Ausbil’s Global SmallCap Portfolio Managers, Tobias Bucks and Simon Wood, discuss how they identify opportunities and the outlook for small companies going forward.
Manny Anton: Hi, I'm Manny Anton for the Finance News Network, and today we are talking to Tobias Bucks and Simon Wood, who are the portfolio managers of Ausbil's Global Small Cap Fund. Tobias and Simon, welcome back to the Network.
Tobias Bucks: Thanks.
Simon Wood: Thanks, Manny. Good to be back.
Manny Anton: Simon, where do the current constituents of the fund mainly come from and why?
Simon Wood: Well, Manny, we focus on global small caps all around the world. Our main market is the US market with about 55 to 60% of our investment universe. We also focus on Europe and the UK and a number of countries within the Asia Pacific region, including Japan, Australia, and New Zealand.
Manny Anton: Tobias, what is the benchmark being used to measure performance and how has the fund performed to date?
Tobias Bucks: So we use the MSCI World small caps benchmark to measure performance. And calendar year to date, net of fees to the end of August, we've delivered 16.81% against an index that's delivered 13.74%. So a strong return for the index and we've delivered strong return against that, up over 3%.
Manny Anton: Simon, what investment time horizon does the fund target?
Simon Wood: So the fund targets five or more years as its investment horizon.
Manny Anton: What screening criteria do you apply to potential constituents?
Simon Wood: So we look at a number of different criteria when we're assessing companies to undertake our detailed research upon. We look at quality, growth and valuation criteria, but very importantly we also look at liquidity criteria as well, to make sure the companies that we're investing in have the market liquidity there so that we can trade in and out of those names easily.
Manny Anton: What strategies do you use to mitigate risk?
Simon Wood: So risk management and risk mitigation is really important for us. Firstly, we think about diversification. So we want to have lots of great investment ideas within the fund, but also we want those ideas to be uncorrelated. So we're looking for ideas in different countries, whether that be the US or Europe, but also our best ideas but in different sectors, whether that be IT names or industrial names or staple names, and that diversification is really important. We also focus quite heavily on liquidity. We really think liquidity is a big risk for small caps and we always make sure the companies that we hold and the weights that we hold them at correspond to ample market liquidity for those names.
Manny Anton: Tobias, small caps tend to get hit harder when the economy is weakening and the market is selling off, but history has shown they always do better in the recovery phase. Do you think we're in or close to that recovery phase?
Tobias Bucks: Well, I think we've been in a strong recovery phase in the asset class since October last year, and that's provided some of the strong returns. I think going forward, whilst valuations will remain at risk from the movements in the bond yield and the pricing of money, what we do see is a lot of areas of demand growth that small caps can benefit from. And if we do see a continued economic trajectory and strong stock market, typically small caps do outperform.
Manny Anton: Small caps are currently trading at multiples to earnings that are three points below their historic average and at near one point discount to large caps. How does this compare to history?
Tobias Bucks: So they're really cheap, small caps are really cheap compared to large caps. And if you look back in time, small caps can trade at discounts to large cap, but when they do start outperforming large caps, they do go on a bit of a tear for a while. And I suppose the most recent example is in '03 when small caps were last trading at this sort of valuation discount to large caps. And from 2003 onwards we saw a robust period of over 10 years outperformance of small caps as yields increase and as the price of money increased.
Manny Anton: Where do you see the greatest opportunities going forward?
Tobias Bucks: Thanks. Look, the greatest opportunities are in demand growth that we are seeing from the energy transition and from IT and AI, particularly the semis that we need for AI and we need for power in EVs. So whilst we don't try and call the macro outlook too much, we want to be on the right side of where we think the economy's going. For us, what's most important with Simon and I is to look at the underlying companies and their clients and where the real demand drivers are coming from. And at the moment, we're expressing that in the portfolio through buying picks and shovels businesses that will help create the future for electric vehicles, for the energy transition of the grid and for AI and data centers.
And to be honest, that's what we're most excited about We've got some great returns already this year from those sorts of businesses. And we think going forward this isn't a one or two year demand cycle, we think this is a three to 10 year demand cycle in those key areas of the energy transition, the investment in the grid and in the semiconductors you need for EVs and data centers for AI.
Manny Anton: Simon, Tobias, thanks for your time today.
Tobias Bucks: Thanks.
Simon Wood: Thanks, Manny.