Fund Updates
Small Caps in focus
Eleanor Swanson, Portfolio Manager, and Chris Robinson, Investment Specialist present on how active small caps are positioned to perform as economic growth recovers.
Chris Robinson:
Over the last two years, we’ve had slowing economic growth and small caps have underperformed large caps significantly, and that’s exactly what we’ve seen through history, but also through history, when economic growth slowdown bottoms and then starts to recover, small caps, and particularly active small caps, outperform significantly. When we look at the market today, valuations are cheap despite a very healthy earnings outlook on a three-year view. Small cap earnings are expected to grow 13% per annum over the next three years, relative to less than 2% per annum for the large caps, and then there’s additional tailwinds now emerging, which get us even more excited. For instance, institutional investors are showing clear intent and are starting to allocate to small caps. We think it’s rare you get all the ducks in a row like this, and we think it’s a great opportunity to invest in small caps.
Eleanor Swanson:
There are three key features of the Firetrail Australian Small Companies Fund I’d like to draw your attention to. Firstly, we’re unconstrained by style. We can invest in both value and growth companies, and that allows us to outperform throughout market cycles. The second way in which we believe we have an edge is our industry expertise. We have mining engineers, actuary, technology experts, and that allows us to invest with conviction in all parts of the market. Finally, it’s a concentrated portfolio. We have 30 to 40 holdings in the fund at any one time, and that has allowed us to deliver 12% outperformance since inception.
This stock is a top five holding in the fund, and that is Regis Healthcare. Now, Regis operates 63 aged care homes across Australia. They’re very high quality homes, which is important, as you’d know if you have a loved one living in aged care. We believe the public market is missing the compelling supply-demand backdrop in aged care. If we think about the population over the age of 80, it’s expected to double over the next 20 years. However, we’re just not seeing that supply in terms of new beds come onto the market. At the moment, we need another 100,000 beds to be built, we currently have 200,000 beds, and that’s going to cost about 50 billion. Clearly, the government needs to incentivise operators to start building beds.
Right now, the return on capital doesn’t make sense. You’re receiving 4% to build a new bed versus the cash rate at 5%. So we believe the solution for government is clear: they need to increase the profitability of the sector. They’ve already put through a 20% funding increase and they’ve recently appointed an aged care task force, which is going to hand down their proposals at the end of this year, and they’re focused on trying to figure out how to attract new greenfield capital into aged care. So we believe the funding backdrop is about to get even better in the sector. If we look at consensus earnings, that is not factored in. We see 30% upside in Regis just using the current funding regime. However, if we incorporate the expected funding uplift, we see 60% upside in Regis, which is why it’s a top five holding in the fund.
Disclaimer
This article is prepared by Firetrail Investments Pty Limited (‘Firetrail’) (ABN 98 622 377 913, AFSL 516821) as the investment manager of the Firetrail Australian High Conviction Fund (ARSN 624 136 045), the Firetrail Absolute Return Fund (ARSN 624 135 879), the Firetrail Australian Small Companies Fund (ARSN 638 792 113) and the Firetrail S3 Global Opportunities Fund (ARSN 653 717 625) (‘the Funds’). Pinnacle Fund Services Limited (‘PFSL’) (ABN 29 082 494 362, AFSL 238371) is the product issuer of the Fund. PFSL is not licensed to provide financial product advice. PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited (‘Pinnacle’) (ABN 22 100 325 184). The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the relevant Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.
Links to the Product Disclosure Statement: WHT3810AU, WHT5134AU, WHT3093AU, WHT7794AU
Links to the Target Market Determination: WHT3810AU, WHT5134AU, WHT3093AU, WHT7794AU
For historic TMD’s please contact Pinnacle client service Phone 1300 010 311 or Email service@pinnacleinvestment.com
This communication is for general information only. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. Past performance is for illustrative purposes only and is not indicative of future performance.
Whilst Firetrail, PFSL and Pinnacle believe the information contained in this communication is reliable, no warranty is given as to its accuracy, reliability or completeness and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Firetrail, PFSL and Pinnacle disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. This disclaimer extends to any entity that may distribute this communication.
Any opinions and forecasts reflect the judgment and assumptions of Firetrail and its representatives on the basis of information available as at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future.
Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from Firetrail. Pinnacle and its associates may have interests in financial products and may receive fees from companies referred to during this communication.
This may contain the trade names or trademarks of various third parties, and if so, any such use is solely for illustrative purposes only. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with, endorsement by, or association of any kind between them and Firetrail.
