It is conventional wisdom that the Australian share market is largely comprised of mature businesses with a particular emphasis on financials and resources.
Happily, if you explore beyond the stocks covered by the larger brokers it becomes obvious that this is not the case and that innovation is alive and well amongst smaller Australian companies. In fact, many of these businesses are exporting Australian innovation globally.
We have been well and truly on the hunt for innovative companies for our Perennial Value Microcap Opportunities Fund (“Fund”).
It has been really pleasing to find so many opportunities. In fact, at 31 December 2017:
- over 50% of the Fund was invested in companies where we consider innovation is a key part of the business; and
- over 40% of the Fund is invested in innovative companies where the companies are exporting the innovation globally.
Some of the more interesting companies that we hold or have held are:
- a Melbourne-based medical device company that has developed a biodegradable polymer. First discovered by the CSIRO it is used in the treatment of burns and surgical wounds. The early results are very promising and it has recently commenced sales into the large US market and will also sell to Europe. There are other interesting applications for the product that the company is considering including hernia surgery and breast surgery;
- a Coffs Harbour-based education software developer which is has developed online education testing software for NAPLAN and has interesting international opportunities including in Singapore and the UK;
- a West Australian-based company that is developing the first “ranched” abalone fishery globally;
- a Sydney-based company developing HR software for medium-sized enterprises;
- a Canberra-based renewal energy development company which has commercialised world leading atmospheric modelling and wind energy assessment developed by the CSIRO. It is now using this technology to identify sites, design and develop wind farms globally;
- a US-based developer of active carbon products that are used to capture emissions from coal-fired power stations;
- a fast-growing Australian online only retailer;
- a Gold-Coast based engineering company that manufactures cooling systems, including high performance cooling systems for racing teams such as the F1 Red Bull team.
Each of these companies has a solid balance sheet, a bright future and while held by the fund was trading at valuations that in our opinion were attractive.
The market environment has been good for stocks such as these and has it has proved to be a positive experience for investors in the fund with performance of +44.0% after fees from inception on 1 February 2017 and +19.8% over the December quarter.
While market conditions may or may not prove to be as conducive going forward, we are encouraged by the range of investment opportunities in innovative Australian companies. Not all of these companies will go to the next level – some will run out of puff and others will be acquired – while some will go on to be substantial Australian companies. We are focussed on having the latter two categories in our portfolios to provide strong returns for our investors.
By Damian Cottier – Portfolio Manager & Senior Equities Analyst
Disclaimer: Please note that these are the views of the writer and not necessarily the views of Perennial.