News: Evaluating MicroCap market performance

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Transcription of Finance News Network Interview with Ausbil Dexia Fund Manager, Tony Waters

 

Donna Sawyer: Hello I’m Donna Sawyer from the Finance News Network and joining me from Ausbil Dexia is Fund Manager, Tony Waters. Tony welcome back.



Tony Waters: Yeah thanks Donna.



Donna Sawyer: Could you start by introducing the Ausbil MicroCap Fund and tell me about your investment philosophy?



Tony Waters: Yeah sure, the Ausbil MicroCap Fund is a fund that invests outside the ASX 200 companies. The philosophy of the Fund is to find companies that we believe, will beat earnings expectations in the market and therefore, deliver outperformance for our investors.



Donna Sawyer: Your Fund is benchmarked to the S&P/ASX Emerging Companies Accumulation Index. How is it performing?



Tony Waters: Yeah our Fund has provided returns to our investors over this financial year of 34 per cent, net of all fees. And that’s been similar to the performance since inception; we’ve been running for a little over three years now. At the same time, the Emerging Companies Index which we’re benchmarked against has provided negative returns. And that’s largely due to the composition of resource companies within that Index.



Donna Sawyer: In your portfolio of Australian shares, which stocks have emerged as the best performers?



Tony Waters: Well unsurprisingly given the composition of the market, the better performers have been the industrial side of our portfolio. A couple of names such as Ainsworth Gaming (ASX:AGI) and Breville (ASX:BRG), both of these are global growth businesses with good US dollar earnings exposure. Both are taking market share off their competition and been very good performers for us. Elsewhere, Credit Corp (ASX:CCP) has been another good stock for us. Post GFC, it’s had a management team which has been very disciplined in terms of how it’s managed the business, reinvested quite prudently in the business and has continued to deliver great returns for us.

And somewhat surprisingly, our manufacturing business. Domestic manufacturing business has been a good performer for us in Maxitrans (ASX:MXI), which is exposed to road transport and has benefited through change of business mix, good productivity gains and also some market share gains. So you know they’re some of the companies that have done quite well for us over the last 12 months.



Donna Sawyer: You say you have a style neutral process. What’s the composition of the Ausbil MicroCap Fund and what’s the strategy behind that?



Tony Waters: Well the style neutral process comes about insofar as we’re trying to provide consistent returns for our investors, across the full business cycle. So in essence, we’re still in the small cap space, look at macro settings and look at how that affects different industry sectors, either from tail winds or head winds that those sectors have been exposed to. On that basis, we’re quite overweight some of the small industrial sectors at the moment, particularly those with exposure to offshore earnings. And have remained underweight resources, as we have for the last 18 months.



Donna Sawyer: You’ve also noted your focus on the unconventional energy space. What’s your view on energy stocks now and are there any standout performers?



Tony Waters: Yeah look we still like that space, but specifically the unconventional space in the US, as opposed to Australia. The performance on the couple of stocks that we do own there hasn’t been as expected, in the last 12 months. But you know we’re not too concerned about that, as long as those companies are tracking to set targets and we’re comfortable that they are doing that. Having said that, we haven’t increased our weight to those companies simply because we’ve found some more favourable opportunities, in some other companies within the industrial parts of our universe.



Donna Sawyer: Which macro factors pose a risk to the MicroCap market in the year ahead?



Tony Waters: I think in the short term, the focus has to be on the domestic economy. And that’s really a third front that’s really emerged in recent times, given the drop in the Australian dollar and the fact that small companies are more domestically a base, in terms of their assets. And you know, to be quite frank, the domestic economy is still facing difficult conditions. We’re seeing structural shift in the domestic economy, where the baton’s been passed across from the west of the country in terms of a huge resources boom, to where that’s now starting to tail off somewhat. But the east coast, in industrial sectors has really yet to pick up the baton, even though we are starting to see more favourable macro conditions. You know, such as a drop in interest rates and of course, the drop in the Australian dollar also.

I think what we’re still waiting for is both business and consumer confidence to pick up. And for some of those macro favourable trends to start to gain some traction, within the non-mining sector of our economy. And we think we’ll start to see that in the second half of this year. So good quality industrials will still be sought after, we believe. And you know, we think that will filter down to some good performances as long as we pick the right companies within that space, throughout the balance of this year.



Donna Sawyer: Finally Tony. What is your forecast for the mid to small segment of the market for the remainder of the year?



Tony Waters: Well I think you need to think about a couple of things here. One is you need to – if you’re looking at the Indices in general being the small ords, or in our case, Emerging Companies Index. And I think there’re still some issues there insofar as, you know, the huge amount of capital that was raised in the junior resource space is still yet to wash fully through, in those indices. So that’s still going to have impact in terms of performance.

Having said that, we think there’s pockets within the small cap end of the market which are going to be quite favourable. Certainly small end of the market, we think we can find companies that are delivering very good returns on its capital base and will deliver better growth, than perhaps some of the larger cap industrials. And so there’s still going to be good opportunities for us to deliver performance, despite the Index in general having composition issues.



Donna Sawyer: Tony Waters, thanks for your update on Ausbil Dexia.



Tony Waters: It’s a pleasure, thanks for the interview Donna.



Ends