We kick off 2022 showcasing the talents of nine of Australia’s top Small Cap fund managers. I must say, the variety of companies is the highest I’ve seen, since we started doing this 10 years ago.
One key reason was record IPOs, meaning tons of newly listed companies. In 2021, the Australian stock market was home to 197 floats, the fourth highest among stock exchanges.
The stocks mentioned in this report have all been vetted by talented investment professionals, so are worth checking out as best stocks for your long-term portfolio in 2022.
The IPO factor, plus the power of index tracking ETFs adds up to a huge variation in performance as professional investors in the broader market do everything in their power to beat the index. This can lead to big errors in financial institutions, such as we’ve seen in the big decline of company Magellan Financial Group (MFG).
Most importantly, it means that stock picking and stock ideas for your stock trading have never been more important.
2022 should mean rising interest rates in the market and the continued effect of Covid, which adds to complexity and effects consumer demand. Money not being free anymore and difficult economic conditions in the foreseeable future will sort out the companies that become swimmers from those that drown. You don't want their market capitalization to drops.
What sectors will perform well in 2022?
We think 2022 will also continue to favour commodities in the share market and these companies will continue to be stocks to buy. This mega trend is not going away. Many fund managers avoid mining because of their lack of expertise. This is a mistake. They need to invest in some!
Many of the big investment themes with growing market value can be accessed through mining companies.
Under the Radar Report's big recent wins have been in companies listed in the lithium and uranium spaces, as well as oil and gas. The prices of our stock picks like companies:
- Lake Resources (LKE)
- Boss Energy (BOE)
- Paladin Energy (PDN)
- Senex Energy (SXY)
These have all climbed very quickly. And the current price is high.
Moreover, we continue to believe that the factors driving these companies – the ESG clean energy investing theme involving carbon reduction, global growth and a lack of supply –will continue along with product innovation.
If anything, Covid exacerbates pre-existing market trends. So don’t be afraid, there is money to be made with our stock picks. We find top stocks on the ASX!
Meet 9 of Australia's Top Performing Fund Managers
Nine of Australia’s top investors deliver their opinion on the big picture, the small picture and all that lies in between. A must read for anyone looking to profit from the market and the top stocks in 2022 and beyond.
Meet the Fund Managers:
Chris Prunty: Portfolio Manager, QVG Capital
Chris has had a varied career but it’s with fellow analyst Tony Waters that he has had success in the field of Small Cap Portfolio management. Prior to kicking off QVG four years ago they ran the top performing Ausbil Micro Cap Fund. At QVG their small cap Opportunities Fund has returned 23.7% a year and their all-cap QVG Long Short Fund has returned 29.7% a year.
Andy Gracey: Portfolio Manager, Australian Ethical Emerging Companies Fund & Australian Ethical Australian Shares Fund
Andy manages one of the most successful Small Cap ethical funds in the world. It has consistently achieved double-digit returns over the past 20 years, of which he has been in charge for the past 12. He manages over $2 billion and specialises in medical technology and tech stocks.
Sam Koch: Equity Analyst, Wilson Asset Management
Sam joined Wilson Asset Management in 2018 and works within WAM Capital, WAM Microcap, WAM Research and WAM Active. Prior to WAM, he was an equity analyst and dealer at IFM Investors and before this, an accountant at Colonial First State.
Richard Bailey: Portfolio Manager, Kuttabul Capital Management
Kuttabul Capital Management is a Sydney based equity long and short investment firm. The KCM Growth Fund invests in small and mid-cap companies and has returned 21.5% a year since inception. Richard has an engineering background and a 20 year career in financial markets.
Steven McCarthy: Portfolio Manager, DMX Asset Management
Steve is a qualified accountant with experience in funds management and corporate finance, and co-founded DMXAM in 2015. DMXAM’s funds provide exposure to small companies that are under the radar. His fund has a track record of strong performance.
Ben Rundle: Portfolio Manager, Hayborough Investment Partners
Ben has 15 years’ experience in financial markets. He is the founding partner and portfolio manager of Hayborough Investment Partners. Prior to starting Hayborough, Ben was as a Portfolio Manager at NAOS Asset Management.
Nick Maclean: Portfolio Manager, Surrey Asset Management
Nick has 15 years’ experience analysing and investing in Australian and global equities. Prior to launching Surrey Asset Management Nick spent close to 4 years at Cooper Investors working across the Australian & Asian Equities portfolios.
Andrew Brown: Portfolio Manager and Former Head of Equities at Rothschild Australia
Andrew has worked in Australia for AMP and Rothschild as a senior portfolio manager and head of equities, and has sat on 19 listed company boards. These days he manages private portfolios and looks for opportunities in places others don’t. He also runs a small NSX listed leveraged long/ short investment company, East 72.
The Idle SpeculatorPortfolio Manager, Under the Radar Report
When he’s not managing his own money, The Idle Speculator runs Under the Radar Report’s diversified portfolio. In a past life he was a senior investment analyst for Fidelity International and has been deputy managing director of an ASX listed company.
What are two big investing themes that you see dominating 2022?
Who knows? My best guess would be rates and margins are the two themes that could dominate 2022.
Most professional investors believe the cost of money will rise in 2022 as the Federal Reserve and other Central Banks taper their bond purchases.
To what extent and how quickly this happens will have serious implications for the performance of equity markets and which sectors perform relatively well. The other issue is cost inflation and the relative degree to which companies can pass this on to their customers. Of course we hope we hold a portfolio that can perform irrespective of an increase in rates as earnings growth offsets multiple compression and has the pricing power to pass on cost increases, although this remains to be seen.
ESG thinking by corporates will be very important in 2022 and beyond, particularly the management of company’s carbon footprint, (clean energy) its supply chain and the attraction and retention of company employees.
Also, on the back of Covid-19, healthcare spend will come to forefront. Covid has familiarised the public with the healthcare system and perhaps reminded many investors of the importance of healthcare.
First, wage growth will accelerate as labour shortages bite.
There are factors underpinning this:
Between December 2019 and May 2021, over 660,000 temporary visa holders left Australia (Source: GoodFood). We are starting to see the early signs of wage pressures building in the system, as businesses reopen without that much needed state/international migrant workforce. Anecdotally you have seen plenty of examples of this. For example, in mining services, company Mineral Resources (MIN) said: “If there are any hairdressers or waitresses or banking people, anything out there, and they want to go from $40,000 to $120,000 a year, give me a ring.”
Tech and developers are achieving 40% pay rises for changing your job. (Source: AFR)
In restaurants, cafes and bars there are “tens of thousands of open positions around the country”, and part of the way some people are addressing it is by raising wages by 20-40%. (Source: GoodFood)
The implications of this are wide-ranging, from other industries like technology to mining services and hospitality businesses.
Staff shortages could impact service levels, drive up costs and lower company earnings. On the flip side, it’ll raise incomes which will support discretionary spend (e.g. retail).
Second, house price weakness.
Residential house prices are likely to fall 0-5% next year as housing credit growth slows (regulation) and mortgage rates rise (mortgage competition eases and banks recoup (net interest margin) pressures).
Changes in house prices often impact consumer sentiment and discretionary spend (“wealth effect”), however a modest fall is unlikely to have much of an impact.
Inflationary pressures/Interest rates and normalisation or otherwise of supply chain issues and travel.
TO ACCESS OUR LATEST STOCK PICKS AND BEST STOCKS TO BUY:
Two interesting themes that we see playing out in 2022 are supply chain onshoring, and ESG reporting and compliance.
Supply Chain Onshoring: With COVID impacting supply chains and geopolitical concerns, companies and governments are looking to bring more critical manufacturing and services on-shore.
In our portfolio, we are already seeing local pharmaceutical manufacturer Probiotec (PBP) capture market share with $15m of new contracts in FY22 that have been on-shored, as global clients look to localise manufacturing in Australia. PBP expects this trend in onshoring of contract wins to continue over the next 3 years.
ESG reporting and compliance: The governance required by company boards to meet compliance requirements is increasing exponentially as issues such climate change risk, cyber-security, modern slavery and data protection must be reported on.
Ansarada (AND) provide software to boards to manage their increasing board compliance as well as tendering and deals. We see AND as well placed to grow their company's revenue in this growing market.
We also expect weather big data provider Aeeris (AER) to be another ESG reporting beneficiary. In 2021, the company developed a Climate Risk Assessment Tool specifically designed for corporate boards of the largest companies to be able to report on their climate risks using their proprietary data sets and tools.
I am referencing (British fund manager) Terry Smith as I say this, but if you look back at previous pandemics, the most obvious one being the Spanish Flu in 1918, they tend to accelerate previous existing trends.
Terry notes from that period the production line improvements in the manufacturing of the Model T Ford driven by the lower availability of employees.
Some trends that have been accelerated during the current pandemic include e-commerce tech stocks, video conferencing, telemedicine and digital payments. I think they will continue throughout 2022 and gain market share.
I think without question a structural shift we have seen over recent years and we believe will continue to increase in importance is the value investors put on ESG.
In addition, the recent volatility that has been brought on by Covid-19 does not look likely to go away any time soon.
Everyone is obsessed about US rising interest rates – but the key theme here is the interplay of the rate of change of US inflation with rates.
Inflation has accelerated very quickly and despite on-going pressures, may flatline. But does it do so at a higher level than stock market investors believe, and does that measure permeate into the general public and create an elevated level of inflation expectations?
Because that’s the most dangerous aspect of the three-pronged inflation push (demand, costs, expectations) which would really shift the interest rate curve upwards.
The other theme is China starting to re-accelerate growth a little whilst still being focused on “common prosperity”.
Australia is different – its themes are the aftermath of the upcoming election and how unwinding the real asset bubble doesn’t crash the (non-resource) economy.
Interest rates and inflation will be the most common answer.
Questions that spring to mind, include:
- When will US inflation start to recede?
- What factors are feeding into it?
- How will quickly can these be controlled before secondary and tertiary inflationary effects starts to kick in?
For instance, if transport costs are elevated temporarily because of Covid related disruptions, at what point do those increases feed into price increases which feed into increases in wage expectations.
Two left field themes might emerge in surpluses and deficits in equal measure.
Some products may remain in short supply with the strains in the global supply chain, while others turn out to have been completely oversupplied by double ordering overestimating demand from multiple channels.
A second theme might reflect geopolitical tensions mounting in both Europe and Asia, and in between.
Set yourself up in 2022: 11 questions for investing in 2022:
Subscribers: Please access Issues 479, 480 and 481 to read the full Fundie Round table.
Richard Hemming asks them:
- What have been your best performers in 2021 and why? Do you still own them?
- What have been your biggest losers in 2021 and why? Do you still own them?
- Do you invest in mining related companies? Which ones and why?
- What are the disruptive trends that you are investing for in 2022? What stocks best reflect those trends?
- Which sector are you most exposed to and why? Which stocks do you own in that sector?
- Have you been buying recovery stocks and if so, which ones?
- Do you have any exposure to travel in your portfolio? Which stocks?
- What proportion of stocks in your portfolio pay consistent dividends? Which smaller stocks you own are most likely to increase dividends in 2022?
- What contrarian bets have you made in the past two years, and have they paid off?
- In your portfolios, are there any particular catalysts that cause you to quickly take action, either buying or selling.
- What are three of your biggest positions and why?
Access the Full Fundie Round Table now, take out a Free Trial or Subscribe.
What will be the best performing stocks in 2022?
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✓ 78.5% on all our 250+ Small Cap stocks
✓ 97.5% on our Best Stocks To Buy Now
✓ 1071.8% on our 10 best performing Small Cap stocks
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But we are constantly looking at future performance and finding the best stocks to buy for our subscribers. How do I find the best shares to invest in? Come Under the Radar where we look for companies with a strong balance sheet that are positioned for tremendous growth.