It has been another action-packed year on the investment markets, though Prime Value’s Award Winning Small Cap Team would tell you there’s never a dull moment in the small and micro-cap world. They share some thoughts on the year nearly gone, with an eye to what we may expect in 2023:
Richard Ivers, Portfolio Manager
What was your favourite stock for 2022? Not our biggest holding, but one that was very satisfying this year was Lindsay Australia (ASX: LAU). We have held it for many years in our microcap fund and added it to our small cap fund early in 2022. We noticed a fundamental shift in the earnings outlook as industry demand was significantly exceeding supply, and price rises were accelerating. Very few funds own it, and it has little broker coverage. The stock is up 75% this year when the small industrials is -20%. Finding these overlooked gems is what makes small cap investing so exciting.
What surprised you during the year? The massive shift in macro conditions brought about by rising inflation. Interest rate levels and the economic outlook have changed significantly, and been a major driver of markets this year.
Name a “quiet achiever” company, a great business which flies under the radar? Equity Trustees (ASX: EQT). Not many brokers cover the stock and it’s not broadly owned. The quality of trustee businesses was recently recognised by the bid for Perpetual’s trustee business. It announced a highly strategic and accretive acquisition in August yet the stock is down since then. We think it is undervalued.
Has there been any positives from a higher inflation/higher interest rate environment, or is it all negative? There aren’t too many positives, however having a cost of capital does remove some of the froth that was building in highly speculative, unprofitable companies. So it’s better to have that froth removed quickly than allow it to become a bigger problem at a later date.
Which investment quote or “Buffetism” best sums up 2022? I like the tortoise and hare analogy. Be careful taking big risks because you just don’t know what’s around the corner. Slow and steady wins the race.
What was your most enjoyable movie or TV series from 2022? I’ve really enjoyed the All or Nothing sports documentary series on Amazon Prime TV this year. Particularly the English Premier League clubs, with a favourite the Arsenal one.
Early thoughts on what investors can expect for 2023? I think earnings risk from the slowing economy will come into greater focus early in the New Year. That’s why we are biased to more defensive, structurally growing businesses. At some point in 2023 I think it’s likely the market will start to look through the weakness towards the recovery, as markets are forward looking and rebound well before the economy does.
Mike Younger, Portfolio Manager
What was your favourite stock for 2022? AUB Group (ASX: AUB). While not generating the strongest performance across our portfolio, the stock gave us another opportunity to top-up our holding with a strongly earnings-per-share accretive deal via the Tysers Insurance Brokers acquisition. It also continued to deliver on its predictable and resilient organic growth journey.
What surprised you during the year? Through the various bear market rallies we have witnessed this year, and in light of continuing interest rate rises, I have been surprised that the strongest performers in those periods have been those loss-making, speculative companies that traded on thin air through the last few years.
Name a “quiet achiever” company, a great business which flies under the radar? Lindsay Australia (ASX: LAU). While the company has been listed for over 20 years, it remains relatively undiscovered by investors, yet has seen a major transformation in its business as industry consolidation and a canny shift from road to rail transport has resulted in consistent and impressive earnings growth and returns on capital.
Has there been any positives from a higher inflation/higher interest rate environment, or is it all negative? It is difficult to identify positives from the current bout of inflation we are witnessing. While investors that don’t have a mortgage can enjoy higher interest rates on their savings, the increase in everyday spending has outstripped this.
Which investment quote or “Buffetism” best sums up 2022? I don’t look to jump over seven-foot bars; I look around for one-foot bars that I can step over” – Warren Buffett
What was your most enjoyable movie or TV series from 2022? I must admit, I am a sucker for Dr Pimple Popper, which is on Foxtel – light-hearted fun for the non-squeamish!
Early thoughts on what investors can expect for 2023? More of the same for the first three-to-six months of the year, before things spice up as 30% of Australians roll off low, fixed rate mortgages priced at around 2%, and onto new variable loans at around 6%. Making it even more interesting will be reducing inflation rates as items such as used cars, soft commodities and freight costs pull back from heightened levels. Ultimately, I would expect investors to have a clearer picture of earnings levels into the medium-term as we exit 2023.
Benjamin Mellody, Equities Analyst
What was your favourite stock for 2022? Omni Bridgeway (ASX: OBL). It’s a complex business – a litigation funder, operating in an emerging global industry that isn’t well understood. For those who have done the work, you can see material cash flows being generated in the next few years. And although not a linear rise, it seems like the market started to come to the party in 2022.
What surprised you during the year? The level to which macro impacts (inflation, rising interest rates, disrupted global supply chains, rising energy costs etc.) can have on all stocks, regardless of their fundamental individual business performance.
Name a “quiet achiever” company, a great business which flies under the radar? Silk Logistics Holdings (ASX: SLH). A logistics business that transports goods all the way from sea ports to their warehouses and ultimately to the end customer. Has great relationships with its customers, and is able to grow organically and via acquisitions – particularly as they expand their operations nationally and into NZ.
Has there been any positives from a higher inflation/higher interest rate environment, or is it all negative? One positive is that the high quality businesses – those that are able to leverage pricing power and pass on any increased costs to customers – separate themselves from the pack. Those businesses that can’t do this see their margins compress and profits disappear. Ultimately, this makes it a better period for stock picking.
Which investment quote or “Buffetism” best sums up 2022? “A rising tide floats all boats… only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffett
What was your most enjoyable movie or TV series from 2022? The Fundamentals of Caring, a Netflix movie featuring Paul Rudd. Funny and inspires generosity.
Early thoughts on what investors can expect for 2023? The focus to shift from rising inflation and interest rates, towards the impact they are having on the economy. And some separation between Australia’s economic trajectory versus other parts of the world (i.e. our experience likely won’t be as bad).
The Prime Value Emerging Opportunities Fund has enjoyed some strong accolades during 2022. It topped Mercer’s Australian Small Companies (ex-ASX100) survey for annualised performance over three years, and was the only fund in the Australian Small Companies (ex-ASX100) category to achieve top quartile performance in each of the last three financial years on the survey, underlining its consistency.
Its performance saw Prime Value’s small caps team rated one of Australia’s ‘Star Managers’ by Financial Newswire and SQM Research – the Star Manager ratings aim to identify Australia’s top 10 most consistent fund managers.
Finally, Prime Value’s small caps team was strongly endorsed by the Zenith Fund Awards 2022, winning the Australian Equities – Small Caps Award.
Over the last four years the Prime Value Emerging Opportunities Fund has returned 14.1% per annum after fees.
To invest in the Prime Value Emerging Opportunities Fund please contact our Client Services Team at info@primevalue.com.au and 61 3 9098 8088