Fact Check: SGH Emerging Companies Fund

Verdict: Pass

Having launched back in 2001, the SGH Emerging Companies Fund has a long-established track record investing in smaller companies and as such, has received a five out of five crown rating by FE.

It’s managed by Adrian Di Mattina who joined SG Hiscock from NAM and has 28 years’ experience in the investment industry across both equities and fixed interest.

The fund aims to provide long-term capital growth over three and five years and seeks to outperform its benchmark of the S&P ASX Emerging Companies index, but notes suitable investors should have a five-year time horizon. It sits in ACS Equity-Australia Small/Mid Cap sector, one of 97 constituents and has consistently outperformed over one, three and five years against its peers. It has met these objectives from its product disclosure statement (PDS) more than satisfactorily, meaning it passes Fact Check.

The fund has returned more than double the sector average over five years to 13 May 2019 with annualised returns of 20.7 per cent, according to FE Analytics, compared to average returns of 9.5 per cent by the sector. This makes it not only top quartile but also the top fund in its sector.

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Chart 1: Total return over five years of the fund compared to the ACS Equity- Australia Small/Mid Cap sector and S&P ASX Small Ordinaries index

Source: FE Analytics

But the fund struggled during 2018 as the small-cap market tumbled, losing 15 per cent during the year, versus losses of 7.7 per cent by the sector but losing less than its benchmark index, which lost more than 20 per cent. After top quartile rankings in 2017 and 2016, 2018 saw it plunge into fourth quartile.

However, it has managed to turnaround performance and return to the top quartile over three and six months. Over six months it has returned 20.3 per cent versus sector returns of 6.9 per cent while it has returned 15.9 per cent over three months versus sector returns of 4.1 per cent. 

In its latest factsheet, the manager was optimistic, noting emerging companies were well-placed going forward due to the combination of improved monetary conditions and a sluggish domestic economy in Australia.
Portfolio breakdown

Some 99.5 per cent of the fund is invested in growth-focused Australian equities while the remaining 0.4 per cent is in defensive money market positions, although it can have up to 20 per cent in cash. SGH classify small companies as those which are less than $500m at the time of purchase and up to 30 per cent of the fund can be in assets whose market cap has grown beyond $500m after they were first purchased. It is also willing to consider companies at IPO stage, unlisted companies and micro-cap companies.

“It is our belief there are more stock selection opportunities, less fund manager competition and better prospects for growth in companies with market capitalisation of less than $500m. Further, we have found there is significantly greater deal flow in emerging companies in the form of IPOs, institutional share placements and M&A activity, providing increased outperformance potential through active management.”

As at 31 March, 2019 there were 92 holdings in the fund, up from 87 the previous month, which may sound high but is not unusual for smaller companies funds as the companies are smaller and riskier so managers don’t want to be too exposed to one particular business, unlike large cap funds which tend to be more highly concentrated. 

In its PDS, the firm notes it will not have more than 10 per cent allocated to any individual company and that emerging companies may be less liquid than large companies, have significant project risk and be speculative in nature. 

“The fund has exposure to both micro-cap companies and unlisted investments which are traded at lesser volumes and less frequency, and therefore considered to be less liquid than larger companies. Micro-cap companies and unlisted investments can also be more volatile than other listed shares.”

The firm notes it is particularly focused on resource exploration companies, early-stage biotechnology companies and technology start-ups, which is reflected in the firm’s top 10 holdings which are divided solely between technology and resources companies. Technology is a popular choice for small and micro-cap funds as many of these companies are small start-ups with the potential to grow significantly very quickly.

Its top ten holdings, as of 31 March, 2019 made up 35.9 per cent of the total fund. Its largest holding at six per cent is Atomos, a manufacturer of hi-tech camera and recording equipment, which was set up in 2010 and now works with businesses such as Adobe, Sony and Panasonic. On the resources side, top ten holdings included Westgold Resources at 4.4 per cent, Galena Mining at 2.9 per cent and Cooper Energy at 2.9 per cent. 

Table 1: Top 10 holdings of SGH Emerging Companies fund

Source: FE Analytics