Positioning for growth from Global Smaller Companies

Paradice Perspective

Q&A Session with Kevin Beck

By Kevin Beck – Portfolio Manager, Global Small Mid Cap Fund

How is the current environment for global small cap investors?

The current environment remains volatile for global small cap investors.  Since August of 2015, global small caps have underperformed their larger cap peers by over 200 basis points. This is one of longest periods of underperformance since the GFC. Key areas of weakness have been cyclical businesses, emerging markets and finance related shares. Nevertheless, we see opportunity in this market as valuations have improved.

What are some of the concerns facing investors like yourself?

The biggest concern remains tepid global growth, record profit margins and unorthodox central bank policies.

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Have valuations and investment opportunities increased with the recent volatility in markets?

Valuations improved materially into February as markets grew concerned with slowing global growth.  Political volatility in places like Brazil plus the upcoming BREXIT vote in the UK have made currency volatility especially jarring for global investors.  However, more central bank intervention from the ECB and Japan along with growing doubts that the US Federal Reserve will be on an accelerated pace to raise interest rates has made the improved valuations short lived.

The fund has an overweight exposure to emerging markets, what is your reasoning for this position and what are some of the types of businesses you own?

The fund maintains investments in emerging market companies that we think have long runways of growth at  cheap valuations.  The majority of these investments are in domestic oriented consumption plays.  For example, the fund owns shares in Cashbuild, a South African hardware and building materials retailer. Cashbuild’s recent results show a retailer with 11% same store sales growth, 30% operating profit growth, net cash and a 3% dividend trading at 15x earnings.  Other examples of EM investments include food groups based in South Africa and South Korea, a retailer in Indonesia and Thailand, banks located in South Korea and Indonesia and restaurant groups in India and China.

Your fund remains underweight in both Europe and Japan, what are your thoughts on these two areas?

We are underweight in Japan and Europe due to very low growth prospects for these two regions, high amounts of leverage and weakening currencies. In addition, high quality assets in this environment trade at significant valuation premiums to similar businesses elsewhere in the world.

How do you view the recent interest rate rise in the US and what affect will it have on US corporates?

We see the very modest scope and pace of interest rate rises in the US as largely immaterial to individual companies.  At the margin, this will help some of insurers, banks and those companies with net cash.  If higher rates begin to crimp industrial growth even further, then this will have a negative impact on our industrial investments.The Paradice Global Small and Mid Cap fund is searching for 50-70 diversified investments opportunities where we think we have the strong ability to compound at above market rates with solid downside protection.  As a bottom up, benchmark agnostic portfolio of investments we will, from time to time, underperform broader based benchmarks. Nevertheless, over the long term and through the economic cycle we believe our philosophy and process will lead to solid risk adjusted. 

To find out more information on Paradice and its strategies see below details

Website: www.paradice.com.au

Telephone: 02 8227 7400