Three Australian companies this fund manager thinks are overlooked

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Australia’s biggest listed companies feature prominently in investors’ portfolios while “mid-caps” – medium-sized companies whose potential for growth can be greater than that of the giants – tend to be overlooked by small investors.

The vast majority of the mid-caps, those companies ranked between 50 and 100 in terms of their market capitalisation, were once small companies.

Fisher & Paykel Healthcare is one of the stocks picked by a new mid-cap fund.

Some of the better-known companies that started life as initial public offerings on the Australian Securities Exchange and have gone on to become mid or large caps include JB Hi-Fi, REA Group, Car Group and Xero.

The further one goes down the market capitalisation spectrum, the less coverage they receive from analysts, says Michael Malseed, director of manager research at Morningstar Australasia. That can create more potential to uncover value, particularly in the hands of a skilled fund manager, he says.

“Where a company is less mature in its life cycle, there can be greater growth opportunities for the company,” Malseed says.

Over the 10 years to October 31 this year, mid-caps, as represented by the S&P/ASX MidCap 50 index, produced an average annual compound return of 10.18 per cent. This is the “total” return, where dividends are re-invested.

The large caps, as represented by the S&P/ASX 50, returned almost 6.4 per cent over the same period, with the S&P/ASX Small Ordinaries index returning almost 4.3 per cent.

However, over the past three years, the returns of mid and small-caps have not kept up with the returns of the largest companies, dominated by miners and big banks.

That is mostly to do with rising interest rates and investors not as willing to take on risk, leading them to gravitate towards the market’s biggest names, Malseed says.

The mid-cap space of the Australian Securities Exchange is not that well trodden by fund managers. Fund managers who have mid-cap funds include Ausbil, Pendal, Paradice, Antares, First Sentier, Bennelong and Fidelity. Eley Griffiths Group is the latest to join their ranks, with the recent launch of its Mid-Cap Fund.

It is the third fund the manager has launched in 20 years, and joins its Small Companies and Emerging Companies funds. As a long-established small-cap manager, it knows many of the companies that have graduated to the mid-cap index very well.

The Mid-Cap Fund will eventually hold between 25 and 45 stocks, including those that are still small companies but which the manager believes will enter the mid-cap index.

Fisher & Paykel Healthcare is one of the stocks in the fund. Ben Griffiths, the co-founder of Eley Griffiths Group, says the global healthcare company that specialises in respiratory care has had a difficult few years, but he is expecting its earnings to recover.

Griffiths says Worley, another of the fund’s holdings, which provides engineering and construction services to a global client base, is set to benefit significantly from the sustainable energy transition.

Car Group, one of the fund’s largest holdings, is using its strong position in the Australian online automotive advertising market with carsales.com to further expand its offshore presence, Griffiths says. He says the expected growth in Car Group’s offshore earnings is yet to be fully reflected in its share price.

Share investing should only be approached with a view to being invested for the long term, as markets are fickle and go through extended periods of volatility. No one knows what the next period holds.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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