Few would think that investing in companies outside the S&P/ASX 200 Index would be profitable or safe. But a group of fund managers not only have beaten their counterparts who invest in the biggest companies but have generated returns some may only dream about.
“Microcap has done itself a disservice by naming itself microcap,” says Chris Prunty, analyst at Ausbil Dexia’s microcap fund that is ranked number three among its peers over one year by Mercer with a 39 per cent return.
“We’re all looking for companies with earnings and we make the argument that our universe of small cap industrial stocks is less risky and higher quality than large caps in aggregate because of better balance sheets, higher returns on capital and they trade at lower multiples of their earnings.”
BT’s $170 million Wholesale Microcap Opportunities fund is the number-one ranked Australian small company fund over five years with a 22 per cent annual return. Run by Paul Hannan and Noel Webster, colleagues for nine years, Mercer says Webster and Hannan’s fund has had annual returns over three years of 23 per cent, second only to Schroder Australia’s microcap fund. The S&P/ASX Small Ordinaries Index has fallen 3.5 per cent per annum over five years.
In contrast, the biggest Australian stock funds have not done as well as BT or Schroder’s microcap funds. The number-one ranked large fund by Mercer over five and three years is Perpetual’s wholesale ethical fund. It has had annual returns over five years of 13 per cent over five years and 15 per cent over three years.
BT’s Hannan says money can be made by a microcap fund manager even through a global financial crisis, as the fund has proved it can do.
“We’re not immune to global events but we have certainly saved people money by focusing on cash generative businesses with good management,” says Hannan. He and Webster spend a lot of time out of the office visiting companies, their competitors and their suppliers and then come back and build their own financial models.
Webster says he has invested in Breville Group because management has focused successfully on selling its household goods to wealthy US consumers. BT has also invested in Thorn Group because of its Radio Rentals brand and information technology service company UXC, which implements specialist software systems for organizations such as hospitals. Webster likes Royal Wolf Holdings whose ubiquitous shipping container can be found on almost any mine or building site in Australia.