Small Caps reporting season in review

So reviewing the August reporting season, another interesting month, quite volatile, lots of dispersion in returns. I think if we look at some of the key takeaways for our emerging companies fund, it was a strong month. We outperformed by nearly 10%. After a pretty tricky June and July, we saw a strong outperformance driven by mining shares over the past year, but then a tricky June and July, but these rebounded strongly through August and we really held our conviction, held our positions and really benefited from the recovery of those through August. I think if we look at what’s been driving that, we saw strong outperformance of gold and really the sort of medium to longer term opportunities there, the structural dynamics that are playing out haven’t gone away. And we benefited from buying some of that pullback that we saw in the gold price earlier in the year.

We think about the fiscal deficits that are here to stay. It seems the high government debt levels globally, the fact that central banks continue to diversify into gold, this continues to stay. And we really like some of these small mid-cap gold producers in Australia. There’s some great companies in the market here, low cost positions, growing volumes. We look at companies like Genesis Minerals, Capricorn Metals, both had very strong months. Look more broadly at the remainder of the commodity space as well, another strong month as well. There’s been a lot of volatility in this space over the past six months, but I think when you see this volatility, it’s important to take a step back, look at the medium to longer term opportunities, and in our view still remains very much intact. We look at the commodity related to the critical minerals, very much seeing strong demand coming through driven by some of these big thematics, the shift towards renewable energy, the shift towards electric vehicles, the build out of the grid and these huge power requirements that are coming from AI.

This is all very commodity intensive. And we look at some of these commodities like lithium, copper, uranium, aluminum. It’s a very strong outlook and we continue to like these and have got some real key positions in that space. Looking through reporting season as well, we saw some great results from some of the suppliers of equipment into the mining industry as well. Chrysos was a standout result, revenue growth over 30%, really disrupting the gold testing industry with their photon assay technology. Continue to like that business. Imdex as well, shares are a bit more volatile, but the revenue growth is over 20%. Great result. This business is providing leading technology into the drilling industry. There was a bit of confusion around some of the interest expense and some of the modeling, but we think you got to take a step back, look at the longer term opportunity.

And this business has some great growth ahead of it still as we see that ongoing recovery and mining investment coming through. If we look at the rest of the market, I think where we’ve been quite active over the past month, really looking to take advantage of the volatility in the market is broadening our exposure beyond materials into areas like consumer, financials, industrials. And we’ve seen some great opportunities there taking advantage of the volatility in the market and particularly in the consumer and financial space. And we call out a few opportunities there because some of these share prices have pulled back quite materially over the past year, especially in some of these diversified financials where you’ve seen 20 to 40% share price falls. And we like companies like Netwealth, Pinnacle and Zip as businesses we’ve been adding to over the past month following those share price falls.

We look at companies like Pinnacle, leading diversified fund manager, multiple affiliates, multiple asset classes, multiple regions, a great track record, reinvesting back into the business, driving organic revenue growth, doing lots of bolt-on acquisitions as well that have been proven to be very value accretive. A bit of uncertainty in the market. Whenever you see share prices fall, there’s some uncertainty around the shares. At the moment with Pinnacle, it’s around metrics and their private credit exposure, but it’s one of 19 affiliates, less than 10% of earnings. And we think the shares have been punished too much in relation to that. Look at companies as well like Netwealth. Again, shares have been very weak. The shares are trading on one of the lowest valuations since its IPO. And this is a leading investment platform for the wealth industry. Great structural growth ahead for that business. It continues to reinvest.

It’s got some really high profit margins that allows it to reinvest back into the platform, building that tech out, building a lot of optionality from AI as well. So it’s continued to like that business. Also Zip, again, shares have been very weak, valuations pulled back. This is a business that’s a leading digital financial services company, a good position in Australia, but really the opportunities for them to continue to expand in the US where they’re building that presence, they’re growing in a very disciplined way, generating very strong cash flow and the business is very profitable now. They’re doing a buyback, got a strong balance sheet and we think that company’s still got a great long runway ahead as it continues to penetrate that US market. So overall when we look at the opportunity set, we think the market will still remain volatile. There’s a lot of uncertainty at the moment around inflation remains sticky, high interest rates.

We’ve got ongoing conflict in the Middle East. I think the remainder of the year you’re going to see ongoing volatility in share prices, but I think in this type of environment, it’s important to stay disciplined, focused on the longer term opportunities and that’s what we continue to do. We see some great opportunities across mining, many elements of a commodity super cycle here in these critical minerals, that remains a core overweight, but we’ve also been broadening the exposure out, looking to buy many of these de-rated quality growth companies across consumer financials, industrials where we’re seeing a lot more opportunities of late as well.