Phillip Hudak
Maple-Brown Abbott Australian Small Companies Co-Portfolio Managers Phillip Hudak and Matt Griffin believe the recent market pull-back makes the Australian small-cap sector increasingly attractive for longer-term investors.
With further recent market weakness, the team believes there is an attractive entry point at both the sector level and for a number of individual stocks.
Mr Hudak stated “Australian small cap companies are well positioned for a downturn: valuation metrics currently look attractive versus large caps, balance sheets are relatively strong with low debt levels, the majority of stocks in the benchmark are profitable, and many companies have cost levers that can be pulled.”
The team believes the poor sentiment for Australian small caps, as the market pays up for liquidity and earnings certainty, is typically a positive contrarian indicator for the asset class.
Mr Griffin stated “Our ‘earnings drive share prices’ philosophy means the team typically focuses on companies that have proven fundamentals and are in the right phase of the earnings cycle. This also means we systematically avoid select parts of the small cap market, namely where companies are ‘selling the dream’ as opposed to delivering growing, reliable earnings over the medium term.”
The team believes the approach of constructing a portfolio of undervalued holdings with idiosyncratic exposures is a reliable form of alpha generation. Since inception of the Maple-Brown Abbott Australian Small Companies Fund (the Fund) this approach has delivered significant outperformance versus the small ordinaries benchmark, with lower volatility than the benchmark.
The Fund has selected exposures to segments of the market experiencing medium term structural growth, including electric vehicles, biotechnology, travel and uranium.
The team believes uranium is a key commodity exposure to be involved in over the medium term. Two key reasons for this belief include growing acceptance of nuclear power as part of the future energy mix and increased term contracting activity, driven in part by increased supply shortages. The Fund’s exposure to the uranium sector is currently through Paladin and Boss Energy, both closely tied to the uranium price.
The Fund is currently underweight retailers but overweight in specific stocks with cyclical and structural tailwinds into the medium term such as travel and technology.
