Microcap investors are better off backing proven profitable companies than trying to pick the next Afterpay at its concept stage, says Ausbil Investment Management.
The Ausbil microcap fund is run by former Australian Ethical portfolio manager Mason Willoughby-Thomas alongside co-portfolio manager Arden Jennings (ex-Hunter Hall).
Both men joined the fund in July 2017 following the departure of portfolio managers Tony Waters and Chris Prunty in April 2017.
Speaking to InvestorDaily, Mr Willoughby-Thomas said he and Mr Jennings follow a fairly strict investment process with liquidity and earnings filters that effectively restrict their universe to the space between the ASX200 and the ASX300.
Unlike some of their competitors in the microcaps sector, the new Ausbil team avoids more speculative 'concept stage' companies with a heavy reliance on external capital to fund their operations.
"We target the companies that have transitioned from early stage concept into a business where the business model is viable and proven but still at a relatively early stage of earnings growth and earnings revisions," he said.
"The number of names that have proven profitable in that regard are countless."
Mr Willoughby-Thomas cited Afterpay as a stock the fund purchased reasonably early – but not at the concept stage – and then "rode all the way" to the ASX200 (after which the fund was obliged to exit the position due to the constraints of the microcaps fund).
The recent earnings season was a good one for Ausbil, he said.
“Whilst we successfully positioned the fund in a number of companies that delivered solid earnings upgrades, avoiding the negative earnings revisions was just as critical," he said.
The core philosophy for the Ausbil microcaps team is that earnings and earnings revisions drive share prices, Mr Willoughby-Thomas said.
"What we're looking for are names where we see potential for earnings revisions – or undervalued earnings. We focus very heavily on the business model and how it generates its earnings," he said.
A key sector for the fund in the past year has been mining services, with Emeco and Imdex as core holdings that have outperformed strongly.
When it comes to resources, the Ausbil microcaps fund is focused on the electric car and battery storage thematic (ie, lithium, rare earths).
'Fintech' wealth management platforms like Netwealth and Hub24 have featured in the portfolio, but they have been pared back for the likes of OneView and Praemium, Mr Willoughby-Thomas said.
The fund is cautious about domestic consumer stocks given high housing costs, anaemic wage growth and the rising cost of living, he said – but the fund is still finding opportunities where valuations are attractive relative to the risks.
The Ausbil microcap fund has roughly $240 million in FUM with capacity likely to be just above the $375-million mark.