He backed Pilbara, Mineral Resources, and WiseTech. He's now backing these stocks

And it's during that time when they populate the mid-cap space. The great thing about them is they are still fairly high-growth companies. They're very focused businesses, but they have well-established capital structures. Most of them pay dividends. They're just higher growth, fairly good quality companies as they migrate from the small-cap to the large-cap space. 

And that's where we focus, trying to find our best ideas in that space. Stocks that are either still emerging, stocks that have been ignored for a while, or stocks that really just excite us.

What's an example of a company that you invested in from the mid-cap stage that ended up graduating to large-cap status?

Sadly, there are a couple of those. The reason I say sadly is because it always frustrates me when they leave our investment universe because eventually, we have to sell them. But that happens all too often. 

And a couple of examples are companies like Mineral Resources (ASX: MIN). It grew very quickly. We've owned it since it was a small cap, in our business more broadly in the mid-cap space, since we became eligible to own it. It's grown right through our space now and blown out the top into the ASX 50. So at some stage, we'll have to look to exit that.

Pilbara Minerals (ASX: PLS), a related stock, has done exactly the same in the last 12 months. And we are strongly expecting that WiseTech (ASX: WTC), which our business has owned since it was tiny, will head into the ASX 50. 

But the growth companies, particularly the ASX internet stocks, like Seek (ASX: SEK), Xero (ASX: XRO), REA (ASX: REA), Carsales (ASX: CAR), have either come straight through our space, grown out the top of it, or are heading towards the top of that space now, for all the right reasons.

Managed Fund

Pendal MidCap Fund

Australian Shares

View

It's always a blend of both. Arguably in a higher interest rate environment, income becomes more important. This part of the market yields about 4.5% and most of that is franked. So it's not a bad yielding part of the market, so that looks after the income aspect. 

The tax efficiency comes from the fact that we typically have fairly long holding periods for most of our companies. They're fairly high conviction companies we're happy to own over a fairly long period of time and that minimises capital gains tax. Then, the growth part is just a function of where they are in the market. That part of the market historically, if you go back over 2, 5, 10, 15 years, is just the higher growth part of the market. 

Because these companies are not nearly as binary an investment consideration as some of the small-cap companies, which are much earlier in their life cycle, they typically are less risky as well.

Mid-caps have two very interesting sectors at the moment that are not necessarily heavily tied to the domestic economy, and offer a lot of both medium and longer-term growth potential. So the first one is in the tech space, we have the benefit of some very high quality, fairly high growth companies in the tech space. 

Companies like WiseTech, NextDC (ASX: NXT), TechnologyOne (ASX: TNE), really typify some of the best-in-class tech offerings. A lot of them are (software-as-a-service) SaaS offerings, or in NextDC's case, it is one of the DC companies that services the SaaS space. And all have high growth, are not terribly correlated to the current economic environment, and have global application. 

The other space is closer to home in terms of it being the tailwind behind the decarbonisation theme, which is also a global theme. It has regulatory tailwinds, so governments are requiring companies and countries to decarbonise, and that really is just in the electric vehicle space. So quite simply the lithium companies, particularly some of the emerging lithium companies, offer good value, likely takeout potential, and a fairly long-lived investment thematic.

So in the mid-cap space, some of the more developed companies in that space, companies like Allkem (ASX: AKE). So Allkem has just announced a merger with a US competitor called Livent. They have assets next door to each other in Argentina. 

There's an enormous amount of operational synergy between those two companies. And they also, for companies that are effectively self-funding now, so they're not reliant on markets for funding anymore, they have by far the highest growth rate, in combination, of all the producing lithium companies.

So that's one we really like. Elsewhere in the raw material space like companies like Patriot Battery Metals (ASX: PMT). Now Patriot is also a lithium company. It's at a much earlier stage. It's effectively still an exploration company in Canada, but it's emerging to be probably the biggest, highest-quality new lithium find globally. 

It recently listed in de jure listing on the ASX, and can be found here for investors too. We think that company will most likely be bought by one of the incumbent producers, and/or develop its own deposit over time, but a highly valuable proposition.

I think it remains emerging. One of the most frustrating things for me is, as a mid-cap investor, these companies grow so quickly that they exit my investment space sometimes almost as quickly as they come into it. But those are really good first-world problems, because it means they've done really well in the interim. 

We have a great pipeline of small-cap tech stocks that are growing quickly and coming into our space. Some of those are already in our space and emerging. 

So, I think it'll continue to be a large and vibrant part of our market that will likely be the subject of corporate activity, or partake in corporate activity on a go-forward basis. And typically that can be fairly value-add to shareholders.

One that we've spent quite a lot of time on more recently is Viva Energy (ASX: VEA). So Viva Energy, as you're probably aware, is involved in refining. It's involved in wholesale fuel supply, but more recently it has purchased both the Coles Express business from Coles, which is a portfolio of service stations and convenience retail. 

More recently, it announced a transaction to purchase the On The Run business, which originated as a South Australian convenience retail and service station business. We think that provides an enormous opportunity for a number of reasons.

One, the increase in convenience retail in their portfolio means we think it means there's a bigger part of this portfolio that deserves a higher rating. It sits on top of its complimentary refining and fuel supply business, which is highly cash generative. So it's an opportunity to reinvest earnings out of the older part of their portfolio into higher returns in the new part of their portfolio. 

And we think in On The Run, which is arguably the best run convenience retail and service station business in the country, applying that model to the very large Coles Express and existing Viva service station and convenience retail network has a huge opportunity to unlock 20 to 30%, or maybe more, of increased profitability from those individual service stations. We don't think the market is pricing it.