Stockhead special guests, Richard Ivers and Mike Younger are a part of the Zenith Small Caps Award-winning Prime Value Asset Management team.\u00a0<\/p>\n
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There\u2019s a good reason Prime Value Asset Management\u2019s <\/em>dynamic small cap duo, Richard Ivers and Mike Younger have spent much of 2024 on the road, lining up a swag of meets with smaller ASX companies<\/p>\n Following the reporting season just gone, the pair have been prepping their Prime Value Emerging Opportunities Fund \u2013 the only small cap fund to be upgraded in the latest Zenith research update to a Highly Recommended rating \u2013 for prime positioning ahead of a likely small cap summer.<\/p>\n According to Wilson Advisory, Aussie small caps historically perform better than large caps after the US Fed\u2019s first rate cut of the monetary cycle.<\/p>\n Indeed, in the 12 months immediately following the Fed\u2019s first rate cut, the S&P\/ASX Small Ordinaries (XSO) has, on average, gained more than 8%.<\/p>\n Of course, the Ivers and Younger fund has outperformed both the XSO and the S&P\/ASX Small Ordinaries Industrials (AXSID) by circa 7% p.a over the past six years, while their measured risk remains approximately 18% lower than both indices.<\/p>\n However there\u2019s movement at the station for a reason, because the colt from Old Regret may\u2019ve already begun breaking out:\u00a0 Wilsons says ASX small caps are trading at a \u201cvery wide and historically attractive discount relative\u201d to large-cap stocks.<\/p>\n Global small caps were said to be trading at the \u201clargest discount relative to large caps in over 20 years\u201d.<\/p>\n Globally, the story is even more compelling, with the US Russell 2000 small-cap index gaining, on average, well over 20% in the year following the first rate cut.<\/p>\n In previous periods, when small caps have traded at large discounts, they have gone on to deliver strong returns over the next 12 months, particularly when economic conditions and the official policy backdrop turn supportive.<\/p>\n But without having boots on the ground to count the number of cars in the company car park, Mike Younger says you\u2019re playing small caps wrong.<\/p>\n \u201cA discipline to meet companies in person is a critical part of any investment process, but doubly so for small companies,\u201d says Younger.<\/p>\n \u201cWe as investors benefit by looking beyond the charts and the reports, and sitting down with the companies we might be considering for investment.<\/p>\n \u201cAt the end of the day we are looking to back companies that we believe have potential. We want to get to know them, to partner with them and grow with them.\u201d<\/p>\n Ivers and Younger agree that small caps currently look poised following a period where many attractive smaller companies were oversold.<\/p>\n Younger says the likelihood that rate rises are near an end helps to fuel optimism.<\/p>\n \u201cWe\u2019re seeing several quality smaller companies which are now attractively valued following a period where they were arguably oversold.<\/p>\n \u201cThe small cap market is now at a position where it offers exceptional opportunities for long-term investment returns.\u201d<\/p>\n But as always when investing in small cap stocks, managing volatility is key. And the key to taming volatility is portfolio construction, according to Ivers and Younger.<\/p>\n Ivers says: \u201cWe primarily look for quality companies, which demonstrate resilient earnings, but also like to hold some higher growth, higher risk stocks as well. Getting this balance right can provide more evenly distributed returns over time.\u201d<\/p>\n Younger adds: \u201cWe\u2019re always conscious to manage volatility because the next challenge is never too far away. We are currently optimistic about small cap stocks, and in particular smaller industrials.<\/p>\n \u201cBut we\u2019re also realistic that markets are full of surprises.\u201d<\/p>\n \u201cWe\u2019ve always felt strongly that managing volatility successfully starts with what you are buying \u2013 if you buy well and focus on quality there is a good chance you will deliver returns with lower risk over the longer term,\u201d Richard Ivers concludes.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u201cWe have owned Propel Funerals in the fund for approximately three years, and before that it was held in the micro-cap fund, so it\u2019s a company we have followed for many years,\u201d says Mike.<\/p>\n Propel is Australia\u2019s second-largest funeral operator.<\/p>\n \u201cIt\u2019s not the most exciting industry, but one with many favourable characteristics including accelerating volume growth due to a growing and ageing population and little correlation to the economic cycle.<\/p>\n \u201cPropel\u2019s stock price was weak during 2023 as the market was concerned by the high death rate in 2022. But we see this as a short-term issue in a long-term growth trend. The death rate is expected to accelerate from 1% p.a. to 3% p.a. over the next 20 years starting about now.<\/p>\n \u201cAs this short-term concern dissipated the stock rallied and is up 30% over the last five months,\u201d Mike adds.<\/p>\n \u00a0<\/p>\n \u201cShares continued to be buoyed by the strong premium rate environment as the Queensland floods continued the trend seen in recent years of these more frequent catastrophic events.\u201d<\/p>\n For the six months to late February, AUB\u2019s underlying NPAT rose to $70.2m from $46.7m a year earlier, and underlying revenue to $635.7m from $466m.<\/p>\n The the listed broking group pulled off a turnaround in New Zealand, while the core engine of the business, Australian Broking, continues \u201c\u2026operating at tremendous margins with lots more opportunities than we originally envisaged\u201d, CEO Michael Emmett told investors.<\/p>\n AUB Group recently upwardly revised FY24 guidance is for underlying NPAT of $161-$171m, compared with a previous $154-$164m range.<\/p>\n The new guidance represents growth of 24.7-32.5% from 2022-23.<\/p>\n Richard says AUB has been one of their fund\u2019s largest holdings, a stock up by double digits over the last year, but which saw a 23% share price rise in 2023, which was largely matched by earnings growth.<\/p>\n \u201cWe continue to view the stock as attractively priced with a solid medium-term growth outlook driven by a combination of resilient top-line revenue growth and further margin expansion.\u201d<\/p>\n \u00a0<\/p>\n The guys say Equity Trustees was established as an independent Trustee and Executor company somewhere around 140 years ago and has become one of Australia\u2019s largest specialist trustee companies.<\/p>\n \u201cEQT has started the year well,\u201d says Richard.<\/p>\n \u201cWhile there has been no new news, we note that the stock traded relatively flat in 2023 (+2%) despite its strong medium-term earnings growth outlook. This is under-pinned by the full earnings impact of its AET acquisition, in addition to further synergies being extracted as the company manages an increasing amount of AET\u2019s Funds Under Supervision inhouse.\u201d<\/p>\n \u201cAdditionally, the closure of the company\u2019s loss-making UK\/European business will further enhance earnings.<\/p>\n Source: EQT HY 24 results presentation<\/em><\/p>\n \u201cTrading on a FY25 P\/E of just 16x, we view the stock as materially undervalued, and it also features as one of the fund\u2019s largest holdings,\u201d Richard says.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u201cConsistency,\u201d Mike says. \u201cIt\u2019s easy as investors to outsmart ourselves.<\/p>\n \u201cBut sometimes you need to stick with what works, and keep backing your process.\u201d<\/p>\n \u00a0<\/p>\n The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.<\/em><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n <\/span><\/p>\n The post Mitigating small cap risk in a volatile small cap world: Richard Ivers and Mike Younger<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"Smaller companies poised<\/h2>\n
Mitigating risk in a volatile world<\/h2>\n
Three smaller ASX companies<\/h2>\n
currently favoured by Ivers and Younger<\/h2>\n
Propel Funeral Partners (ASX:PFP)<\/strong><\/a><\/h2>\n\n
AUB Group (ASX:AUB)<\/strong><\/a><\/h2>\n\n
EQT Holdings (ASX:EQT)<\/strong><\/a><\/h2>\n\n
The final word: Consistency.<\/h2>\n