Exploiting opportunities in the small cap sector

Interviews

Transcription of Finance News Network Interview with Antares Small Companies Fund Portfolio Manager, Paul Dewar

Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from the Antares Small Companies Fund, is Portfolio Manager, Paul Dewar. Paul welcome to FNN.

Paul Dewar: Thank you.

Lelde Smits: The Antares Small Companies Fund provides actively managed exposure to a portfolio of Australian small companies. What is the attraction of small company Funds?

Paul Dewar: The attraction of small company Funds is the opportunity for investors to benefit from superior returns, generated from the exploitation of market inefficiencies. So the small cap end of the market is less efficient than the large cap end of the market, for a variety of reasons. Less buy side and sell side coverage, less rigorous disclosure from companies, less liquidity. So there’s a range of things that can be exploited to the ultimate benefit of the investor.

Lelde Smits: What is the objective of the Antares Small Companies Fund?

Paul Dewar: The objective of the Fund is to outperform its benchmark by five per cent per annum over a rolling five year period. So that’s the ASX/S&P Small Ordinaries Index.

Lelde Smits: Who is the Fund suited to and what timeframe do investors need to allocate to an investment in small caps?

Paul Dewar: Well it’s suited to investors with a high risk tolerance, seeking high returns over a five year plus period.

Lelde Smits: Investing in small caps can be inherently risky, as you mention. So how do you manage the risky downside with the highly attractive blue sky opportunities?

Paul Dewar: We actually have a risk management framework that we actually call core growth and blue sky. So that actually sets individual stock limits and also limits of stocks within those three categories. So a core stock would typically be a larger more liquid company, within the universe of stocks that we look at that has a longer track record and is profitable. A growth stock will be a bit smaller, a thinner management team, but growing more quickly than the blue sky. Kind of more the concept stocks or stocks that don’t have an earnings track record. So by placing limits at both a stock level and in the category itself, it ensures that inappropriate levels of client money aren’t directed towards risky stocks.

Lelde Smits: Moving to your performance now. How has the Fund performed over the past year and how does that compare to your benchmark?

Paul Dewar: In the 12 months to the end of March, the March quarter, the Fund had outperformed its benchmark by a little over 14 per cent. So in absolute terms it was around 13 per cent, versus the index at around minus 1.5 per cent.

Lelde Smits: Where have you made money over the March quarter and have you added to these positions?

Paul Dewar: In the March quarter we’ve made money out of a number of positions, as we have over the past year. TPG Telecom Limited (ASX:TPM), Ardent Leisure Group (ASX:AAD) and CSR Limited (ASX:CSR) have been three names that we’ve made good money out of, in the past year. Those names have done well; a couple of them have been playing the domestic East Coast cyclical recovery theme, in housing the CSR and domestic tourism with Ardent. We haven’t added to those positions, they’ve been large positions in the Fund for quite some time and have done very well.

Lelde Smits: On the flip side, which stocks detracted from your performance?

Paul Dewar: Probably in the March quarter, the main one would be Mermaid Marine Australia Limited (ASX:MRM) which is a company we’ve held for a long period of time. They made a very large acquisition in the quarter which took investors by surprise, both in its timing and its size. And it’s made investors wonder whether there’s an issue with the existing assets that this acquisition is seeking to cover up. We don’t think that’s the case, albeit there are some head winds with the existing business as offshore oil and gas activity off north Western Australia, starts to wind down.

Lelde Smits: Finally Paul, as a small cap Fund, what is your outlook for the sector over the year ahead?

Paul Dewar: The outlook’s positive. Low interest rates should continue to be supportive of equities in general and small caps in particular. We think the Australian dollar should weaken over the course of the next 12 months. And a domestic cyclical recovery is in train, particularly on the East Coast led by housing and retail stocks. We think valuations in the market are broadly OK, the small industrial P/E multiple is trading a little bit above its historic average, but still at its normal historic discount to large caps. So we think valuations are OK. And as always, there’s the opportunity as we find in any market, to add value through individual stock analysis and selection.

Lelde Smits: Paul Dewar, thank you for the update from the Antares Small Companies Fund.

Paul Dewar: Thank you.


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