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AUSTRALIAN SMALL COMPANIES:
Volatility can present opportunity
April 2012
Presented by:
Nick Greenway, Investment Manager, Karara Capital
Important Information
This document has been prepared by Ironbark Asset Management Pty Limited ABN 53 136 679 420 AFSL 341 020 (‘Ironbark’).
The Ironbark Karara Investment Funds referred to are issued by Ironbark Funds Management (RE) Ltd ABN 94 106 888 662 AFSL 284442, a wholly owned subsidiary of
Ironbark.
The Karara Australian Small Companies composite referred to are issued by Karara Capital Limited ABN 34 134 075 157 AFSL 333318 (‘Karara Capital’).
It has been prepared for use by advisers, dealer group researchers and research houses only and is not for wider distribution.
This document is not an offer of securities or financial products, nor is it financial product advice. As this document has been prepared without taking account of any
investors’ particular objectives, financial situation and needs, you should consider its appropriateness having regard to your objectives, financial situation and needs. To
acquire units in the Fund, complete the application form that accompanies the current PDS, which you can obtain from www.ironbarkam.com or by calling client
services on 1800 034 402. You should consider the PDS in deciding to acquire or to continue to hold units in the Fund.
Past performance is not a reliable indicator of future results.
Although specific information has been prepared from sources believed to be reliable, we offer no guarantees as to its accuracy or completeness. The information
stated, opinions expressed and estimates given constitute best judgement at the time of publication and are subject to change without notice. Consequently, although
this document is provided in good faith, it is not intended to create any legal liability on the part of Ironbark, Karara Capital or any other entity and does not vary the
terms of a relevant disclosure statement.
All dollars are Australian dollars unless otherwise specified.
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Why Australian Small Companies?
 Under-researched by sell-side brokers
 Companies often in high growth phase
 Entrepreneurial, incentivised management, often with large ownership stakes
 Access to new and emerging industries
 Non-index opportunities
 Potential scope for factor returns
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Evolution of the Small Cap Indices
$160
100%
$140
$120
Billions
100%
66%
$100
$80
61%
$60
$40
$20
34%
39%
100%
86%
14%
$0
2002
2007
XSI ($28B) XSR ($5B) XSO ($33B)
XSI ($96B) XSR ($49B)XSO ($145B)
2012
XSI ($61B) XSR ($38B) XSO ($99B)
Legend:
 XSI: S&P/ASX Small Industrials Accumulation Index
 XSR: S&P/ASX Small Resources Accumulation Index
 XSO: S&P/ASX Small Ordinaries Accumulation Index
Source: IRESS. For the 2002 and 2007 years the data is as at 31 December, for 2012 the data is at 29 February 2012.
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100%
Domestic Economy
Mining Sector Capital Expenditure
140
140
Annual (incl. company projections*)
Quarterly (annualised)
$b
$b
120
120
100
100
80
80
60
60
40
40
20
20
0
0
00
02
04
06
08
Source: ABS, CIRA.
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10
12
14
Small Companies Market Outlook
 Market significantly weighted towards small resource companies (both direct and indirect)
 “Trucks and shovels” versus traditional mining companies
– Reduced exposure to commodity price volatility
– Additional projects coming on-line – higher volumes for mining service providers
 Capital expenditure finally starting to kick-in
 Small Mining and Energy companies an opportunity:
– Overseas buyers of Australian resources have a long-term investment horizon
 Nation building and Energy security
Source: Karara Capital Limited.
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Why invest in Australian Small Companies now ?
 Significant global resources demand and the shift of economic power towards emerging
nations
 Post GFC, elements of the market remain under-researched by sell-side brokers
– Opportunities exist for disciplined stock pickers to identify value and achieve strong
returns
– A 3-5 year investment time horizon is key to successful Small Caps investing – the
fickle “risk on/risk off” trade in response to prevailing macroeconomic influences is a
mug’s game
 Continued M&A activity is expected with overseas interest in Australian resource plays
elevated
Source: Karara Capital Limited.
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Excess returns:
Ironbark Karara Australian Small Companies Fund
Ironbark Karara Australian Sm all Com panies Fund (net) Excess Returns period to 31 March 2012
1400
1200
1000
800
Quarterly Excess Returns (bps)
600
400
200
0
-200
-400
-600
-800
Rising Markets
Falling Markets
-1000
-1200
Mar-12 qtd
Dec-11 qtr
Sep-11 qtr
Jun-11 qtr
Mar-11 qtr
Dec-10 qtr
Sep-10 qtr
Jun-10 qtr
Mar-10 qtr
8
Dec-09 qtr
Source: Karara Capital Limited. Past performance is not an indication of future results.
Sep-09 qtr
Jun-09 qtr
Mar-09 qtr
Dec-08 qtr
Sep-08 qtr
Jun-08 qtr
Mar-08 qtr
Dec-07 qtr
Sep-07 qtr
Jun-07 qtr
Mar-07 qtr
Dec-06 qtr
Sep-06 atr
Jun-06 qtr
Mar-06 qtr
Dec-05 qtr
Sep-05 qtr
-1400
Performance:
Ironbark Karara Australian Small Companies Fund
Performance summary: 31 March 2012
Portfolio
3 months
6 months
1 year
3 years (p.a.)
Since
inception p.a.
Ironbark Karara Australian Small Companies Fund*
+15.87%
+18.32%
+0.50%
+25.26%
+17.50%
S&P/ASX Small Ords Accum Index
+14.98%
+14.30%
-8.57%
+17.93%
+4.47%
Excess Return
+0.89%
+4.03%
+9.08%
+7.34%
+13.03%
* In April 2010, the Patriot Small Companies Fund was rebranded and re-launched as the Ironbark Karara Australian Small Companies Fund to coincide with the transition of the investment management to Ironbark’s strategic
partner, Karara Capital Limited. Performance figures quoted are net of fees. Inception date 30 June 2005.
Source: Karara Capital Limited. Past performance is not an indication of future results.
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Why Ironbark Karara Australian Small Companies
Fund ?
•
Both Ironbark Asset Management and Karara Capital are independent boutiques businesses ->
Better aligned
•
Low portfolio turnover -> More tax effective
•
Minimal capacity constraints -> Exploit more opportunities
•
Strong research ratings -> External and within BTFG Research
•
Experience -> Depth and Breadth
•
Consistency of delivering alpha -> Rising and Falling markets
Past performance is not an indication of future results.
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