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Micro Cap companies and their investment potential
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Would you organise an Adventure Holiday yourself?
Poll Question: Borders open up. You are looking to organise an adventure get-away. Do you plan it yourself?
YES
NO
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What are Micro Caps?
Micro Cap <$500m
Small Cap
Mid Cap
Large Cap
$350m - $2bn
$1.5bn - $5bn
>$4bn
Source: Ellerston Capital.
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What are Micro Caps?
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Size of Australian Micro Cap Market
1,455 $83m $390m
Listed Micro Caps
Average Market Cap
Daily Value Traded
Source: Bloomberg, as at 13 October 2020.
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S&P/ASX Small Ords vs. S&P/ASX 200 performance 14,000 13,500
13,000 12,500 12,000 11,500 11,000 10,500 10,000 9,500
S&P/ASX Small Ordinaries TR Index
Sep-20
Jul-20
May-20
Mar-20
Jan-20
Nov-19
Sep-19
Jul-19
May-19
Mar-19
Jan-19
Nov-18
Sep-18
Jul-18
May-18
Mar-18
Jan-18
Nov-17
Sep-17
Jul-17
May-17
9,000
S&P/ASX 200 TR Index
Source: Lonsec iRate as at 12 Oct 2020.
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Why invest in Micro Caps?
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Why invest in Micro Caps?
Better Risk/Reward
Under-researched
Greater Alignment
Low correlation to ASX100
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Why invest in Micro Caps? Your portfolio needs more than just blue-chip exposure • Better Risk/Reward • Strong Diversification benefits • Return per unit of risk: • S&P/ASX Small Ords: 0.31 • S&P/ASX 200: 0.28 • Ellerston Australian Micro Cap Fund: 0.73
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Why invest in Micro Caps? 100%
Under-researched â&#x20AC;˘ No broker coverage on over 60% of the micro cap market â&#x20AC;˘ Over 50% of small caps have 3 or more brokers covering the stock
Broker Coverage
90% 80% 70% 0
60% 50%
1
40%
2
30%
3
20% 10% 0%
Small Cap
Micro Cap
Source: Macquarie, 2020.
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Why invest in Micro Caps? Average Insider Ownership (Grouped by Market Cap)
Greater alignment with shareholders â&#x20AC;˘ Insider shareholders have larger presence in smaller stocks â&#x20AC;˘ Indicates greater alignment of management and shareholders
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
<$400m $400m - $750m 750m $3bn
$3bn $10bn
>$10bn
Source: Macquarie, 2020.
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Why invest in Micro Caps? Correlation with ASX100
Low correlation to ASX100 • >40% of ASX100 is Financials & Resources • Micro Caps include • high growth companies • different names
85% 80% 75% 70% 65% 60% Micro
Small
Source: Macquarie, 2020.
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Opportunities in the next 12 months Globalisation
COVID Structural Shift
Rate of Change in Technology
Source: Australia Post
M&A 90 80 70
Number of Deals
60 50
50
39
40 40
30 17 20 10
27
27
2014
2015
17
12
0
2013
ASX300
Source: The Aspen Institute
2016 YTD
Ex 300
Source: Macquarie
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Key criteria for Micro Cap selection
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Key criteria for Micro Cap selection
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Near Term Outlook • Next quarter will be volatile → US Presidential Elections → US Stimulus → COVID Vaccine news
• AGM season → mini reporting season with more trade updates
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Johns Lyng Group – JLG AU • JLG is an integrated building services company focused on the insurance and restoration market across Australia. • We continued to like JLG as the company continues to grow their BAU (business as usual) segment organically, at the same time we have seen a large number of CAT events (catastrophic weather events) that have increased the companies higher margin order book for the next 2+ years. We believe the cash flow from the CAT work can enable the company to make strategic acquisitions that are accretive and increase the overall quality of the company. • In addition, JLG’s Restorx (which offers commercial and industrial cleaning services) recently launched a COVID-19 Rapid Response service. We believe this business is performing exceptionally well, as commercial or public buildings with suspected exposure to the virus requiring hospital grade cleaning services. • We have rolled our 3 year valuation and based on current share price, our expected return is now 12% pa.
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The Ellerston Australian Micro Cap Fund Performance as at 30 September 2020 22,000 20,000 18,000
S&P/ASX Small Ordinaries TR Index S&P/ASX 200 TR Index Ellerston Australian Micro Cap Fund
16,000 14,000
12,000 10,000 8,000
Performance as at 30 Sept 2020
3 Months
6 Months
1 Year
3 Year p.a.
Since Inception (p.a.)*
Ellerston Australian Micro Cap Fund^
14.61%
65.35%
24.50%
18.64%
22.72%
S&P/ASX Small Ordinaries Index
5.67%
30.93%
-3.33%
6.53%
7.02%
Value added / detracted
8.94%
34.42%
27.83%
12.11%
15.70%
Source: Lonsec iRate as at 12 Oct 2020, Ellerston Capital. ^The net return figure is calculated after fees & expenses. Past performance is not a reliable indication of future performance. *Inception date of the Fund is 1 May 2017.
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Disclaimer This presentation is given by representatives of Ellerston Capital Limited (ACN 110 397 674) (AFSL 283 000) (Manager) as Responsible Entity and manager of the Ellerston Australian Micro Cap Fund (ARSN 619 727 356) (Fund) and associated investment mandates. The offers of interests in the Fund will only be made in, or accompanied by, a copy of the Product Disclosure Statement (PDS) for the Fund. This presentation does not constitute an offer of interests in the Fund or any associated investment mandate. You should not rely on this presentation if or when deciding whether or not to make an investment in the Fund or invest in an associated mandate. This document must not be circulated and is confidential in nature. By accepting this document you are agreeing to comply with such confidentiality requirements. This presentation has been prepared without taking into account any investor's objectives, financial situation or needs. An investment in the Fund or mandate carries potential risks and fees which are described in the PDS. An investor should, before deciding whether to invest in the Fund, consider the appropriateness of the Fund or mandate, having regard to both the PDS (which can be obtained by contacting the Manager 02 9021 7797) in its entirety and the investor's objectives, financial situation and needs. This presentation is for general informational purposes only and is not intended to be a definitive statement on the subject matter. Neither the Manager nor any other person guarantees the investment performance, earnings or return of capital invested in the Fund or mandate. The information provided in this document is current only as at the date indicated on this document and is subject to change without notice. This document is not necessarily exhaustive of the relevant subject matter. This material has been prepared based on information believed to be accurate at the time of publication, including actual and estimated returns. Past performance is not indicative of future performance. Assumptions and estimates may have been made which may prove not to be accurate. The Manager undertakes no responsibility to correct any such inaccuracy. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information. To the full extent permitted by law, none of the Manager, or any member of the Ellerston Capital Group of companies makes any warranty as to the accuracy or completeness of the information in this document and disclaims all liability that may arise due to any information contained in this document being inaccurate, unreliable or incomplete. This presentation is not available to persons for which it would be a contravention of a law to provide or offer interests in the Fund or mandate. By attending this presentation, or reading this document, you are representing that you are not such a person.
This presentation is directed at persons who are sophisticated investors with sufficient professional or other experience to properly assess the nature of the Fund or mandate including the risks of investing in such.
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Disclaimer Lonsec iRate: Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Lonsec receives fees from fund managers and financial product issuers for rating financial products using objective criteria and for services including research subscriptions. Lonsecâ&#x20AC;&#x2122;s fee and analyst remuneration are not linked to the rating outcome. Lonsec, its representatives and their associates may hold the financial product(s) rated. Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice based on the investment merits of the financial product(s) alone, without considering the objectives, financial situation and needs of any person. It is not a recommendation to purchase, redeem or sell the relevant financial product(s). Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Except for ratings, Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions and ratings are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which canâ&#x20AC;&#x2122;t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. Š2020 Lonsec. All rights reserved. Report run as at 12/10/2020.
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