The Australian small-cap sector remains a high alpha segment of the market. Of the funds covered by Zenith, the median outperformance of the benchmark has been more than 10 per cent over the previous 12 months. This has been on the back of similar outperformance figures for the 12 months prior. The sustained strong performance can be attributed to managers’ focus on quality, and avoiding poorly managed companies and companies in challenged economic cycles. As such, most funds have avoided exposures to the resources segment of the small-cap market, which has underperformed its industrial peers over the recent past. With the resources segment beaten down and industrial stocks becoming increasingly overvalued, some managers are beginning to find value in the better quality resource companies and have cautiously begun increasing their resources exposures.
Winner: Ironbark Asset Management
Zenith says: The Ironbark Karara Australian Small Companies Fund is co-managed by David Slack and Nick Greenway, who have both established long and successful track records investing in Australian small-cap equities. Slack and Greenway are supported by Peter Kormendy, a dedicated small companies research analyst. In Zenith’s view, Slack and Greenway are exceptional small-cap investors.
Melbourne-based Karara Capital (Karara) was established in April 2007. Karara’s non-investment functions are outsourced, with distribution support provided by Ironbark Asset Management. Karara is 100 per cent owned by employees. Zenith believes Karara is a well-run, financially stable business that has created a strong incentive for its team to outperform through broad equity ownership and performance driven bonuses. Karara’s investment style is best described as “core”, with no deliberate targeting of value or growth attributes in its stock selection process. The team’s focus is on bottom-up stock selection, although the broader operating environment is also taken into consideration. Zenith believes that Karara’s investment philosophy is based upon robust investment principles, and that its style-neutral approach provides the team with the flexibility to add value for investors over a range of market conditions. In Zenith’s view, Karara has appropriate portfolio risk constraints in place, although notes that these are quite broad and allow the team to exercise a reasonably high degree of conviction if deemed appropriate.
Interview
Avoiding the dogs is equally as important as selecting the right companies, according to Karara Capital investment manager Nick Greenway.
The Ironbark Karara Australian Small Companies Fund delivered 31.22 per cent (before fees) in the year to September 30, 2013, outperforming the S&P/ASX 300 Accumulation Index by 7.61 per cent.
It deliberately avoided speculative resources companies and troubled stocks like Billabong. Some of the biggest contributors to the fund’s success were M2 Telecommunications, G8 Education, Bega Cheese, Flight Centre and REA Group.
“Our three main goals are to buy high-quality companies at attractive prices, identify companies that can grow their earnings in difficult economic conditions, and avoid any major investment mistakes,” Greenway says.
“We do that by looking at the potential downside risk in each and every investment. It’s a combination of these three factors that drive performance.”
Greenway describes current volatile market conditions as “ideal” for small-cap managers like Karara, adding that the fund also benefited from its high exposure to the industrials sector.
“We try and look through the noise and our view is that China will engineer a soft landing. A lot of stocks have been sold off because people don’t agree with that view and that has thrown up some buying opportunities,” he says.
“Industrials significantly outperformed the small resources, which were hit hard.”
The Karara Australian Small Companies Fund is managed by David Slack, Peter Kormendy and Greenway.
– Leng Yeow
Finalists:
– Celeste Funds Management
• Highly experienced investment team.
• Disciplined investment process.
• High conviction and concentrated portfolio.
– Fairview Equity Partners
• Collegiate team-based culture.
• Strong depth of research and logical investment process.
• Strong risk-adjusted performance.
