of last year. Since we’ve started, we’re into our third year now and so far, investors who have been with us from the start have had a compound annual growth rate of over 44 per cent.
Clive Tompkins: OK and what sort of volatility should investors expect from MicroCap returns?
Tony Waters: Well the reality is that the small end of the market has been quite volatile and I think will always be a more volatile component, compared to a top 100 stock. But you know, that doesn’t mean to say that we can’t find some terrific business models within that, in you know that volatility for us creates opportunity.
Clive Tompkins: Thanks Tony. So investors really need to understand this if they’re to be rewarded for investing in small caps?
Tony Waters: Yeah absolutely. The interesting point was that some of the companies that got beaten up quite badly during the back half of last year, actually came out with some pretty good results for the half year in reporting in February, and have rebounded quite strongly there. So the market isn’t always efficient in the short term, it becomes more of a liquidity event based on market conditions at the time. But you know, we can look beyond the here and now and look at the business model and how it’s going to perform over the next few years. We can find some terrific opportunities and still believe that’s the case today.
Clive Tompkins: Looking at the composition of your Fund Tony. What’s the split between resources and everything else?
Tony Waters: Well if you look at our index, 60 per cent of our index is extractive industries base. Our exposure is 40 per cent, so we’re quite underweight the resources end of the market. But nevertheless still have some good exposure there.
Clive Tompkins: Good. So is this a case of diversification to reduce risk, or is it as much about returns being available elsewhere?
Tony Waters: A little bit of both. You know we always want to find good companies within a broad range of sectors, and we are finding a number of interesting ideas outside of the resources space. Within the resources component of our market, while we are finding some interesting ideas, overall there are a lot of names that are still fairly early in their business evolution. And still in some cases, many years before earning profits.
Clive Tompkins: So what are some of your bigger positions right now?
Tony Waters: We’ve been very favourably disposed towards the unconventional energy space. The key reason there is we’re seeing much greater returns on the cap invested in that space and reduced risk in that capital employ. And so a couple of names that we like there are Sundance Energy (ASX:SEA) and Red Fork Energy (ASX:RFE), both of those are exposed to US oil shale. Some of the small services companies in the market are still doing quite well, for example in Salary Packaging. McMillian Shakespeare (ASX:MMS) is a company that we took advantage of during the downturn last year and it’s performed well for us. And Credit Corp (ASX:CCP) in the financial services and in debt collection, is a company that we felt was very cheap coming into February and reporting results. And they certainly delivered and we still like that story. Elsewhere, BC Iron (ASX:BCI) is a junior iron ore player that actually makes money and not only does it make money, we think we’re peaking that on a multiple of its earnings that is very attractive, given its outlook. And it’s in ramp up phase to full production this year, and we very much like that story. And outside of that, you know some other sectors that we like that we found some good ideas are for example, Prime. Prime Group (ASX:PFG) which is a regional affiliate for the Seven Network, which is by far and away the number one rating network in the country. And we’re seeing a change in management really deliver some results there. And a retail business that nonetheless, is doing very well in Breville (ASX:BRG) in terms of you know, home wares and in kitchen goods, is really making some good inroads into the US market and has turned that business into a growth story. At least we think, for the next two to three years.
Clive Tompkins: Last question Tony. How do you think the mid to small segment of the market will perform this year?
Tony Waters: Well anyone answering that question is a very brave person indeed, given the volatility we’ve had over the last couple of years. But you know it’s probably worth keeping in mind what’s led the rally just at the start of this year; certainly we’ve had conditions ease somewhat in Europe. That’s not to say that we’re not going to have further issues down the track. But you know, while we’ve had those conditions ease, you will get a multiple re-rating based on the earnings that have been delivered. And you know in all probability, as long as those conditions stay in place, we should still see a fairly optimistic outlook for small caps. But given the volatility, we’ll just have to wait and see. What I would say is that, you know, we are still finding some good opportunities and that’s very much the case when you’ve got a universe where you’re looking at over a hundred different names that could, that are prospective companies for our portfolio.
Clive Tompkins: Tony Waters, congratulations on beating your benchmark for two years running.
Tony Waters: Thanks Clive, thanks for the interest.