Portfolio Manager for the DNR Capital Australian Emerging Companies Fund, Sam Twidale discusses the importance of looking past the short term noise in the market and focussing on the long term.
So we’ve just been through the reporting season in the Australian small cap sector, and lots of focus on some of the short term issues in the market currently, given the disruption of COVID. Lots of impacts of border closures, increasing costs, increasing shipping costs, labor constraints. So lots for management teams to deal with. But I think generally management teams are dealing with this well, corporate profitability’s been recovering strongly and also balance sheets are in a very strong position. Lots of cashed up balance sheets. But I think whenever the market’s focusing on all of these short term issues, it’s important for long-term investors to step back from this and really think about what are some of the long term opportunities in the market. And that’s certainly what we’ve been focusing in on our Australian emerging companies fund. And I think we can group some of these opportunities into sort of three key categories, digitalization, reopening, and decarbonization.
And if we look at these in a bit more detail, firstly, looking at some of these great reopening opportunities, I mean, these are some of the companies that have been hit hard by COVID in the short term, but where there’s significant earnings recovery potential longer term. Many years of earnings growth ahead. If we look at some of the companies we are invested in companies like Lovisa, a fast fashion accessories retailer, hit very hard by the lack of events and a lot of these in-person activities, but they’ve managed it through the downturn very well. Also IDP Education, leading provider of student placement services and English language testing. And that’s an area where we see a lot of pent up demand, a lot of recovery potential, and they’re a key industry leader and very well placed to take advantage of that.
Both those companies as well, they’ve been investing through the downturn, doing opportunistic acquisitions, really focused on creating value for shareholders, which is what we like to see, and that really sets them up well when that recovery comes through. The other areas, digitalization. Key structural thematic that we see playing out over multiple years, the whole shift away from on-premise to cloud based computing, the digitalization of manual processes, the shift from bricks and mortar to online retailing.
This is creating lots of opportunities for some of these smaller companies. And we are invested in a number of these that are taking advantages of these structural trends. Companies like TechnologyOne key provider of ERP systems to local council and the university space. Real industry leader, taking advantage of that. And we see some very good opportunities for that company. And also PEXA a leading property settlements exchange. It’s involved in the sort of automation of that process away from paper based to digital based transactions and a real key industry leader as well in that space in Australia.
And then the last one is decarbonization. We see lots of opportunities here, a real game changer. We’re really just the start of this real key thematic that we see playing out over the next decade and beyond. The whole shift away from fossil fuels towards renewables, the shift towards electric vehicles away from the combustion engine and also areas like reducing the carbon intensity of steel production. So some great opportunities in a small cap space in particular, in the resources sector in Australia.
I think we’re see a step change in demand for some of these commodities like nickel, lithium, the rare earths, and we like companies like IGO leading producer of lithium and nickel, and also Lynas Rare Earths, key producer of these specialty rare earth commodities used in the magnets and electric vehicles where we see very strong demand growth coming through.
So overall I think, look, there’s always lots of short term volatility, lots of noise in the short term, really important as long term focused investors that you really think about these long term thematics, some of these key structural trends, a lot of the companies in our emerging companies fund are really exposed to these. So we’re really focused on putting together a concentrated portfolio of the highest quality companies we can find that are attractively priced. And that’s where we see some of the opportunities currently in the market.
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