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Ask a Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In part 2 of this edition, Michael Steele, co-portfolio manager at Yarra Capital Management, unveils his two top ASX small-cap share picks at the outperforming Yarra Australian Small Companies Fund.
Motley Fool: What are the best ASX small-cap shares to buy right now?
Michael Steele: Those would also be the two biggest holdings in the UBS Yarra Australian Small Companies Fund, which are Austbrokers [AUB Group Ltd (ASX: AUB)] and Auckland International Airport Ltd (ASX: AIA).
MF: Why do you like Austbrokers?
MS: Austbrokers is an Australian and New Zealand insurance broking business. Its insurance broking market is highly attractive. You've got constant increases in premiums and the demand for the services is there because people need to manage complex risks.
In addition to that, Austbrokers has the benefit that they can take a greater share of industry profit. And that profit pool is large. They're getting better pricing with underwriters; they're reducing their costs by consolidating businesses; and they're looking to add extra businesses to source product and get more of a vertical margin.
They've also got technology that's really innovative. They've got some hidden value in one of their technology businesses, called BizCover. It's a technology company that does the full SME insurance process online. So, it's a digital disruptor with higher growth.
Austbrokers also has a strong track record executing on acquisitions and adding value.
MF: Auckland Airport shares took a hammering with the pandemic travel restrictions. Why is that a top ASX small-cap share recommendation and holding for you now?
MS: We are really quite positive on travel. If you think about the background for travel, everyone's been effectively at home for at least two years, not being able to travel internationally, so there's a lot of pent-up demand. Also, consumers have saved up a lot of cash during the COVID-19 period; savings rates are quite high.
If you put those two fundamentals together, we think there's going to be a really strong period for travel over the next three to four years. We see significant demand coming through both across corporate and leisure. That will benefit Auckland Airport.
Auckland Airport really is an amazing asset. This is a monopoly asset in the north of New Zealand.
Effectively there are two parts to the business.
First, there are the aeronautical assets that have that recovery from travel. This also has a large opportunity to increase the earnings from their regulated asset base. So, they'll see price increases and they can invest a lot of capital in expanding the airport. This is a great infrastructure investment where you keep investing and you keep getting a guaranteed return in addition to that cyclical recovery.
The second component of the business is their property portfolio, an amazing property portfolio adjacent to the airport. They've got industrial and they've got retail. But arguably they can add the most value through developing new properties. They have an undeveloped property portfolio of 180 hectares.
The company also has a strong balance sheet. If we see further disruptions and delays with the COVID recovery, they are able to see their way through that. More importantly, they can fund this capex property redevelopment from their balance sheet.
MF: If the market closed tomorrow for four years, which ASX small-cap share would you want to hold?
MS: We'd be happy to hold both of these companies if the market closed for four years.
Auckland Airport has the type of characteristics that you really can set and forget. You could say the same thing for this business with a 10-year view. That's probably the one that would stand out the most.
We try to invest in every company for three to five years. We think there's a time frame inefficiency within the market. A lot of people are focused on what's happening in the next 12 months. If we think more about the next three to five years, we're going to think differently to a lot of people in the market, resulting in outperformance.
We really do see that inefficiency with people chasing the short-term, which is why we stay long-term focused. That's been a notable factor that's supported our outperformance over the last six years.
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Be sure to tune in tomorrow for part three of our interview with Yarra Capital's Michael Steele. If you missed part one, you can find that here.
(You can find out more about the Yarra Australian Smaller Companies Strategy here.)
