Sam Twidale, manager of the DNR Capital Australian Emerging Companies fund, has been repositioning the portfolio in light of COVID-19, with small-cap equities unlikely to be immune from the stockmarket volatility.
Twidale said the problem for small caps was they were often less diversified and had greater sensitivity to the economic cycle.
Since the start of the year to 23 March, the ASX Small Ordinaries index had lost 36% while the ASX 200 had lost 31%.
Twidale said the DNR Capital Australian Emerging Companies fund had exited two positions in construction firm Monadelphous and energy firm Karoon Energy in light of the falling oil price which he said he expected to have a ‘longer-lasting impact’ on the two companies. Oil prices had halved in the past month from US$56.30 to $28.20 per barrel for brent crude oil.
Instead, he had been adding to existing positions in fintech firm Bravura Solutions and payment provider Tyro Payments. Other firms he namechecked as providing opportunities were consumer appliances manufacturer Breville and technology firm Nanosonics as these were quality companies which were leaders in their industry.
“[Bravura] has $100 million of cash on its balance sheet, providing it with significant downside protection. Although the current market uncertainty may delay new customer signings, the company has a long sales cycle with customers agreeing long-term contracts. Bravura’s software also improves automation, digitalising manual processes and replaces expensive legacy software. We believe this will be a key structural theme in the coming years as the focus on digital transformation increases,” Twidale said.
“Tyro is certainly facing a short-term disruption given its payments terminals are used across the hospitality, retail and health industries, many of the hardest-hit in the economy.
“However, management have significant financial flexibility with $170 million of cash on its balance sheet. The long-term opportunity for Tyro hasn’t changed and we expect the company to continue taking share from the major banks.”
Performance of ASX 200 and ASX Small Ordinaries index since start of the year to 23 March, 2020
