Glennon Capital talks long-term performance

Funds Management

by Jessica Amir

Glennon Capital Portfolio Manager Tim Powditch talks about the small caps segment of the market, the company's investment process, portfolio composition and performance.

Jessica Amir: Thanks for tuning in to the Finance News Network, I’m Jessica Amir. Today I’m with Glennon Capital’s Small Companies Limited (ASX:GC1) Portfolio Manager, Tim Powditch. Hi Tim and welcome to the Network.

Tim Powditch: Hi Jessica, thanks for having me.

Jessica Amir: First up, for those who haven’t heard of your listed investment company (LIC), just give us a quick introduction.

Tim Powditch: The listed fund listed around three years ago, it’s now worth just under AUD$50 million. We’re stock pickers at Glennon Capital, we don’t tie ourselves down into any particular style, although we like to find growth in our investments, and we need to have value in that growth. We’ve been paying franked dividends since inception and currently yielding, around 4.3 per cent.

Jessica Amir: Now let’s zoom in on the small caps segment of the market, and why it’s so unique. What can you tell us?

Tim Powditch: We like small caps, because they tend to outperform if left to their own devices, as they did in 2017. In 2018, they’ve been performing in line with the large cap stocks, because the market’s been influenced by outside forces. We like small caps because they offer growth. If you compare them to the top 100 companies, which grow at GDP, small caps are striving for that growth.

We also like them because of their diversity. Buying small caps, you are getting a range of companies in the whole of innovative areas. Whereas in large caps, you tend to get the banks, BHP Group (ASX:BHP), Rio Tinto Limited (ASX:RIO) and Telstra Corporation (ASX:TLS), and maybe a couple of large retailers.

Small caps also tend to outperform industrials over time, so we do prefer industrials. But at the moment, the whole market’s been sold off and so there’s good value in the small cap market.

Jessica Amir: Now to the fund, just tell us about the composition, or what it’s made of?

Tim Powditch: The Glennon fund typically operates around 35 stocks, that’s pretty concentrated. We prefer industrials over resources, although we do hold some producing resource stocks, which are earning revenues. At the moment, the fund’s probably concentrated to a few sectors like mining services, on the back of the resurgent resources industry and the inflation being caused, by the east coast infrastructure spend. Stocks like Macmahon Holdings (ASX:MAH), Emeco Australia Pty Ltd (ASX:EHL), Alliance Aviation Services Limited (ASX:AQZ).

We also have quite a good skew towards Australian stocks that are performing internationally. And that’s helped by the lower $AUD, but also the innovation and these capital light services businesses, such as Apollo Tourism & Leisure Limited (ASX:ATL) and Afterpay Touch Group Limited (ASX:APT), and Lovisa Holdings Limited (ASX:LOV) and City Chic Collective Limited (ASX:CCX).

Jessica Amir: Thanks Tim and how has the fund performed?

Tim Powditch: Since inception, which is a little over three years, the fund has returned around 12 per cent per annum. That’s if you reinvested the dividends over that time. The NTA, including accumulative dividends is AUD$1.16 and the stock’s trading at AUD$0.94 cents.

Jessica Amir: What’s your outlook for the fund?

Tim Powditch: The macro environment is quite benign, unemployment is at six-year lows, inflation is low. GDP growth’s topping three per cent, interest rates are still pretty low. Stock picking is key for us. Earnings should be solid, but we think investors will be shy for sometime, it may be flat outcome. So we certainly need catalysts in our investments. There’s been a valuation shift in the market obviously. And this allows us to look further into the bigger end of the small cap market, and less towards the higher risk microcap portion of the market.

Jessica Amir: What’s your message to investors in terms of long-term wealth creation, and what are the principals that you follow?

Tim Powditch: We look at a three-year plus horizon when investing in stocks. Every good stock has a good start, middle and an ending. In other words, you need the right valuation at the beginning, when you invest the stock, you need the rights to hold that stock over time. And to see the share price appreciate. And you need the right valuation to when you should quit the stock. Within the macro environment of course, we would look for growth in most of our stocks.

We like to have a value element in that growth. Now that could be a pure value element like a low P/E and a high yield, but that must come with growth. Or it could be a stock that doesn’t appear good value at the moment, but it might show great value in four or five years, with rapid growth. And as I’ve said before, stock picking must have catalysts. A good example is Macmahon Holdings. Macmahon Holdings (ASX:MAH) is a contract mining services business. It’s been around a long time, it’s had some tough times in the past.

Why we like it is because it’s starting to prove itself with new management. It’s through its recovery phase now and the valuation should improve in the market, as it continues to prove that. It’s showing reasonable growth, it has a pipeline of AUD$7 billion. But importantly, AUD$6 billion of that pipeline is with existing customers, or on existing contracts. So the opportunity for Macmahon is quite large and it has an element of surprise too, which we think is positive. It has a profit share arrangement with some of its contracts that could certainly boost earnings, over the next couple of years.

Jessica Amir: What would you like to leave with investors today?

Tim Powditch: I think every equities portfolio should have an element of small caps in there, for the growth and diversity they bring. And after the recent market correction, small companies happen to be a lot cheaper than they were, quality small companies. And the best way to invest in small companies is through an experienced stock picker, like Glennon Capital.

Jessica Amir: Thank you so much for your time Tim Powditch.

Tim Powditch: Pleasure.


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