Australian Small and MicroCap companies ASX Investor Hour- Melbourne Contang’o (-ngg-) n. (pl. ~s) implies that prices will be higher in the future than today. [orig. unkn.] The market is said to be in contango when the forward price is higher than the spot price.
Lessons • A clear case for holding MicroCap stocks • Yes you can do this yourself • You do not have the information fund managers have – Apart from a few shares you may know “very well” • Managers provide diversification • Know your structure • LICs at a discount – Vs Unit Trusts fund redemptions & shared tax allocation • Shareholders in CTN receive quality information 2
Contango MicroCap Limited (ASX: CTN) Contango is a company listed on the ASX: A diversified portfolio of 60-100 Listed Australian Microcap companies with a targeted market capitalization between $10m & $350m. There are over 1,000 stocks in this universe with a total market cap. of approx $70 billion. Investment Objective: To outperform the S&P/ASX Small Ordinaries Accumulation Index by greater than 5%pa over rolling five year periods before taking into account fund fees and expenses. Investment Style: Style Neutral : We manage the portfolio on the basis of sensitivity to economic and market factors as well as stock specific considerations. At some stages of the cycle we have a growth bias while in periods of economic weakness we typically have a bias to value/defensive stocks 3
Slide to identify some features you can find on a fund managers web site- in this instance www.contango.com.au 4
About the Portfolio Manager • Contango Asset Management Ltd • Established in 1998 by ex-HSBC senior executives • Senior staff own 50.1% of the company – passive investor owns remaining equity • Large team of experienced investment professionals • Proven investment process • Approx $1b managed • Specialist boutique Australian equity manager – Small and MicroCap experts • Web: www.contango.com.au 5
* own equity 6
Contango Asset Management Ltd Investment Team ALISTAIR FRANCIS B.Ec, CA, F Fin (25 / 11) DAVID STEVENS • Insurance CAROL AUSTIN B.Ec [32 Yrs Experience / 12 with CAML] • Diversified Financials B.Ec (Hons), B.Sc (30 / 11) • Chairman Contango MicroCap Limited • Transportation/Infrastructure • Chairman Economics Committee • Chairman Strategy Committee • Healthcare Equipment & Services • Global & Domestic Economics • Portfolio Manager Large Caps • Pharmaceuticals, Biotech & Life • Banks NAHEED RAHMAN PAUL DAVOREN B.Com, BIS (5 / 2) BILL LAISTER B.Sc (Hons), F Fin (15 / 6) • Software & Services B.Ec (29/ 11) • Consumer Durables & Supplies • Semiconductors & Equipment • Portfolio Manager Micro Caps • Telecommunication Services • Commercial & Professional • Metals & Mining (inc Steel ex Gold) • Food & Staples Retailing Services • Energy (inc Coal ex Oil • Food Beverage and Tobacco • Consumer Services • Chemicals • Gold • Paper/ Forest • Retailing • Containers and Packaging ANDREW MOUCHACCA • Media PhD, B.Eng (Chem), SA Fin (12 / 11) CRAIG ALLEN • Portfolio Manager Small Caps LUKE FEATHERSTONE B.Com, B.Sc (7 / 4) • Energy (ex Coal) B.Com (Hons) 30 / 1) • Real Estate ex REITS • Capital Goods • Sector Analysis • Construction Materials • Property Trusts • Domestic Economics • Quantitative Analyst Organised on sector lines • Senior members of the team each have more than 25 years experience • Long, successful track record at Contango • Investment team supported by experienced professionals in back office, compliance & administration 7
Contango at a glance • Experienced and high-quality team of 9 professionals • Generate unique insights from external &internal research Investment Team • Team is organised on sector lines • Sector, style and cap size rotation • Multiple sources of added value including Investment Style • macro, industry and stock • Track record of delivering strong out performance with Performance Record solid risk management across all markets • High quality back office, compliance & administration systems Business Structure • Well established, profitable business 8
Long term outperformance has come through 1. Contango is a top down manager 2. In-house economists provide our Macro & Sector forecasts 3. These factors are built into Sector and Stock valuations 4. Core strength is our market cycle awareness and stock valuations 5. All portfolios are built on a bottom-up basis I. Stock decisions are based on internal valuations- earnings driven II. Investments are made on a relative-value basis III. No minimum or maximum sector rules IV. We do not manage to a benchmark- no tracking error targets 6. Sector and Stock weights are monitored for risk management Macro calls Stock Selection 9
Map of S&P/ASX Indices 10
MicroCaps in Context ~2100 Most shares on MicroCap the ASX companies in Materials This green square Mkt. Cap was $300m 11
2000 companies: How many would it take? 12
…….lopsided MarketCap. of # of Companies BHP Billiton $ 153,104,369,600 1 All ASX Companies Ex-ASX200 $ 146,297,941,695 1683 5 Largest ASX-listed companies $ 412,167,435,660 5 All Companies Ex-ASX50 $ 414,388,708,680 1833 15 Largest ASX-listed companies $ 694,552,354,914 15 Every other ASX-listed company $ 691,865,942,518 1868 All ASX-listed companies $ 1,386,418,297,432 1883 All Companies Ex-ASX100 $ 261,766,603,829 1783 All Companies Ex-ASX200 $ 146,297,941,695 1683 All Companies Ex-ASX300 $ 95,198,077,886 1583 All Companies Ex-ASX500 $ 47,095,450,060 1383 Source: Contango- as at 31.12.2010 13
Is bigger better? 14
Not always Performance (p.a) 1 Year 3 Year 5 Year 10 Year S&P/ASX 100 0.8% -4.8% 4.3% 8.40% S&P/ASX 300 1.9% -5.0% 4.4% 8.50% 9.30% S&P/ASX SMALL ORDINARIES 13.1% -5.9% 5.5% ALL ORDINARIES 3.3% -4.9% 4.9% 8.70% 25.8% -1.8% 11.7% S&P/ASX Emerging Co's Index n/a (Total Return) Source: Contango- as at 31.12.2010 15
Micros are not “top heavy” Number of Market Cap Top 10 as Companies ($b) total % S&P/ASX 100 100 $ 1,042 55.5% S&P/ASX 300 295 $ 1,152 50.2% S&P/ASX SMALL ORDINARIES 195 $ 110 14.6% ALL ORDINARIES 489 $ 1,346 43.6% S&P/ASX Emerging Co's Index 154 $ 28 20.9% All ASX-listed companies 1883 $ 1,386 irrelevant Source: Contango- as at 31.12.10 16
The significance of MicroCap Companies • Continue to play an important role • The importance of the sector cannot be ignored • Particularly to jobs growth and innovation in industry • ~1500 ASX-listed companies with a Market Cap < $500m • Data provided by just over half of these identifies they alone directly employ more than 120,000 Australians • A combined market cap of ~$70b • Total assets exceeding $111b • Sitting on over $11b in cash • Reported NPAT over $5.5b All data as at 26 August 2010. Source: Morningstar. 17
Why portfolios need a Small Companies Allocation Diversification • Of ~2100 listed companies- most funds generally only invest “as deep” as ASX300 • Many fund managers hold the same 60-80 ASX100 stocks • Reduces the “Blue - Chip” risk factor of being over-exposed to ASX100 companies Opportunity • MicroCaps are often the fastest growing companies on the sharemarket • There is very little research undertaken on MicroCap companies • Those specialising in MicroCaps can find growing companies and invest in them Performance • MicroCap companies offer some of the best opportunities for investors • Increases in revenue often have great impact on profit for MicroCap companies • The S&P/ ASX Emerging Companies Index has outperformed the broader market 1 1 vs All Ords Accum and Small Ords Accum Over 1,3 & 5 years to 31 December 2010 18
Stock selection is critical Cross Sectional Volatility ( Smoothed) 20.00 ASX200 Fifty Ldrs 100x50 200x100 300x200 15.00 10.00 5.00 0.00 19 Source: Contango-
Intra Sector stock behaviour- it is still down to the stock More usual share price range + % - % Micro Cap Large Cap Small Cap 20 Not an empirical chart- used simply to illustrate that the smaller the company the more share price volatility it may experience
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