Mirrabooka portfolio manager, Keiran Kennedy, recently sat down with GFM Wealth Advisory for a webinar with their clients. He was joined by the portfolio managers from other Listed Investment Companies, AFIC, Djerriwarrh, and AMCIL to discuss the differences between the LICs and the investment approach for each.
Kieran discussed Mirrabooka’s approach to delivering long-term returns with small and mid-cap companies, and its outlook. We’ve summarised the conversation here.
What’s the benefit of investing in small and mid-cap companies?
Mirrabooka offers investors unique diversification opportunities. We focus on small and mid-cap companies, providing exposure beyond the large-cap stocks typically found in the ASX 200. This reduces investors’ reliance on the performance of a limited pool of companies.
We are long-term investors who focus on quality companies at this end of the market. In theory, the market can be more volatile in small and mid cap companies with the resultant expectation for better returns.
What factors drive superior long-term returns in small and mid-cap companies?
There are three key factors that we believe can drive superior long-term returns investing in small and mid-cap companies:
First, founder-led businesses foster a strong sense of ownership and commitment within the company. Founders are passionate about their life's work and often reinvest a significant portion of their own capital, demonstrating a long-term commitment. This focus translates into measured and strategic decision-making, maximising value for all stakeholders.
Second, early-stage investment in high-growth companies. We identify quality companies before they gain wider recognition and shareholders receive a valuation benefit from this approach. Investors benefit from acquiring these companies at an attractive entry point, followed by value appreciation as their potential becomes more widely recognised.
Third, we focus on being able to consistently deliver realised gains from our portfolio holdings, primarily when these quality companies get acquired or by generating a franking stream for shareholders when some trimming of holdings occur as share price exceeds long term value. This approach allows us to offer shareholders a compelling combination of benefits: superior long-term capital growth for wealth creation, coupled with a reliable dividend stream for ongoing income.
Why does Mirrabooka hold onto small and mid-cap companies for a long time?
Active management is about recognising, not creating, value. Some fund managers believe they can predict market movements, but that's a tough challenge. Instead we try to identify businesses with strong leadership teams and other quality characteristics - these companies are the true value creators. Our role is to recognise market cycles, allocate capital to quality businesses and then not get in their way. This might involve taking profits during periods of particularly strong growth or adding to positions during temporary downturns. While we do not hold stocks statically, we acknowledge the fundamental strength lies with the businesses themselves growing and reinvesting over time and the founders leading them.
How is Mirrabooka positioned in the current economic environment?
As long-term investors, every investment we make has a five-to-10-year view or longer. We avoid chasing short-term market cycles and we don’t trade around the next data point or try to pick where interest rates are heading. We focus on building a portfolio that can survive over our long-term investment horizon.
While 2021 saw exceptional performance, leading to potential overvaluation, we experienced a natural correction in 2022. However, we have a track record of consistent outperformance of the market over the longer-term, and our portfolio remains strong.
We look for companies that reinvest in their business, hold a market leadership position, have strong management teams, and maintain healthy balance sheets. Our Top 20 holdings represent companies that have consistently demonstrated strong performance over an extended period. They've earned their place through a rigorous selection process, consistently generating attractive returns. Two good examples are Gentrack and IPD Group.
Gentrack, now our sixth-largest holding, joined our Top 20 within a year and a half, and IPD group within two years and its share price has quadrupled since our investment. This does not happen often, but it shows the ability to identify undervalued high-potential companies.
While we've trimmed positions in some top 20 holdings that have experienced significant valuation increases, we remain confident in these companies' long-term potential. These strategic adjustments have generated tax liabilities, but also created a healthy reserve of franking credits to support future dividend payments.
What is the outlook for Mirrabooka?
We anticipate a more measured approach to total returns, potentially including some short-term underperformance compared to the recent strong run given the way many of our top 20 holdings have performed from a share price perspective. Our focus remains on identifying quality businesses for the long term and actively seeking new investments to maintain portfolio quality while achieving better relative value.