Tuesday 26th April 2022
'You don't need to swing for the fences to get good returns'
The passive vs. active debate remains alive and well, particularly in the larger company universe, where being different to the index is quite a challenge, and in many cases, a career risk. The consistent standout among the quarterly passive vs. active reports, however, has been the Australian smaller company sector.
Globally recognised as companies valued between $300 million and $2 billion, but tending to spread lower in Australia, the sector has “an incredible track record” for delivering alpha, according to Richard Ivers, who spoke at The Inside Network’s Equities & Growth Assets Symposion. Ivers, the portfolio manager of Prime Value’s Emerging Opportunities Fund, presented a unique opportunity in domestic small caps, that “continue to pay their way” in portfolios.
According to Prime Value’s research, and the assistance of Lonsec, the median (that is, the middle of the performance rank) small-cap fund has outperformed the S&P/ASX Small Ordinaries consistently over the last three and five years. This is represented by a cohort of around 40 individual funds operating diverse strategies in the sector.
There is, according to Ivers, a significant difference in the level of risk taken by each of these strategies in their pursuit of alpha, an issue that has been brought squarely into focus during the 2022 bout of volatility. While the common understanding of investing is that higher risk equals higher return, this has been disproven consistently; but more importantly, Ivers put forward evidence to support the idea that higher returns can actually be delivered by taking less risk.
Comparing Prime’s investment approach to the cricketer Don Bradman, who scored just six sixes in his career, but averaged a never-to-be-beaten 99.94 in Test Cricket, Ivers highlighted the fact that one “doesn’t need to swing for the fences to get good returns” from the circa-2,000-strong universe of ex-100 Australian companies. A case in point, according to Ivers, is the difference between Zip Co (ASX:ZIP) and Propel Funerals (ASX:PFP), two businesses that couldn’t be further from each other.
The former is a well-known BNPL player that enjoyed a wild share ride amid strong momentum and the FOMO (fear of missing out) trade. Such was the popularity of Zip Co that about 1,400 per cent of its entire market cap was traded in the previous 12 months; naturally, this contributed to greater volatility. Propel, on the other hand is a funeral service provider, the share trading of which turned over just 30 per cent of its market cap.
The opportunity comes from the information asymmetry and the ability to be patient, with just two brokers covering Propel, but 10 brokers focusing on Zip, which has since fallen as much as 80 per cent. Over the long term, Zip’s fundamentally loss-making approach caught up with the business, while the slow and steady compounding of the Propel “tortoise” delivered similarly stable returns.
Propel isn’t alone either, with Ivers highlighting the “diversity of businesses” available within smaller companies, which universe Prime Value limits to around 240 “investable” companies at any given time. Other unique opportunities included growth telco companies Uniti Wireless (ASX:UWL) and Chorus (ASX:CNU), as well as insurance broking groups.
Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.
