How to navigate the large-cap rotation: 7 stocks Ausbil tips to outperform in the coming years

Everyone loves a small cap at the moment. After a period of lacklustre performance, small and micro-caps are experiencing momentum. The year of the small cap has finally arrived, but picking the winners is not always a guarantee.

The Ausbil MicroCap Fund has delivered 33.53% for FY24 and 20.08% since inception (February 2010), while the Australian Small Cap Fund delivered 25.73% for FY24 and 24.17% since inception (April 2020). 

Given these funds have performed in tougher climes for small and micro-caps, as well as periods of momentum, it’s safe to assume portfolio manager Arden Jennings might be onto a good formula.

Jennings recently joined Livewire’s Ally Selby on The Rules of Investing to share which stocks drove the team's success in FY24 and the winners he is backing in the year ahead. 

If you’re looking to take advantage of the pullback in the market, perhaps these companies are a good starting point to fuel your research!

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The great US large-cap rotation and what it means for Australia

In the US, we’ve increasingly seen a pattern of investors moving out of large-cap companies into smaller caps.

A significant portion of this activity comes down to the expensive valuations in large-cap companies, particularly when you consider large-cap tech stocks. With better valuations in smaller companies, investors are taking the opportunity to crystallise gains and take advantage of prospective growth in these areas.

The momentum can also be credited to the expected changes to monetary policy.

“Small caps benefit from rate cuts. Cuts in the US have been factored into small caps,” says Jennings.

He anticipates the stock rotation will also hit Australian shores to an extent and tips the US first cut to come in September this year.

The ASX stocks to watch in an easing interest rates cycle

“We expect cyclicals with exposure to lower rates to benefit,” says Jennings, with a focus on the financials sector.

The stocks he likes on this front include:

1. HUB24 (ASX: HUB)
2. Credit Corp Group (ASX: CCP)
3. ZIP Co (ASX: ZIP)   

He also notes US REITs should benefit from cuts, though doesn’t expect to see the same extent of benefit for Australian REITs.

In addition to this, he believes that there is still some value to be found in technology stocks, nominating Life360 (ASX: 360) and Dug Technologies (ASX: DUG) as his picks.

Life360 is a high-conviction position for Jennings, as the largest position in the fund. While some commentators might suggest it has become a crowded trade, Jennings argues he invested before the stock hit popularity and if it has an earnings miss this reporting season, that could be an opportunity for buying.

Similarly, he holds conviction in Aussie Broadband (ASX: ABB) which has disappointed in the past. 

“We’re expecting strong cashflow,” he says and adds that he has been increasing his position in the company.

The key to long-term winners in the ASX small and micro-cap space

Good fundamentals and valuations never go astray when it comes to picking winners, but Jennings also nominates another factor to consider if you were to buy and hold a stock for the next five years.

“Founder-led businesses generally outperform,” Jennings says.

He argues that, because there is skin in the game, founders will make decisions for the long-term success of a business, even if that means taking a shorter-term hit.

This view is behind his conviction in Aussie Broadband - but it’s not the only telco he likes at the moment - he also names Tuas (ASX: TUA) as a stock he would hold for the next five years. 

“Tuas took 20% market share in 10 years in Australia,” says Jennings. 

He points to the use of the same successful strategy being applied by founder David Teoh to the Singapore market.

It’s a stock he would happily hold for the longer term based on what he sees today.

More from The Rules of Investing

To catch up on previous episodes of the Rules of Investing, click here.