Reporting season is underway and while company results provide an important signpost, nothing beats the opportunity to meet with ASX-listed companies directly, according to the Prime Value equities team.
This is something the team lives and breathes every day: Over the last 12 months the team has conducted 1,364 meetings with ASX companies.
Richard Ivers, Portfolio Manager for the small cap Prime Value Emerging Opportunities Fund, says meetings are an essential part of the investment process, to find out what makes a company tick. “We see owning equities as an opportunity to be a part-owner in a company. We aren’t traders, we’re looking to buy and hold quality companies as it’s a proven way to generate wealth.
“The opportunity to meet with management, and the opportunity to ask questions directly is more useful than reading a company’s balance sheet.”
Ivers says commitment to process, including company meetings, has been key to consistency of performance for the Prime Value Emerging Opportunities Fund, which has returned 12.8% after fees for the year-to-date until 31 July 2023 (compared with the Small Ordinaries Accumulation Index return of 4.8% over the same period), and has returned 11.8% per annum after fees since inception in 2015.
“Our process is to focus on businesses with a higher certainty of earnings. This helps to lower risks.
“The other important risk reduction technique comes through portfolio structure and weightings. For us, the riskier the stock, the smaller the weighting.”
Short-term focus can be a trap
It’s important to avoid being too focussed on the short-term, says ST Wong, Chief Investment Officer of Prime Value Asset Management and Portfolio Manager for the Prime Value Opportunities Fund, which has returned 9.2% per annum after fees since inception in 2012.
“There are two main perspectives to keep in mind on equities investing. If you zoom in you will see short term fluctuations from month-to-month. But if you zoom out to a long-term view you will see the power of compounding returns. This should be measured in years, rather than months.”
When considering the bigger picture, it’s evident the market never rises in a straight line. “The market always goes through cycles, which provides both investment risk and opportunity.”
Mike Younger, Portfolio Manager for the small cap Prime Value Emerging Opportunities Fund, says investors need to ‘look through’ the short-term noise and focus on returns over several years at least. “To get the most from small cap investment we generally seek to hold small cap companies for three-years at the bare minimum, though five-to-seven years is better as compounding growth comes through.
“In the short-term we have reporting season, which will be interesting. We’re expecting a mixed bag. We expected to see a lot more downgrades coming through but they haven’t materialised – having said that, there is likely to be an awful ‘downgrade to upgrade’ ratio.”
A solution to uncertainty
Richard Ivers says many investment decisions are made during periods of uncertainty and short-term market fears. “There are many short-term themes happening in the market, which can cloud investors’ views. But given the market is forward-looking you can’t wait for the perfect market conditions to exist.”
What’s the solution to such uncertainty? “Look for the boring companies”, Ivers says.
“There’s always something that’s booming, which often busts later – we’ve seen it time and again with resources stocks, tech stocks and fintech stocks.
“If you consider the evidence, the boring stocks are often the most resilient. So there is something to be said for targeting the boring stocks and buying when the prices fall.”
Looking forward
ST Wong says it’s impossible to overstate the importance of looking forward and not back as investors. “Statistics such as inflation are backward-looking and we need to be careful not to put too much stock in these numbers.
“The reality is markets look ahead at all times. Yes, they may react to certain backwards-looking announcements but generally markets are priced on what they think is happening in the near future.
“The market always looks ahead to the next 12-18 months, well before the economic data becomes available. Equities lead the economy, not the other way around.”
Opportunities in small industrial stocks
Mike Younger says there is lots of ebb and flow between defensive and cyclical stocks in small cap investing. “We’ve seen a big shift to cyclicals as inflation fears subside, but we think a cautious approach is best at present.”
He says small industrials currently seem undervalued. “Small industrials are still down five per cent since Covid-19 hit, as compared to small resources which are up around 50% since early 2020. Yet there are some excellent companies in small industrials and we think there is strong potential for growth in this area over the medium-to-longer term.”
The manager is always wary of the ‘boom-bust’ behaviour often seen in resources. “This plays out on a regular basis and for this reason we avoid resources, even though this means we might leave some returns on the table in the short-term. It’s just too risky.
“To perform consistently in equities you don’t need the best winners. You just need to avoid the worst losers to do well.”
To invest in the Prime Value Emerging Opportunities Fund and the Prime Value Opportunities Fund, please contact our Client Services Team at info@primevalue.com.au and 61 3 9098 8088