- Why have small caps been performing so strongly? Do you expect this to continue, and why?
After several years of underperformance investors were initially attracted to the better valuations which were available in Small Caps.
However more recently there has been a noticeable improvement in risk appetite.
This has added fuel to the rally with investors taking comfort from the almost synchronised growth that is occurring around the world.
Finally investors have responded to slower growth in traditional large cap sectors (eg. Banks, Telco’s) and begun searching the small cap market to access higher growth sectors such as the Chinese consumer exposed names and small resources
- What’s the most exciting thematic or sector you can see in small caps right now? Is there a sector that looks too hot?
- Can you tell us about a high-conviction idea from your portfolio that you think could produce big returns from here?
As contrarian value investors we prefer to exit sectors once they become too hot – for example we have sold out of our exposure in Lithium and Infant formula.
One sector which is under the radar at the moment is healthcare after the sector was knocked around for several years as a result of changing government regulations. With the government recently taking a more collaborative approach to reforms we believe the risks have reduced in the sector while ageing demographics continue to be a tailwind. Our preferred exposures are:
- Lifehealthcare which imports, develops and distributes high end surgical devices. The stock has valuation support (10.3x FY18 PE) and an energetic management team
- Integrated Diagnostics where costs are now coming under control courtesy of a new CEO and CFO. The stock also trades at a discount to peers (15.4x FY18 PE) despite having a strong balance sheet
