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Three themes driving the Montgomery Small Companies Fund’s performance

 

Three themes driving the Montgomery Small Companies Fund’s performance

In this week’s video insight David interviews portfolio manager of the Montgomery Small Companies Fund Gary Rollo to discuss the three themes which have helped deliver the Fund’s strong out-performance. Since its inception the Montgomery Small Companies Fund has turned $1 into $1.62 compared to its benchmark the S&P/ASX Small Ordinaries Accumulation Index which turned $1 into $1.26.

Transcript

David Buckland:

My name is David Buckland, and I am the CEO at Montgomery Investment Management. Today, I’m pleased to be joined by Gary Rollo, from the Montgomery Small Companies Fund. As you know, I’ve been doing a series of presentations with both Gary and his colleague, Dominic Rose, on the Montgomery Small Companies Fund, and today I’m delighted, because the Montgomery Small Companies Fund has in fact just passed its two year anniversary. It started on the 20th of September 2019, and in the two years to the end of September 2021, the Montgomery Small Companies Fund has put on 63 per cent. So, it’s turned a dollar into a $1.63, inclusive of the eight cent distribution paid at the 30th of June. Over the same two odd years, the Australian Small Ordinaries Accumulation Index, has in fact only put on 26 per cent, i.e., it’s a dollar into a $1.26. So the Montgomery Small Companies Fund has outperformed it benchmark by 36 percentage points over two years, and on an annualised basis, that’s nearly 15 per cent a year, after all expenses.

David Buckland:

Congratulations, Gary, and Gary is going to talk to us today about three thematics that have really helped deliver this extraordinary outperformance over a two-year period.

David Buckland:

The first thematic, is the Cloud, and Gary’s a bit of an expert in this area, and he’ll talk briefly about that. The second one has been decarbonisation, and in fact, Gary and Dominic, have really gone into the decarbonisation theme, and have often had 10 or 12 per cent of the portfolio in stocks exposed to both lithium and copper. And finally, the reopening trades, and just for your information, on Monday this week, Australia hit 29 million vaccination doses, and by the end of November, we’re expecting those dose numbers to exceed 40 million. So a jump from 29 million to over 40 million, in the eight weeks to the end of November. So that reopening trade has been alive and well.

David Buckland:

Anyway, ladies and gentlemen, without further ado, Gary, congratulations, a great two years. Can you keep that extraordinary outperformance up over the medium to longer term?

Gary Rollo:

Okay, well look, thanks for the introduction, Bucko. So let’s break some of that down. First of all, the Fund, two years old, it’s my second two year birthday. I should be very grateful for that, but look, two years old, we’re still early in our life cycle, which means we’re also still quite small. So around 150 million bucks or so, that’s what we’re running today. So our view is, we can run a whole lot more money than that, and still generate good returns. So look, come to me when we’re three or four times the size of that, and then we can ask the question about whether or not we can keep on generating those returns sustainably. But let’s break down a little bit, some of the factors that give us some confidence about where we’re investing now, and why we’re optimistic that there’s still some pretty good returns ahead.

Gary Rollo:

The first thing is that Dominic and I, we play in small caps. Small caps, they’re, as you know, under-researched, they don’t have as many sophisticated research eyeballs looking at them, so you can find good stories in that market that are undiscovered. That’s the world that Dominic and I live in every day. The other factor is, is that we are looking for companies that have their own destiny in their hands. The value creation levers in the business are gripped firmly by a talented management team that we speak to, we speak to hundreds of management teams a year, and so we get to understand where people are in that journey of value creation, real time, as you would say. So that’s a big, big factor.

Gary Rollo:

There’s something to go for in small caps, and these businesses are certainly buffeted by the macro conditions, but their value creation journey they’re on, is their own. It’s not that you’re investing in a big mega cap company that’s going to go up or down based on the macro. These managers, they’re creating value based on something that’s specific to that company, and that’s what Dominic and I look for, those companies that can create value, they’re market share takers typically in some of those areas of the market that we’re looking for. So that journey from small cap to big cap, you can generate some good returns there. So that’s the first thing.

Gary Rollo:

I think the second thing, and you highlighted there, three themes that have been driving portfolio performance recently. Dominic and I have many themes in the portfolio. So at any one point in time, we’d expect something to be working in the portfolio, and for sure, we’d like it all to be working, but that’s typically not what happens.

Gary Rollo:

So we have a diversified opportunity set, and that allows us to go away and pick out the best of each of those, and over time, that collective outperformance that you’ve seen in the last couple of years, that’s what drops through. We can’t claim to say that we saw decarbonisation coming, but we certainly knew which stocks were going to benefit when it did, and benefit the most, and so that’s how we like to anticipate and play these themes in the portfolio. We look for the best expressions or for the least risk, and we place many investments along that journey, and we simply sit back and analyze. I’m sure you’ve seen that with us, Bucko. We try to work out which ones of these are going to win the best, and that’s how we look to create the value, and we don’t see those conditions changing.

Gary Rollo:

Now, like I said earlier, small caps create value, based on their stock specific stories and we are much more focused on that than any prevailing micro conditions that we have.

Gary Rollo:

So to come back to the question, do we think that we can continue the outperformance that we’ve had? Our view is that we’re going into the next year, and what comes ahead after that, with the view that we certainly can, and we won’t be changing what we do. We think it works quite strongly in this market, and there’s plenty of opportunities ahead in small caps, that you’ll see Dominic and I get stuck into over the course of the next two or three years. So yeah, we’re optimistic, and we look forward to you measuring us on our ability to deliver those returns.

David Buckland:

Thank you, Gary, and viewers, I hope you got something out of that, and Gary and Dominic, quick congratulations once again, on a wonderful beginning of what we hope is a very exciting, long-term journey for our investors.

David Buckland:

Thanks very much ladies and gentlemen, and please continue to follow us on Facebook and Twitter.

You can watch David’s previous interview here: Two high growth retailers with global expansion strategies

INVEST WITH MONTGOMERY

Chief Executive Officer of Montgomery Investment Management, David has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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