Lonsec upgrades the DNR Capital Australian Emerging Companies Fund

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DNR Capital’s Australian Emerging Companies Fund[1], has been upgraded to ‘Recommended’ by Lonsec Research, which says the Fund’s investment approach has been tested during a challenging environment since its launch in 2018 and “has delivered strong results.”

Lonsec says the DNR Capital Australian Emerging Companies Fund provides investors with access to DNR Capital’s highly regarded bottom-up stock selection approach, with a focus on quality companies trading at attractive valuations.

Lonsec notes the broader team and process have been able to generate considerable alpha versus the large cap benchmark during their tenure. While the process is less established in small caps, Lonsec believes it is reasonable that the team can achieve similar alpha potential in small cap equities through the application of its ‘quality’ approach.

According to the Fund’s latest performance report, it produced a return of 59.06% over 12 months 31 July2, compared with a return of 32.30% for the S&P/ASX Small Ordinaries Accumulation Index over the same period.

Since inception in August 2018, the Fund has returned an average of 19.42% a year[2], compared with 8.57% a year for the index.

DNR Capital takes a concentrated approach, with the portfolio holding 20 to 45 stocks. Management of the Fund is led by Sam Twidale, who joined DNR Capital from Schroders in 2017. Lonsec says his global investment experience is a benefit in the management of the Fund.

DNR Capital’s stock research has a strong focus on identifying high quality companies. Stocks must pass an initial series of quantitative screens designed to narrow the investment universe. This approved list of companies is then subject to detailed qualitative analysis based on industry positioning, earnings strength, balance sheet strength, company management and ESG factors.

Lonsec believes this approach provides a disciplined and highly repeatable process which allows the manager to quantify a ‘quality score’ for each company.

Lonsec rates DNR Capital’s ESG policy, which involves integration within the investment process, as “above peers”.

“There is clear evidence of ESG integration within the research elements of the investment process. There is one resource within the team who is designated as ESG champion and serves to maintain the integrity of the ESG output that feeds into the process.”

Sam Twidale, Portfolio Manager for the DNR Capital Australian Emerging Companies Fund adds: “We will continue to back quality small cap companies because we believe they can successfully reinvest capital and achieve pricing power that allows them to grow above inflation. Additionally, these companies have strong balance sheets that allow them to ride out cycles, along with providing strategic optionality.”

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[1] DNR Capital Australian Emerging Companies Fund, ARSN 627 783 957.
[2] Performance is net of fees as at 31 July 2021. Past performance is not an indicator of future performance.

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