Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Maple-Brown Abbott portfolio manager Phillip Hudak explains how the coming period will be far more challenging for ASX shares than the preceding decade, but there are pockets of opportunities.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Phillip Hudak: My name is Phillip Hudak and I'm co-portfolio manager for the MBA Australian Small Companies Fund. The fund is an all-weather Australian small-cap strategy that is designed to outperform in most market environments.
We define ourselves by our earnings drives share prices philosophy. We go where the earnings go and are happy to invest in resources, in industrials and not bucketed into any particular or specific investment style like value or growth — and this is particularly important in the current market environments.
We focus on companies with improving fundamentals, all the way through to the upgrade cycle. We are looking to construct a portfolio of undervalued Australian small-cap companies that have idiosyncratic exposures.
MF: Fantastic. And it's a new product, isn't it? It only opened a couple of months ago?
PH: Yes. It was launched in June of this year. However, the investment philosophy and the investment process is identical to our previous employer, which has over a nine-year track record.
MF: So the big question on everyone's lips right now is where do you reckon the market might be heading? How's the state of play now and where it is going?
PH: I'm not a macro person and don't make market predictions. I'd rather focus on stock-specific factors. However, what is clear is the future market environment is going to be more challenging for investors than what we've seen in the past. Economic and business models that relied on cheap debt and low cost inputs typically flourished in a non-inflationary environment and it looks like that period may be ending.
The current geopolitical tensions, and I suppose hangover from COVID, have suggested that globalisation and cheap inputs may be a thing of the past. There's no question that lead indicators imply softening inflation. However, tightening financial conditions continue to be required to contain the inflation genie, which is currently happening at the expense of some market dislocations that are happening here domestically.
The key question for investors is what will be the impact on companies of high interest rates and rising living costs? Is Australia just behind the rest of the world or are we still "the lucky country"? The sectors that the market has been most worried about, including domestic cyclicals, appear so far to be more resilient than market expectations so far. However, it is clear that market expectations for financial year 2023 are too elevated and expect those to continue to pull back.
The key challenges for investors is whether or not companies invested have adequate moats, defensive earning streams and/or levers to pull to offset these emerging input costs and financial pressures that are emerging in the Australian marketplace.
Australian small caps have experienced significant multiple de-rates so far this calendar year to date, and have almost been indiscriminate across many stocks and valuations are definitely looking more attractive. We see upside risk for select companies with sustainable business models that have strong medium term outlooks.
In summary, there is the potential for more challenging sort of market conditions for investors and the expectations that investors will need to rely more on alpha sources to achieve overall return objectives with the Australian small-caps market continuing to be a fertile ground for return duration.
MF: For a new investor who's joined you in the last couple of months, it's a pretty reasonable time to get into the market, isn't it?
PH: Oh definitely. And particularly with small caps, given the breadth and depth of opportunities available, you're able to actually find good, sound investment ideas that are able to grow earnings irrespective of the market environment which we're currently in.
