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Today we hear from Richard Ivers from Melbourne-based Prime Value.
Prime Value’s Emerging Opportunities Fund made an 18.1% gain in FY20 – ahead of the ASX Small Ord’s 5% loss – which led to it topping Mercer’s Australian Small Companies survey of the best performing funds.
In the 2021 calendar year, Ivers reports the fund is up ~17% while the ASX Small Ords (the fund’s benchmark index) is up ~13%.
“We’ve had a good, solid year. We’ve shot the lights out the last couple of years, we haven’t this year but we’re still ahead of the market,” he says.
Despite lockdowns easing, Ivers says the ASX stocks that have paid off the most are higher-quality structural growth stocks.
“You might [not] think [so], with all the re-opening, with COVID and everything, but it’s been the structural growth [companies] that grow well in most conditions that have done well,” he said.
“Companies like Uniti (ASX:UWL), it’s up 150% this year, AUB (ASX:AUB) is up 50%, Pinnacle (ASX:PNI) is up 110%, News Corp (ASX:NWS) up 30%, IPH (ASX:IPH) up 30%.”
“These are all higher quality growth stocks that have done well, we’ve held them for many years and we expect them to continue to do really well.”
Ivers says most of these companies grew from organic growth in their core businesses, but some have gone on the M&A trail.
Uniti listed at 20 cents in early 2019 and is over $4 now with acquisitions playing a big part in that. One of those was Opticomm (ASX:OPC) which it bought in 2020 and that deal was the catalyst for Prime Value to buy in.
“That lifted the quality of the business significantly,” Ivers said.
“IPH traditionally does acquisitions but hasn’t this year with COVID – because of the borders shutting it hasn’t had a lot of the opportunities.
“And News Corp, in Australia, has been more about crystallising the value that’s in the business.
“They had to make a couple of acquisitions… they’ve been small but they’ve been about illustrating the value in the business because it’s obvious for everyone to see they’re very cheap but have improved transparency so people get more detail.”
And looking into 2022, Ivers says there will still be opportunities for investors even though volatility might persist.
“I think after the drawdown of COVID back in Feb-March last year, the rebound since then was relatively easy to generate good returns.
“It gets harder from here I think with interest rate rises in the US and tapering happening. There might be some volatility ahead – it’s hard to know of course – but we’re not afraid of that volatility.
“And the changing environment, too – interest rates have been declining for 40 years but now we’re going into a period where they’ll be rising, we don’t know how fast and how far they’ll rise – it’s really hard to forecast that.
“You’ve got to focus on core competencies and good quality growth stocks but have to be nimble and aware that the environment is changing.”
Ivers highlighted not only interest rates but continuing uncertainty about just how deadly omicron is.
“I think it [omicron] just highlights that we’re in a changing environment and you can really build your portfolio around core businesses like the ones I’ve mentioned, they’re all pretty core, you can hold them for many years and they’ll trade well through,” he said.
“But you have to be nimble as well looking at other things. Some areas like high-priced tech you should be more cautious on at the moment. It’s worked well over the last few years but we could be coming into a period where that’s a bit harder as interest rates ride.
“So I think it’s just about being nimble, aware that the environment is changing and not just relying on things that have worked in the past.”
Of course, no company will tell you they’re a bad buy. So how do you sort the sheep from the goats?
“You don’t find the answer straight away, it takes time – experience plays a big part in that, you get to see how different businesses perform through different cycles and which models are more resilient than others,” Ivers said.
“And then you have to do your due diligence on the company as well, look through the financials, ensure it’s all attractive and the trends are heading in the right direction.
“You have to talk to their competitors, suppliers and customers and work out if what they’re saying is right or not.
“We often come to it from the customer perspective in that you look at it from their point of view – a product or service that makes sense, if I was using it and the price increase would I switch and buy another product?
“Those are the things we try to understand, it goes to the quality of the product and if it’s high quality you’re unlikely to switch and you have pricing power.
“Margins are a good indicator, too – they let you know if the company has pricing power and ability to generate a good return. If margins are going down it often implies the barriers or competitive moat they have may be decreasing over time.
“But it’s an ongoing process, even for the stocks we own we continue to reassess all the times.”
And for Ivers this process will be going on over the Christmas/New Year period.
“With markets if they’re open you have to be alert all the time. Liquidity dries up through this period so things do get quieter, there’s less ability to trade even if you wanted to because liquidity is not there,” he said.
“Announcements slow down, there’s less news flow although retailers sometimes come out with news because it’s a key season.
“But I’m passionate about the industry, I love this job so I don’t ever shut off 100%, I love reading research reports – it’s what I like doing.
“Over the next few weeks I’ll still be spending a fair bit of time looking at stocks and markets even if I am on holidays.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee 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.
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