The huge inflow of superannuation money has made local small caps expensive, says boutique fund manager David Paradice – and he’s betting Aussie investors are ready to look overseas.
Mr Paradice is based in the US these days as he oversees Paradice Investment Management’s offices in Denver and San Francisco, but he took the time to sit down with InvestorDaily during a brief visit to Sydney.
“When I set up [Paradice Investment Management] in Australia [in 1999] there were only one or two specialist small cap fund managers,” he said.
Now there are 33 managers competing for the most attractive Australian small cap stocks, he said – and our superannuation market is the fifth biggest in the world.
“So you’ve got all this money trying to get into the Aussie market and the valuations of a lot of small cap stocks are quite pricey now,” he said.
Paradice Investment Management launched the Australian Small Caps fund on 1 July 2000.
The fund, which was closed to new investors in June 2002, currently has $1.2 billion in funds under management (FUM) and has returned investors 17.32 per cent since inception – an impressive 12.22 per cent on top of its benchmark, the Small Ordinaries Accumulation Index.
Mr Paradice launched the Australian Mid Caps fund in September 2006 and Australian Large Caps fund in 2007, both of which were later closed to investors in November 2009 and June 2009, respectively.
The latest venture for the boutique firm is the Global Small Mid Caps fund, which has been run out of the US since its inception on 1 July 2010 and is currently open to both institutional and retail investors.
The fund has $1.3 billion in FUM and Mr Paradice is keen to continue targeting retail investors, who currently account for $170 million of the fund.
"We’re about to close it to the big wholesale guys," he said.
"I’d say we’ll probably close that to new investors at $1.5 billion and allow existing clients' funds grow to $2 billion," Mr Paradice said.
Compared to the crowded small caps space in Australia, the "opportunity set is really deep" throughout the rest of the world, he said.
"I do feel that in time as clients begin to look more and more for alpha, they’ll start moving into the small mid caps global space," Mr Paradice said.
"There are a lot of stocks out there – it’s a huge marketplace."
Mr Paradice added that with the Australian dollar likely to continue falling against the US dollar, it's "not a bad idea" to keep a bit of money offshore – although he acknowledged that is more of a short-term play.
Paradice Investment Management had $9.5 billion in FUM as of 28 February 2015.