Active strategy driving strong small caps returns

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MEDIA RELEASE: The recessionary environment has been an opportune time to focus less on market movements and more on stock-picking and finding value in previously underrated companies, according to SGH ICE director and portfolio manager, Callum Burns.

“Because the market downturn was triggered by a specific event – a health crisis – rather than it being part of the typical bull and bear market cycle, this has brought some anomalies to what we would otherwise expect,” he said.

Mr Burns said the aim of the SGH ICE Fund is investing in companies with more certain earnings growth – at sensible prices – that display a sustainable competitive edge, and this approach has borne fruit in the current market.

“History shows that companies that have a competitive advantage tend to perform better in uncertain environments, however investors often underestimate the power of this advantage. There continues to be a significant difference in performance between those companies with a structural advantage, and mediocre companies. As a result, it remains a stock pickers’ market,” he said. 

Mr Burns said some of the industries poised for growth opportunities include pharmaceuticals, cloud software, online retail, and food.

A focus on companies with organic growth opportunities that exhibit appropriate debt levels and strong cash flow has also proved rewarding for the Melbourne-based asset manager.

“The economic backdrop is driving product innovation and reinforcing the need for strong company management. The volatility and uncertainty clouding the large end of the market is further emphasising renewed interest in small caps,” he said. 

SGH ICE is a benchmark unaware fund, but most closely aligns with the Small Industrials market, which it has outperformed during the COVID-19 event and over the long term.

It currently holds 43 stocks which are a mix of longer-standing companies which are growing at a steady rate, and those that have been advantaged by the COVID-19 pandemic and experienced significant growth as a result.