Positioning for growth from Global Smaller Companies
Paradice Perspective
Q&A Session with Kevin Beck
By Kevin Beck – Portfolio Manager, Global Small Mid Cap Fund
How is the current environment for global small cap investors?
The current environment remains volatile for global small cap investors. Since August of 2015, global small caps have underperformed their larger cap peers by over 200 basis points. This is one of longest periods of underperformance since the GFC. Key areas of weakness have been cyclical businesses, emerging markets and finance related shares. Nevertheless, we see opportunity in this market as valuations have improved.
What are some of the concerns facing investors like yourself?
The biggest concern remains tepid global growth, record profit margins and unorthodox central bank policies.
Have valuations and investment opportunities increased with the recent volatility in markets?
Valuations improved materially into February as markets grew concerned with slowing global growth. Political volatility in places like Brazil plus the upcoming BREXIT vote in the UK have made currency volatility especially jarring for global investors. However, more central bank intervention from the ECB and Japan along with growing doubts that the US Federal Reserve will be on an accelerated pace to raise interest rates has made the improved valuations short lived.
The fund has an overweight exposure to emerging markets, what is your reasoning for this position and what are some of the types of businesses you own?
The fund maintains investments in emerging market companies that we think have long runways of growth at cheap valuations. The majority of these investments are in domestic oriented consumption plays. For example, the fund owns shares in Cashbuild, a South African hardware and building materials retailer. Cashbuild’s recent results show a retailer with 11% same store sales growth, 30% operating profit growth, net cash and a 3% dividend trading at 15x earnings. Other examples of EM investments include food groups based in South Africa and South Korea, a retailer in Indonesia and Thailand, banks located in South Korea and Indonesia and restaurant groups in India and China.
Your fund remains underweight in both Europe and Japan, what are your thoughts on these two areas?
We are underweight in Japan and Europe due to very low growth prospects for these two regions, high amounts of leverage and weakening currencies. In addition, high quality assets in this environment trade at significant valuation premiums to similar businesses elsewhere in the world.
How do you view the recent interest rate rise in the US and what affect will it have on US corporates?
We see the very modest scope and pace of interest rate rises in the US as largely immaterial to individual companies. At the margin, this will help some of insurers, banks and those companies with net cash. If higher rates begin to crimp industrial growth even further, then this will have a negative impact on our industrial investments.The Paradice Global Small and Mid Cap fund is searching for 50-70 diversified investments opportunities where we think we have the strong ability to compound at above market rates with solid downside protection. As a bottom up, benchmark agnostic portfolio of investments we will, from time to time, underperform broader based benchmarks. Nevertheless, over the long term and through the economic cycle we believe our philosophy and process will lead to solid risk adjusted.
To find out more information on Paradice and its strategies see below details
Website: www.paradice.com.au
Telephone: 02 8227 7400
DISCLAIMER: Paradice offers institutionally‐oriented investment strategies. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. This material is prepared by Paradice Investment Management Pty Ltd (ABN 64 090 148 619, AFSL No. 224158) (Paradice, we or us) and is intended only for “wholesale clients” within the meaning of sections 761G and 761GA of the Corporations Act 2001 (Cth). These materials are not to be distributed to any persons who do not qualify as a wholesale client. Information has been obtained from sources believed to be reliable, but we do not represent it is accurate or complete, and it should not be relied upon as such. Opinions, forecasts and estimates constitute our judgment at the date of this presentation and are subject to change without notice. Any rates of return, forecasts or estimates contained in this presentation are not guaranteed. Past performance of any investment strategy contained in this presentation is not a reliable indicator of future performance. Information in this presentation is current as at the date specified and is subject to change. Copyright © 2016 owned by Paradice. All rights reserved. This document may not be reproduced, distributed or transmitted, in whole or in portion, by any means, or incorporated in any other way into another document or other material without written permission from Paradice.
AUTHOR
Partner Article
Recommended for you
Hybrid securities can offer investors equity-like returns, yet with a lower level of risk. Here’s a rundown on hybrids and why they are attractive investment options.
Diversified managed funds could make an ideal addition to a managed account, as the broad toolset available to the fund manager enables them to seek outperformance and manage risk, according to Allan Gray.
The number of advisers using managed accounts has exploded in recent years, often at the expense of diversified managed funds. But diversified funds deserve a place in almost any multi-asset portfolio, held either within or alongside a managed account, according to Allan Gray.
Over the years government regulations regarding financial advice delivery has increased complexity, compliance costs and time to deliver advice. As a result, financial advisers have been forced to “orphan” their less affluent clients.
