A stock to back for the next 10 years - according to one of Australia's best-performing funds

LW: The Fund has an impressive batting average over the past five and 10 years. What do you think is unique about the strategy that helped you achieve this?

Andrew Mitchell: When we started Ophir, I literally invested all the money I had in the Opportunities Fund. I didn’t own a house, couch or even a bed. I rented a fully furnished apartment. All my family were invested and friends too. It certainly would have been a lonely Christmas if we got things wrong. Having that level of alignment makes you really focus on performance and getting each investment right.

We also generally have 40-45 stocks in the portfolio of small-cap companies so it's quite concentrated. We focus on companies where we think they can deliver good results no matter what the economic backdrop is. Certainly, this helps you weather different cycles.

What was the best move you made over the past five years and also over the past 10 years? What was the worst?

I think not getting worried out of core positions when COVID hit. That was a scary time and there were a lot of negative headlines. We focused on our process and made some great investments in that volatile time rather than going to ground. We outperformed when COVID hit in March 2020, but also through the recovery, focusing on the opportunity that the volatility presented. We’re lucky to have a trusted investor base that sticks with us through tough parts of the market cycle so we can focus first and foremost on getting the companies we own right.

What is the one thing you and the team are spending the most time discussing internally right now?

We just had a good reporting season. Companies like Codan (ASX: CDA) and Life360 (ASX: 360) went very well. The challenge now is to find the next group of winners. So we are focused on going through the companies we didn’t see in reporting season and finding the next gems to keep driving the performance.

What is one thing you believe the market is getting wrong today?

The market is very efficient and a key part of our process is respecting what it is telling you and not just thinking you are smarter than the market. Insecurity in yourself as a stock picker and the positions you hold is a prerequisite to being a good fund manager. Having said that, the liquidity premium between large and small caps stocks is large now and we think that now is one of the best times to be allocating to small caps in decades.

Where are you seeing the most opportunity - and can you talk through a few different examples here?

There is always opportunity in any share market. But we don’t focus on making sector bets we focus on individual companies. We are always looking for companies where the market is mispricing the optionality. We want to invest in good management teams with good balance sheets for that reason, they can use it to grow. 

One company we have been invested in for a while that no one is talking about is Service Stream (ASX: SSM). They had some bad contracts that they are on the other side of now and we think that gives a great springboard to improve margins. They also are bidding for a defence contract and if successful that will open up a new vertical for them and probably warrant a rerate. We don’t think the market is pricing that in.

If you could only back one stock for the next 10 years, what would it be and why?

Probably NextDC (ASX: NXT). Small-cap stocks, by their nature, have disruption occurring all the time and 10 years is a very long time. Very few companies are still firing on all cylinders after 10 years. However, we have a platform change occurring now towards AI, and these cycles usually take 20+ years. 

The amount of data centres and computing power needed to support this over the next 10 years will be phenomenal and I think companies like NXT that operate in this space will continue to benefit for a long time. So for longevity in structural tailwinds, I would say NXT is our favourite pick.