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Small caps emerge stronger post COVID

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MEDIA RELEASE: Many Australian small cap companies have emerged largely unscathed from the uncertainty of the past 12-18 months, outstripping some of their larger peers in earnings per share growth, according to managing director of ICE Investors, Callum Burns.

Mr Burns said the trend also occurred following the Global Financial Crisis of 2008/09, when many small cap franchise businesses emerged from the crisis in a better shape than when they entered.

“We’re seeing a similar trend with COVID; franchise companies have used the uncertainty to their advantage and have come out the other side in good shape.

“These companies have often got more certain earnings growth and, provided investors paid the right price for the shares, they can deliver superior shareholder returns.

“A lot of the Australian companies have had depressed earnings since COVID emerged, so we’re expecting they’ll have substantial earnings rebounds in FY2023. This doesn’t necessarily mean they’ll return to pre COVID levels, but the percentage increase will look large even though their dollar value may not be that great,” he said.

In constructing the ICE Investors portfolio, Mr Burns said he typically looks for quality franchise businesses with sustainable growth, which also possess a durable competitive advantage.

“A key measure for us is, if these companies were to put their prices up, what would happen?  If the answer is “nothing”, that tells you there’s something special that ties the customer or user to that particular business, and price isn’t an issue.

“They’ve got a moat around them, making it very difficult for other companies to come in and take their revenue and they are managed in such a way that the product or service is sticky with the client,” he said.

Mr Burns cites online furniture and homewares retailer, Temple & Webster, as a prime example of a stock that has weathered the impacts of COVID particularly well.

“Its market share is now bigger than pre-COVID; it’s increased its brand recognition among existing and prospective clients; it has excellent management, which was evident pre-COVID but is now proven beyond a doubt; and its logistics expertise has improved substantially over the past 12-18 months. It’s a company that is in a substantially better position than prior to the onset of the pandemic,” he said.

Mr Burns’ comments follow the recent review of the ICE Investors fund by investment research consultancy, Lonsec, which again awarded the fund their highest rating – Highly Recommended.

The research report acknowledged the fund as having a “well-structured investment process that combines a focus on franchise investing with strong valuation discipline and a robust portfolio construction framework.”

The Melbourne-based boutique fund manager has also recently appointed Mason Willoughby-Thomas to the position of portfolio manager. The appointment further reflects the strong performance of the fund and growth prospects within the small cap sector of the Australian market.

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