Sam Twindale

Momentum continues to build in the small-cap sector, with recent performance and reporting season results pointing to renewed investor confidence and attractive opportunities across several sectors, according to DNR Capital Portfolio Manager Sam Twidale.

“The standout story in recent months has been the strength of small caps,” said Twidale. “We’ve seen some excellent bottom-up opportunities emerging, with the Small Ordinaries Index up over 8%, significantly outperforming the large-cap index.”

Twidale noted that investor focus is returning to the small-cap space, with structural growth companies delivering particularly strong results.

“Businesses like Zip and Life360 have been standout performers. Zip has shown continued strength, particularly in the US market, where buy-now-pay-later penetration remains relatively low compared to Australia. The company is growing profitably, supported by a strong balance sheet and disciplined management,” he said.

“Life360 has also continued its strong momentum, growing revenue by over 35%. The company is building an entrenched position in the family tracking and location-sharing market, demonstrating both strong revenue and earnings growth with a long runway ahead.”

Twidale noted the resilience of consumer-facing businesses as one of the key takeaways from the latest reporting season.

“There was a lot of concern heading into reporting season about how consumer companies would fare given macroeconomic headwinds,” he said. “However, what we saw was much greater resilience than expected. Many businesses continue to perform solidly despite the broader economic uncertainty.”

While gold has dominated headlines, Twidale pointed out that several industrial commodities are now presenting value opportunities after an extended downturn.

“We’ve been through a challenging bear market in commodities like lithium, coal, and iron ore,” he said. “Lithium prices, for example, are down around 90% from their peak. But we’re now seeing signs that we’re near the bottom of the cycle.”

“Demand for lithium remains strong with electric vehicle growth remaining strong and stationary storage demand increasing. With prices so low that many producers are loss-making, supply discipline is beginning to emerge, particularly in China. That sets the stage for potential recovery.”

DNR Capital has been repositioning its portfolios to take advantage of these dynamics.

“We’ve been active in recent months, building positions in quality, low-cost, long-life mining producers,” said Twidale. “We’re now overweight the mining sector, which supported our performance through the recent month.”

“Overall, the small-cap space remains full of opportunity. There’s volatility, yes, but also strong potential for alpha generation. We continue to favour quality businesses across technology, financials, consumer, and now selectively within mining.”

“The underperformance gap between small and large caps is beginning to close, and as we move beyond current reporting season, we expect continued interest and momentum in this space.”

DNR Capital Australian Emerging Companies Fund offers investors exposure to a concentrated portfolio of high quality, small cap Australian listed equities. In 2024 the Fund received a “Highly Recommended” rating from Lonsec Research and a “Highly Recommended” rating from Zenith Investment Partners.

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Gonzalez is a proven leader with a track record of transforming businesses and delivering exceptional results. As the CEO of Pendal Group from 2010 to 2021, he oversaw the company’s evolution into a global asset management powerhouse, growing funds under management from $41.9 billion to $101.7 billion.

Previously, Gonzalez served as Chief Investment Officer and Group Executive of Global Equities at Perpetual Investments. He was also Chair of the CFA Institute and Director of The Banking and Finance Oath Limited. His current non-executive director roles include the Queensland Investment Corporation and the Australian Brandenburg Orchestra Foundation.

“We are delighted to welcome Emilio to the Board. His depth of experience, strategic insight and exemplary leadership in the asset management sector will be invaluable as we continue to grow and deliver exceptional outcomes for our clients,” said Justine Hickey, Chair of the DNR Capital Board.

“DNR Capital has achieved significant milestones in recent years driven by strong focus on quality, delivering exceptional results and client-centric approach. Emilio’s appointment comes at a pivotal time as the firm expands its capabilities and explores new opportunities to strengthen its position as a leader in the Australian investment management sector.”

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“The manager’s track record has delivered impressive relative performance outcomes since the Fund’s inception [in August 2018] along with the portfolio management team’s co-tenure and stability has led to increased conviction in the capability,” Lonsec said in its report.

The Fund is managed by Portfolio Managers Sam Twidale and Mark Sedawie, and in its report, Lonsec said the pair are dedicated to small cap research and contribute their insights to the broader investment team.

“We are extremely pleased to receive this upgrade. Lonsec has recognised the skills of our team and our bottom-up stock selection process which focusses on quality companies at attractive valuations,” Portfolio Manager, Sam Twidale said.

Lonsec listed the Fund’s high-conviction, concentrated approach (the Fund invests in 20 to 45 companies) as one of its key strengths, along with a boutique investment culture and a highly regarded and well-structured investment process.

“The manager demonstrated a strong engagement program and a structured approach. Engagements are tracked clearly with clear objectives set and outcomes tracked,” the Lonsec report found.

The DNR Capital Australian Emerging Companies Fund is also the recipient of a ‘Highly Recommended’ rating by Zenith.

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Sam Twidale

The recent ASX reporting season highlighted that small caps, in particular, have continued to face challenges in this sluggish economic environment where high interest rates are weighing heavily on many companies. Despite these headwinds, one of the overriding themes of this reporting season has been the outperformance of quality, noted Sam Twidale, portfolio manager at DNR Capital.

“For many small caps the tide has gone out this reporting season,” said Twidale. “We’ve seen the impact of fiscal and monetary support being removed and significant fluctuations in inflation. This environment has made it crucial to identify what the true sustainable level of profitability is for companies moving forward.”

Twidale highlighted that many companies faced significant challenges during the reporting season with some struggling with margin reversion, stretched balance sheets, high interest costs and underperforming acquisitions. “We saw some significant share price reactions to the downside for several companies,” he said.

Despite these challenges, DNR Capital’s Emerging Companies Fund delivered a strong performance, significantly outperforming the index, largely due to its focus on quality.

A standout performer was Breville, a long-held position in the fund. “Breville really showed its strength this season. Despite concerns around consumer resilience in a high interest rate environment, the company’s continued reinvestment into product development and geographic expansion has put it in arguably the strongest position in its history,” Twidale said.

Twidale also pointed to the investment platform market as another area of strong performance. “HUB24 and Netwealth continue to cement their positions as market leaders, taking significant share from legacy incumbents. Their success is driven by economies of scale, reinvestment in their platforms and superior customer service,” he said.

Looking ahead, Twidale sees a compelling opportunity set in the small cap space, despite current challenges. “There is a big dispersion in quality across the market and that really came through in reporting season. Our focus remains on being highly selective and targeting quality businesses in the consumer, financials and tech sectors where we see the potential for attractive long term returns,” he said.

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The prestigious annual awards, hosted by Zenith Investment Partners, celebrates excellence in investment management across various asset classes and strategies. Recognised as a benchmark for the industry, the awards aim to uphold the highest standards in funds management, ultimately benefiting investors.

Launched in 2018, the DNR Capital Australian Emerging Companies Fund1 provides investors with access to a concentrated, long-term portfolio of high-quality, small-cap Australian listed equities. It has posted an annualised return of 13.01% since its inception in August 2018, outperforming the S&P/ASX Small Ordinaries Total Return Index by 9.62%2.

“We are honoured to be recognised by Zenith as a leading investment manager in this space. The small-cap sector is known for its inefficiencies, offering significant opportunities to add value through our rigorous, bottom-up investment approach,” said Sam Twidale, Portfolio Manager at DNR Capital.

“Our team applies DNR Capital’s disciplined investment philosophy to identify high-quality small-cap companies. We define quality as companies with strong earnings, a superior industry position, robust balance sheets, excellent management and ESG risk assessment. This, combined with a thorough valuation analysis, allows us to take advantage of market inefficiencies,” Twidale added.

The DNR Capital Australian Emerging Companies Fund has been awarded a ‘Highly Recommended’ rating by Zenith.

The winners of the 2024 awards will be announced on 18 October by Zenith Investment Partners.

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The IMAP Awards, now in their 7th year, celebrate excellence among advice firms and investment providers within Australia’s managed accounts sector. DNR Capital previously claimed this award in both 2022 and 2023.

“Our dedication to providing outstanding Australian equity portfolios is bolstered by the expertise of our team of investment professionals and analysts. With over two decades of proven success, our disciplined, high-conviction approach sets us apart in the Australian investment management industry,” Robert White, Chief Executive Officer of DNR Capital, said.

“We are honoured to receive this continued recognition from our peers and the broader industry,” he said.

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Oliver Attwater

DNR Capital one of Australia’s leading equities fund managers, has announced the launch of a global small and mid-cap equity fund manager, Tura Capital.

The introduction of Tura Capital enables DNR Capital to meet the growing client demand for global investment opportunities, without interruption of its focus and commitment to Australian equities.

“The Tura Capital Global Small & Mid Cap Fund^[1], launched in December 2023, is a new investment product designed to provide investors with a diversified exposure to high growth developed markets worldwide. This Fund is managed by a team of experienced investment professionals each with a strong track record, and is committed to delivering quality investment outcomes,” said Robert White, Chief Executive Officer of DNR Capital.

“The Fund employs Tura Capital’s investment philosophy of identifying quality global small and mid cap companies that are well placed to deliver strong investment returns through economic cycles. With DNR Capital providing full operational support covering compliance, marketing and distribution, and investment administration, the Tura Capital investment team can focus on global investment opportunities,” White added.

Brad Partridge, Portfolio Manager at Tura Capital, noted “The Tura Capital investment process is designed to be disciplined and transparent. Our proprietary process screens the vast universe of global small and mid-cap companies for quality characteristics. We then conduct fundamental research to identify the highest quality opportunities, resulting in a concentrated portfolio of typically 25 to 45 high-quality companies trading at reasonable valuations.”

In conjunction with this launch, DNR Capital is excited to announce the appointment of Oliver Attwater as Tura Capital Portfolio Manager, who will co-manage the fund alongside Brad Partridge.

Attwater, who has relocated from the UK to join the Tura Capital team in Sydney, brings extensive experience in managing global equities portfolios. Most recently, he was jointly responsible for €8.4 billion in global equities at Robeco.

“We are delighted to have someone of Oliver’s experience and calibre join the team. Prior to his time at Robeco, he was Head of Equities and Lead Portfolio Manager at British Airways Pensions overseeing a $US2 billion mid-large cap US equity portfolio,” Partridge said.

White added “This hire underpins our focus on building a high-calibre team at Tura Capital. Oliver will work with Brad, who joined us in 2022, to enhance our capabilities and provide our clients with the quality investment solutions they demand.”

“I am excited to be taking on this role and look forward to working with the team at Tura Capital to continue building on the strong foundations of the global equities capability,” Attwater said. “Global equities continue to offer investment opportunities for growth and innovation. I am eager to contribute to Tura Capital’s vision and help deliver exceptional value to our clients and investors.”

The Fund has posted a return of 9.53% since its inception in December 2023, outperforming the MSCI World SMID Total Return Index by 1.42%.^[2]

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Notes:
[1] Tura Capital Global Small & Mid Cap Fund, ARSN 667 101 635. APIR: PIM6047AU
[2] Performance is net of fees as of 30 June 2024. Past performance is not indicative of future performance.

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“Zenith’s strong conviction in the Portfolio  is underpinned by DNR Capital’s robust investment process and high calibre investment team. Zenith believes the Portfolio- represents one of our premier investment options within the Australian shares asset class,” Zenith said in its report.

“We are delighted to receive this upgrade and recognition that our high conviction approach to investing provides strong results for investors,” DNR Capital’s Chief Investment Officer, Jamie Nicol, said.

“We are also pleased that Zenith have commended our collegiate investment process, which is conducted by myself and Scott Bender,” he added.  “We have both been at DNR Capital for more than two decades and I believe this experience and stability makes a difference to our investors.”

Offering investors a concentrated portfolio of its highest conviction stocks, the DNR Capital Australian Equities High Conviction Portfolio has posted an annualised return of 12.16% since its inception in October 2002, outperforming the S&P/ASX Total Return Index by 3.13%^[2] per annum.

“Zenith believes that DNR Capital’s portfolio construction process ensures that the Fund has a bias towards high-quality companies,” Zenith said.

“Zenith draws a high degree of confidence in DNR’s investment process, which has been consistently applied over the long term, producing impressive investment outcomes. “

The DNR Capital Australian Equities Socially Responsible Portfolio and the DNR Capital Australian Equities Income Portfolio and Fund^[3] retain their Recommended rating from Zenith.

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Notes:
[1] DNR Capital Australian Equities High Conviction Fund, ARSN 604 465 849, APIR PIM0028AU.
[2] Performance for the DNR Capital Australian Equities High Conviction Portfolio and is gross of fees as of 31 May 2024. Past performance is not indicative of future performance.
[3] DNR Capital Australian Equities Income Fund, ARSN 639 285 902, APIR PIM8302AU.

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Scott kelly

Following the Federal Reserve’s interest rate pivot last year, the S&P/ASX 200 Industrials Index has surged over 20% over the past four months, ending February 2024 with a 12-month forward PE of around 19 times, well above the long-term average, notes DNR Capital, a leading Australian equities investment manager.

In a recent update, Scott Kelly, Portfolio Manager for DNR Capital’s Australian Equities Income Strategy, says “However investors seeking income from ASX listed companies should look closely at a few factors.

“Investor optimism for the ‘Goldilocks’ scenario of soft landing and low interest rates has seen defensives lag over that market rally. Traditional defensive stocks like Amcor (ASX: AMC), Endeavor (ASX: EDV), The Lottery Corporation (ASX: TLC) and Telstra (TLS) have underperformed in our portfolio over this period despite no real fundamental change in operating performance or investment thesis.”

Additionally, Kelly highlights the outperformance of banks, which has been a headwind for the strategy’s double-digit underweight position.

“Despite concerns such as falling net interest margins and rising mortgage delinquencies, banks have traded at all-time high over CBA’s 22 times 12-month forward PE. We remain comfortable with our underweight position in the big four banks and that really represents our non-holding in CBA which is due to valuation. Our preferred bank remains NAB.”

Kelly notes the impact of falling bond yields, which has favored long-duration and growth stocks, sectors the strategy is underweight in. “The current market pricing reflects a Goldilocks scenario, leaving us cautious due to the narrow path of outcomes being priced in,” he says. “We believe market multiples are stretched and vulnerable to compression, especially given the uncertainties in the global landscape.”

“We are concerned that equity markets have become overly optimistic, leaving market multiples stretched and vulnerable to compression, especially in a year where we think investors need compensation for these risks.

“We continue to add resilient quality companies that have underperformed the market despite delivering operationally good results and presenting good value as we believe in risk reward metrics.

“Companies like Auckland Airport (ASX: AIA), Qube Logistics (ASX: QUB), Scentre Group (ASX: SCG) and The Lottery Corporation are a few examples of resilient quality companies that we expect will deliver regardless of the economic environment overall.

“We remain comfortable with a defensive tilt, particularly given market expectations and the overlay of the macro and geopolitical environment. We are also conscious that income seeking investors are typically retirees and vulnerable to sequencing risk at this point in the market cycle.

“In terms of the dividend outlook for 2024, we think balance sheets of companies remain under geared relative to history and with the market seemingly more confident that the interest rate cycle has peaked, we think the market will start to see more capital management initiatives.

“Payout ratios are also still well below pre pandemic levels, which should allow the corporates to gain greater confidence to return cash to shareholders.

“The DNR Capital Income Strategy is well positioned to deliver a gross dividend yield for calendar year 2024 of over 5%,” says Kelly.

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The Fund, managed by DNR Capital offers investors a relatively concentrated, exposure to quality Australian smaller companies. It has posted an annualised return of 11.23% since its inception in August 2018, outperforming the S&P/ASX Small Ordinaries Total Return Index by 8.08%^[2].

This rating also reflects Zenith’s “high regard for DNR Capital’s robust investment process, which aims to identify high-quality companies trading at attractive valuations.”

Furthermore, Zenith believes the Fund is a highly attractive investment option within the Australian smaller companies peer group and believes the Fund is well placed to deliver upon its investment objectives.

The report highlights the robust security selection process adopted by DNR Capital and says “Zenith seeks to identify Funds that can outperform in over 50% of months in all market conditions, as we believe this represents consistency of manager skill. In addition, we view a strategy’s ability to produce stronger upside capture ratios relative to downside capture ratios as an attractive feature.

“The Fund has achieved both outcomes since inception. It has displayed greater consistency of outperformance in rising markets relative to declining markets. The Fund’s tracking error has remained significantly higher than its peers, which is consistent with DNR Capital’s concentrated and benchmark-unaware approach.”

Zenith acknowledges that both Sam Twidale and Mark Sedawie, who have joint responsibility for the Fund, are capable investors with complementary backgrounds and skill sets.

DNR Capital Australian Emerging Companies Fund Portfolio Manager, Sam Twidale says “We are pleased to retain this high rating from Zenith.

“We continue to focus on positioning the portfolio in quality businesses with attractive valuation upside. Key overweight positions are across the Consumer Discretionary, Technology and Financials sectors. Of particular focus are management teams reinvesting cash flows at high returns on incremental capital, and where the runway for organic growth remains substantial.

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Notes:
[1] DNR Capital Australian Emerging Companies Fund, ARSN 627 783 957. APIR PIM4357AU
[2] Performance is net of fees as of 31 January 2024. Past performance is not indicative of future performance.

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