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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 two of this edition, we're rejoined by Adam Lund, analyst, head of trading & co-founder, Spheria Asset Management.
Motley Fool: The Spheria Australian Smaller Companies Fund and Spheria Australian Microcap Fund focus on the smaller end of the market. How do you see small-cap ASX shares performing compared to the big blue-chips in 2023?
Adam Lund: Small-caps dramatically underperformed large-caps in 2022. It's an asset class that tends to underperform during periods of economic turmoil as sentiment turns negative and investors look to reduce the liquidity risk in their portfolios.
But the good news for 2023 and beyond is that smaller companies are also an asset class with a well-documented history of strong outperformance during market recoveries.
In recent months, we have been seeing some exceptional value in small-cap ASX shares and starting to add some fresh names to the portfolio.
Given the lack of coverage of small caps relative to large-caps, the inefficiency in this market is much greater than what you see in large caps. Particularly at times like this, that provides active small-cap managers an edge to outperform their large-cap peers.
MF: Which ASX shares are you most bullish about for 2023?
AL: One company we're positive on is City Chic Collective Ltd (ASX: CCX). It's a retailer of plus-sized women's apparel, footwear and accessories in Australia, New Zealand, the United States, Canada, the UK and Europe.
The recent weakness in the City Chic share price came with the market betting on a potential capital raise as the balance sheet looked to be under pressure. This saw the shares trading at close to asset backing.
The weaker retail environment and excess inventory position has forced increased promotional activity which resulted in further gross margin compression. The company is now expecting a small loss in the first half of 2023.
MF: The half-year loss isn't concerning?
AL: We're taking a longer-term view on this business. We think management can work through the currently elevated inventory levels to take the balance sheet from a net debt to a net cash position.
Much like The a2 Milk Co Ltd (ASX: A2M) [discussed in part one of this interview], we have a long history of investment with CCX. We previously owned a substantial position post its spinoff from Specialty Fashion, before divesting most of the position as the stock re-rated with the international growth of the business.
We now think it's a great time to reacquire a position in what is a sound business trading at a very attractive multiple, and where the risk/reward is skewed in investors' favour.
MF: Any other ASX shares you think will outperform in 2023?
AL: One other ASX share we like that might surprise some readers is listed funds management company, Platinum Asset Management Ltd (ASX: PTM).
It's perhaps one of the most under-owned stocks in the Australian market. But when you buy Platinum shares, you are investing in a very experienced investment team that manages $18.1 billion across strategies that have outperformed their direct competitors over most periods.
And you're getting that for nine times EBIT [earnings before interest and taxes], with a net cash balance sheet and strong cash flow generation.
MF: Platinum is also popular with some income investors.
AL: Right, PTM pays a 6.5%, fully franked dividend yield and provides investors with cheap beta in a market that has started 2023 with strong positive momentum.
Recently we've seen investors starting to appreciate that the team's performance may start to strengthen flows into their funds. Investor flows in and out of funds management companies is a metric they live and die by.
Additionally, one of the firm's founders, Kerr Nielsen, recently stepped off the board. So the question is, can we expect the overhang of his stock to hit the market as the shares recover? A sell-down would see a large index upweight which would mean a large flow of passive capital back into the name.
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Be sure to check in tomorrow for part three of our fund manager interview series with Adam Lund. You can read part one right here.
(You can find out more about Spheria Asset Management's fund offerings here.)
