Sam Twidale
DNR Capital, a leading Australian equities investment manager, says now is the time for investors to be positive on opportunities in the Australian small caps space.
Sam Twidale, portfolio manager of the DNR Capital Australian Emerging Companies Fund, says “We are changing our view of the sector and moving from a defensive bias to embracing more positive positions in this segment of the market.
“If we look at the economic backdrop over the last 18 months, small caps significantly underperformed compared to large caps.”
But now valuations are pulling back, and a significant number of high quality companies are being de-rated, notes Twidale.
“But we still need to be selective. Investors need to look closely at what’s under the surface of the market as there are still some areas of overvaluation and speculative activity. Defensive companies still have high valuations as investors pour into that sector to manage recessionary risks and concerns around slowing economic growth.
“However, it is the earnings’ downgrades which is the main catalyst for us to turn more positive. Those downgrades are now coming through.
“As valuations pull back there are new opportunities to buy companies on much more realistic valuations and more conservative earnings expectations. This is quite a change from the price for perfection scenario 18 months ago,” says Twidale.
“Fear and uncertainty around high quality businesses is causing dislocations between price and value. And for us, this shows up as a concern around the economy, especially impacting the consumer discretionary sector. That’s now our largest overweight. It’s a more contrarian positioning but I think investors will be rewarded taking a longer term view for many stocks in this sector,” says Twidale.
“We have been investing in Breville and Lovisa, two high quality companies, in recent months. They are leaders in their industries and generate high returns. These companies are well managed with strong balance sheets to get through a bit of a trickier period in the short term. They’re not out of the woods yet. However, we think they will emerge on the other side of this cycle in a really strong position. This presents the opportunity for long-term investors.
“On the other hand, we have been actively reducing our exposure to the mining sector. That’s been a key overweight for us for several years now. But I think conditions have changed and we are not seeing the contrarian opportunities and the mispricings that we saw several years ago.”
Twidale adds “Across the Emerging Companies Fund, we are back in some of the companies that we sold out of several years ago, and see de-rated quality opportunities in consumer discretionary, financials, industrials, and tech sectors. We have a concentrated portfolio of some great businesses where valuations have really pulled back.
“For investors willing to look through short term uncertainty, the small cap sector is now presenting great opportunities to take advantage of.”
