Small caps outperform amid volatile reporting season

So reviewing the small caps reporting season, another volatile month. It seems like every reporting season there’s more reports about the volatility that we’re seeing the volatility’s getting greater and greater. And this one was no different. But the key takeaway from this one was really the strong, our performance of small caps. We’ve seen some great strong bottom up opportunities coming through. Small cap index was up over 8% and significantly outperformed a large cap index that was up about 2%. And we’re sort of seeing these strong bottom up opportunities, these companies that are growing quite rapidly. And this compares to some of these large caps, some of these more mature companies like the banks trading on high valuations, not delivering much growth. So I think there’s a lot more focus on the small cap space at the moment. When we look at our emerging companies fund, we had a very strong month increased nearly 10% versus the index.

That was up a bit over eight. And for us, there were a couple of key takeaways, some real highlights from the reporting season. The first one was the standout opportunities in some of these structural growers, these offshore growers like Zip and Life 360 that reported some very strong results in the case of zip. This is a business that we’ve owned for some time now. The business is really going from strength to strength and the highlight from that result was a strong performance in the US that accounts for the majority of the company now in the US by now pay later penetration is still quite low compared to Australia and we see a long runway for growth in that market and that management team is being very disciplined. They’re growing in a very profitable way. They’ve got a strong balance sheet. They have been buying back shares recently and so we really like what the company’s doing there in the management team.

Life 360 as well. Another good structural grower. That business is really going from strength to strength, growing revenue over 35%. That business is building a really entrenched position in that family tracking location sharing space. And again, we see a very, very long runway for growth and the market’s rewarding them for that. We’ve done well out of this position over the last year or so, generated from some very strong alpha, but we continue to like that business. It’s now you’re seeing the operating leverage coming through strong revenue growth, strong earnings growth, and just that long runway for growth. Still ahead when we look at some of the other opportunities as well, real standout takeaway from reporting season was the resilience of some of these consumer companies. I think there’s a lot of fear coming into reporting season about the performance of some of these consumer companies with all the tariffs backdrop concerns around the economy.

But what we saw was much greater resilience and some of the standard opportunities there we saw was a RB quite similar to the last result, the export growth, this four drive accessories business, the export growth was very, very strong. They’re benefiting from the investment they put into that US market. They’ve got that retail footprint there that they’ve been investing in and they’re seeing some good results coming through from that. So we like that one. It’s a great long-term opportunity. Very disciplined management team, good long runway for growth ahead. And when we look at some of the other opportunities in the consumer space as well, Breville delivered double digit growth across all regions. Again, that business continues to reinvest back into the business delivered a very strong result. And also another company, AP EGUs, that was a recent purchase last year. We bought that on a very depressed valuation.

This is a leading automotive retailer in Australia. We bought that business on about 0.25 times revenue, so on a trough, trough valuation. And that business reported a very strong result, much stronger than expectations, nearly 20% revenue growth. That business has built a very strong position in Australia. They’ve got about 13% market share. But what’s interesting is that business is selling about one in three EVs in Australia. So a P has built a very, very dominant position. It’s going to be quite hard to replicate that now. And we see into that interest rate cutting environment. This is a business that’s very well placed. It’s going to be hard to replicate. And the other standout opportunities that we saw in reporting season and what benefited our performance was the out performance of some of these mining companies looking through reporting season, some of the value opportunities, mining really outperformed versus growth and we benefited from that because we have done some quite significant repositioning in recent months taking advantage of some of these strong bottom opportunities in the mining space.

We’ve seen what’s been happening in commodities. There’s been many commodities that’ve been underperforming for some time. All the focus has been on gold. Gold’s been doing very well. But we look at some of these other industrial commodities like lithium, coal, iron ore, they have been forgotten about. It’s been a pretty difficult bear market in commodities like lithium prices are down 90% from the peak and we did quite well in the previous cycle, buying them at some trough. Valuations getting out at the peak and we’ve been waiting patiently for some opportunities to emerge again. Well those opportunities have come about and in recent months we have been building positions in some of these companies and it’s got all the hallmarks of the bottom of cycle. There’s some bottom of cycle signposts that we’re seeing in some of these commodities like lithium. And that’s presented some great opportunities.

Look at lithium. Demand continues to grow very, very strongly. We’re seeing very strong EV growth. We’re seeing some strong demand from stationary storage coming through as well. If you look at solar installations, only about 5% globally have a battery attached. So we see some very strong growth of stationary storage demand coming through. So demand looks good. And then on supply, well prices have fallen so low that half the industry’s loss making the prices are so low that miners won’t be incentivized to invest in any new mines. So it would be inevitable at some point prices would start recovering. Sometimes you never know where the catalyst is going to come from to sort mark that bottom. But we did see some interesting news flow during the month out of China and we’re seeing some supply discipline finally coming through. This anti-evolution campaign in China means that perhaps this race to the bottom in terms of prices and a lot of this excess supply is coming to an end.

So we are seeing some more discipline in terms of supply. We’ll see how long that lasts for. But it is not just lithium, it’s extending to steel, aluminum, cement chemicals. And it’s quite interesting for some of these industrial commodities. So we have been building some positions in some of these low cost long life producers in the mining space. We are now overweight that sector and that certainly helped our positioning through the month. So as always, if we look at small caps, lots of volatility, lots of opportunities coming about. We’ve been very active in recent months. Repositioning the fund, continue to like some of these strong bottom up opportunities. These quality businesses, we believe in mispriced and we have a particular focus at the moment on tech, financials, consumer, but also more recent recently mining where we now have an overweight position. We’ve closed that long sort of underweight over the last couple of years and now have positioned in that overweight position. So looking at small caps, continue to light the space, we’re starting to see some of the underperformance gap getting closed and we’ll be looking of interest to see what comes of our out post is reporting season.