Quality growth stocks continue to deliver for Australian small cap investors

Tuesday, May 25 2021

As investors focus on the prospect of a strong recovery from the coronavirus pandemic combined with significant pent-up demand and rebound of the global economy over coming quarters, the DNR Capital Australian Emerging Companies Fund1, continues to show impressive results.

Sam Twidale, Portfolio Manager for the DNR Capital Australian Emerging Companies Fund says: “We are positioned across a broad range of opportunities, including the more cyclical areas of the market like resources and consumer discretionary, reopening stocks that will benefit from a normalisation of the pandemic, and quality growth stocks that we believe are attractively priced.

“Although the macroeconomic outlook is receiving a lot of attention given the debate around inflation/deflation and the direction of bond yields, we continue to search for strong bottom-up opportunities, with a preference for companies that can deliver value for shareholders regardless of the prevailing economic environment.

“Given the lessons learnt following the GFC when a number of economies suffered double-dip recessions and anaemic growth, there appears limited appetite to tighten policy too prematurely. This is providing a supportive environment for equities and general risk appetite levels.

“Given this backdrop, many of the more cyclical sectors of the market performed strongly recently.

“Of the Fund’s holdings, this included companies exposed to housing like Reece (REH), a leading supplier of bathroom and plumbing products. Commodity prices also strengthened further, benefiting holdings in the Materials sector like IGO (IGO) and Orocobre (ORE) who are exposed to growth in renewables investment and electric vehicles.

“We continue to focus on high-quality business models with positive long-term outlooks. For example, we recently added to the Fund’s holdings in Breville Group (BRG), with the shares having fallen nearly 20% since the positive update in February. However, we remain cautious on those areas of extreme valuation, with many of the secular growth stocks still on elevated valuations and with optimistic earnings forecasts.

“A key risk surrounding the market outlook is a pickup in inflation, especially given the unprecedented scale of the stimulus measures. A number of companies are already warning of increased inflationary pressures, which we expect to build further as the global economy recovers and capacity utilisation tightens,” notes Twidale.

The DNR Capital Australian Emerging Companies Fund has a ‘Recommended’ rating from leading ratings house Zenith Investment Partners.

The Fund reported returns2 of 16.18%p.a. since its inception in August 2018, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 8.39%p.a.

The Fund takes a concentrated approach, investing in between 20 and 45 stocks. Its investable universe is the ASX Small Ordinaries Accumulation Index. It has an active share greater than 75 per cent – a measure of active management that tracks the extent to which the Fund varies from the composition of its benchmark index.

Twidale adds : “We back quality small cap companies because we believe they can successfully reinvest capital and achieve pricing power that allows them to grow above inflation. Additionally, these companies have strong balance sheets that allow them to ride out cycles, along with providing strategic optionality.”

Learn more about the DNR Capital Australian Emerging Companies Fund, visit: https://dnrcapital.com.au/financial-advisers/ec-adviser-managed-fund/

 

1 DNR Capital Australian Emerging Companies Fund, ARSN 627 783 957.
2 Performance is net of fees and taxes as at 30 April 2021.

 

IMPORTANT NOTE: This article has been prepared by DNR Capital Pty Ltd, AFS Representative – 294844 of DNR AFSL Pty Ltd ABN 39 118 946 400, AFSL 301658. It is general information only and is not intended to be a recommendation to invest in any product or financial service mentioned above. Whilst DNR Capital has used its best endeavours to ensure the information within this document is accurate it cannot be relied upon in any way and you must make your own enquiries concerning the accuracy of the information within. The information in this document has been prepared for general purposes and does not take into account the investment objectives, financial situation or needs of any particular person nor does the information constitute investment advice. Before making any financial investment decisions you should obtain legal and taxation advice appropriate to your particular needs. Investment in the DNR Capital Australian Emerging Companies Fund can only be made on completion of all the required documentation. The Trust Company (RE Services) Limited ABN 45 003 278 831 AFSL No 235150 (as part of the Perpetual Limited group of companies) is the issuer of the PDS for the Fund. An investor should obtain and read the PDS and consider their circumstances before making any investment decision. The PDS is available at the Fund website at www.dnrcapital.com.au/invest, or a paper copy can be obtained, free of charge, upon request by calling DNR Capital Pty Ltd (‘Manager’), the investment manager of the Fund. This material is general information only and not an investment recommendation. The Manager or The Trust Company (RE Services) Limited does not guarantee the repayment of capital from the Fund or the investment performance of the Fund. An investment in this fund is subject to investment risk including loss of some or all of an investor’s principal investment and lower than expected returns.

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