Ausbil Australian SmallCap Fund celebrates first year with gain of 82.3%

Funds Management

by Melissa Darmawan

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Ausbil Australian SmallCap Fund Portfolio Managers Mason Willoughby-Thomas and Arden Jennings talk about the outlook for small caps, the performance of the fund on its first-year anniversary, major themes, and the stock holdings that contributed to the fund's outsized returns.

Melissa Darmawan: Hello. Melissa Darmawan for the Finance News Network. Joining me from the Ausbil Australian SmallCap Fund are Portfolio Managers Arden Jennings and Mason Willoughby-Thomas. Arden, Mason, nice to meet you both.

Arden Jennings: Good morning. Thanks for having us.

Melissa Darmawan: You're welcome. Tell us about the fund and its key focus?

Arden Jennings: So, the fund is a high conviction, small cap fund. We can hold up to 60 stocks and down to 25, but typically around 40 stocks in the portfolio. We're really wanting to build a portfolio that is full of undiscovered, under-researched, and under-owned small caps.

Mason Willoughby-Thomas: So, our core investment philosophy is that earnings and earnings revisions drive share prices. So, as a consequence, our fund is style agnostic. What this means is, at any point in time, our fund may have a growth or value bias, depending on where the opportunities for earnings revisions may reside. So, for example, in the early months of the fund's inception, we had a distinct growth bias within the portfolio, but as economic prospects began to improve, the fund did start to tilt towards more cyclically sensitive names, or value-based names. So, it took on a distinct value bias towards the end of calendar year '20 and into early calendar year 2021.

Melissa Darmawan: How has it performed?

Arden Jennings: The fund for the one year to 30 April 2021 has returned an absolute return of 82.3 per cent net of fees versus the benchmark return of 39.8 per cent, leading to outperformance of 42.5 per cent. And this has been really spread across a number of sectors and names, which is very pleasing.

Mason Willoughby-Thomas: Just as important as picking winners is avoiding the blow-ups in small cap investing. Our process seeks to avoid concept stocks, stocks with unproven business models. And it does impart a degree of natural quality bias to the fund with an emphasis on balance sheet strength, cashflow and return on invested capital. Our bottom 20 companies within the portfolio, from a contribution perspective, delivered a negative 12 per cent return on average, which compares very favourably to the top 20, which delivered a return of 104 per cent, highlighting the benefits of a disciplined investment process and a focused bottom-up investment analysis process as well.

Melissa Darmawan: Now to the portfolio. What positions are you excited about?

Arden Jennings: Uniti Group (ASX:UWL) is a position in the small cap fund that regular readers of our monthly reports will be familiar with. Over the last six months, it's returned over 130 per cent. What excites us about the position still is that it's an NBN Challenger essentially operating in an oligopoly like structure with two major players. It's highly cashflow-generative. It has strong organic growth with a contracted and in-construction order book of over 200,000 lots, which should provide over five years of organic growth for the business going forward. Over 70 per cent of revenue and earnings are recurring in nature and rely on people paying their internet bills, which we think is highly likely to continue. It operates in the infrastructure space. We think it can be potentially be a takeover target in the future, given its high cashflow, organic growth and recurring revenue.

Mason Willoughby-Thomas: So, another company that we're very excited about is BetMakers Technology Group (ASX:BET). At its core, BetMakers acts as a content pipe between the content providers, who are the racing bodies, the global racing bodies, and the consumers of that content, which are the bookmakers and race-wagering operators. A recent acquisition that they made we thought was particularly exciting. So, they acquired a company called Sportech. This provided them a very favourable position in the US market, with 9,000 on-course retail betting terminals across 36 states. Not only does it provide a step up in scale for the business, but it also positions them very favourably to benefit from the potential expansion of fixed-odds wagering in the US over the coming years.

Arden Jennings: Other top holdings that are held in the fund, and we have conviction in include UK bank Virgin Money (ASX:VUK), which is really leveraged to a recovery in the economy in the UK. Also, a few names are exposed to a recovering in both housing or infrastructure. So, those two being Domain Holdings (ASX:DHG), which will benefit from a rising in listing volumes as we've seen house properties rise, but also Fletcher Building (ASX:FBU), that is exposed to both the materials space of the housing market as well as infrastructure. And finally, we also have the EV thematic in the portfolio, with a number of names exposed to that, including Linus (ASX:LNU), IGO (ASX:IGO), and Galaxy (ASX:GXY) in the fund.

Melissa Darmawan: Last question. How do you see the market for small caps over the coming year?

Mason Willoughby-Thomas: We're seeing a very strong global economic recovery. One of the key things for small caps and the sustainability of their business models is the ability to access capital at attractive prices. And, at the moment, there is certainly plenty of evidence, if we look at the IPO market as well as the number of placements that been taking place, that access to capital at attractive rates is certainly available and supportive of small cap companies.

Melissa Darmawan: Arden Jennings, Mason Willoughby-Thomas, thanks for the update and congratulations on the fund's great start to its first year.

Mason Willoughby-Thomas: Thank you.

Arden Jennings: Thanks a lot. Thanks for having us.


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