SG Hiscock portfolio manager of the SGH ICE fund, Callum Burns, said ASX 100 companies in aggregate have struggled to grow earnings and there are more sustainable companies outside of this cohort.
“Some investors are focused on market movements and volatility, and how low the market can go. Our focus is less on the market as a whole and more on stock picking and finding value,” Mr Burns said.
“The key for us to investing for sustainable future growth is to look for good quality companies with a business franchise with a sustainable competitive advantage where it is difficult for clients to discontinue using the product or service.
“Companies displaying these characteristics are typically outside the top 100 and tend to deliver more certain earnings growth than those that don’t.”
Mr Burns said the key difference in this approach is active management with investment in “quality” franchise companies, which tend to perform better in uncertain environments due to their competitive advantage.
“There continues to be a significant difference in performance between those companies with a structural advantage, whose operations are doing well, and mediocre companies. As a result, it remains a stock pickers’ market,” he said.
Mr Burns added that there is increased adviser interest in small cap funds thanks to low or no earnings growth in the large cap stocks.
“With growth in the large end of the market volatile and uncertain, there has been a renewed interest in small caps,” he said.
“There are definite opportunities outside of the ASX 100 and there is no question that small cap stocks have delivered some good returns to investors in recent times. But those embracing small caps for the attractive opportunities they offer for greater returns should also be mindful of the risks.”
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