Richard Ivers is the portfolio manager of Prime Value Asset Management’s Emerging Opportunities Fund and the Microcap Fund. The Melbourne-based firm oversees around $3 billion in assets.
Small industrials have faced a challenging environment which has weighed on performance. What’s been driving outcomes, and where are you seeing opportunities?
Our team of three manage both funds that invest in Australia and New Zealand. The funds fish in the small industrials pool, which is the small-cap market excluding the more speculative mining sector.
The small industrials accumulation index is now only 3 per cent above its pre-COVID level of early 2020. In fact, since the index started in 1990, only the global financial crisis has produced a worse five year stretch for small industrial stocks than now. You wouldn’t think it, given the broader Australian market has delivered strong returns.
While both funds have performed much better than the index, it would be nice to have a tailwind. But the silver lining is that when small-cap bull markets begin, returns are typically very high and peaking interest rates are a possible catalyst for that.
In a world of high asset prices, we’re spoilt for choice. We’re seeing a disconnect between earnings and valuations among quality small industrials stocks. There are pockets of high valuations in our corner of the market, but these are the outliers rather than the norm.
Macro has been a big impact on stock performance, but some better ones have included Cuscal and Skellerup in New Zealand. The weaker performers have been more rate-sensitive stocks like Australian Finance Group and Qualitas.