Originally published by UBS Asset Management
We've just had one of the more volatile and 'interesting' reporting seasons for small caps in some time. What's clear from this is that small caps are returning to being a market more for stockpickers. This is after some years of being impacted largely by macro factors requiring less stock selection skills, most notably the long term structural decline in interest rates but also the rise-fall-and partial rise again of resources and mining services.
At face value the +1.3% rise in the ASX Small Ordinaries during the month of February suggests that we've just experienced a reasonable reporting season. However, looking beneath the covers tells a much more volatile story. For example, of the 200 or so stocks in the Small Ordinaries Index, there were 31 that rose by more than 10% (best were Seven Group Holdings Ltd (AX:SVW) and Lynas Corporation Ltd (AX:LYC), both rising +35% during the month) and another 37 that fell by more than 10% (CSG Ltd (AX:CSV) and Isentia Group Ltd (AX:ISD) the worst at -40% each). That is a lot of opportunity for stockpickers to get things very right (and conversely also very wrong).
When you have 34% of the stocks in your index moving by more than +/- 10% during a single month, it clearly meets the definition of volatility. The small caps market appears to be returning to the domain of the professional investor, requiring from investors much more due diligence than just jumping onto a popular theme or macro trend. It is also requiring from investors a greater level of risk diversification, the sort typically found in a professionally managed small caps fund. This is now not a DIY'ers market.
Our UBS Australian Small Companies Fund had an OK reporting season with the fund rising by around +1.4% (after all fees) during February, slightly beating the benchmark. February's volatility may be a pointer to the fact that it was the sort of month where some managers may have struggled to match the index.
Thankfully our fund avoided most of the 'land mines' that went off during the month. The fund's best contributors were:
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Nextdc Ltd (AX:NXT) (+20%) – strong result with 'cloud' based demand for datacentre space appearing stronger than even some of the most optimistic forecasts of recent times
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M Pharma Fp (AX:MYX) (+17%) – good result saw strong bounce post recent regulatory issues that are now better placed into context
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Wisetech Global Ltd (AX:WTC) (+13%) – good result, good management and strong industry position with years of growth ahead
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Sirtex Medical Ltd (AX:SRX) (+11%) – new CEO making sensible initial moves but next month's medical trial data may be a watershed moment for the company
Our fund is not one with a high level of stock turnover so the good businesses it owns tend to keep on giving over an extended period of ownership. Nevertheless, we continue to uncover new and interesting ideas (WiseTech Global) and sometimes recycled and improved older ones (Super Retail Group) that provides us with some optimism that the outlook for the small caps sector remains positive.