Smaller cap stocks are ripe for active management given the many quality smaller companies available for those prepared to look beyond the ASX 100 index, according to award-winning small cap managers Richard Ivers and Mike Younger of Prime Value Asset Management.
Many quality small defensive companies are trading at a valuation discount to the Small Industrials average and well below their long-term averages, providing strong investment opportunities, according to Mike Younger, portfolio manager for the Prime Value Emerging Opportunities Fund.
He says times of change and volatility often provide the best opportunities to invest in smaller companies. “Historically, these times of change and volatility have been a fruitful time to invest as sentiment normalises and the earnings power of quality companies is proven.
“We think this presents an exceptional opportunity for long-term investment returns in quality small cap companies.”
Richard Ivers, Portfolio Manager for the Prime Value Emerging Opportunities Fund, said downward momentum in small cap stocks had also impacted quality companies with resilient earnings. “The small cap sector has underperformed larger caps, yet it’s not unusual for smaller stocks to be oversold on the downside and then outperform larger stocks on the rebound.
“Quality companies like Equity Trustees and IPH Limited have demonstrated resilient earnings, and low earnings volatility, yet have been caught up in the indiscriminate small cap sell-off of recent times.
“Some of these stocks now look attractively valued”, Ivers said.
Every downturn provides some buying opportunities, according to Mike Younger. “We won’t call the bottom of the market. But we can expect the rebound will happen eventually, and there is potential for smaller industrials in particular to rebound strongly”, Younger said.
Small cap industrials have meaningfully underperformed small resources for much of the last four years, according to Younger, yet this can provide the conditions for a bigger response. “The drawdown creates the potential for an additional rebound in small industrial stocks, including the potential to outperform small resources on the way back up.”
The Prime Value Emerging Opportunities Fund has outperformed both the small ordinaries and small industrials indices for each of the last six years, and has delivered 10.2% after fees per annum to investors since inception in 2015. Mike Younger and Richard Ivers are part of the team which was winner of the Australian Equities – Small Cap Award at the Zenith Fund Awards in late 2022, and a finalist for the same award in 2023.
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