Small caps are on fire. Here are Ausbil’s top picks

Note: This interview was recorded on 3 December 2024.

As Ausbil Investment Management’s Arden Jennings puts it, “2024 certainly was the year of small caps”. It’s not over yet, and he is confident of a “second innings” in 2025.

Jennings, who is Co-Head of Emerging Companies and Co-Portfolio Manager for the Small and Micro-Cap strategies, pointed to expected rate cuts as being conducive to small-cap performance. Beyond that, he believes there is a huge catch-up to come for small caps “as conditions become easier and also economic growth accelerates into 2025.”

It’s a bullish view, particularly in light of the returns that have already been generated in the portfolio this year. In a year where the ASX Small Ordinaries has returned 12% and the ASX Emerging Markets Companies Index has returned 15%, the Ausbil Australian Small Cap Fund is up 30% net of fees for the calendar year, while the Ausbil Microcap Fund (closed to new investors) is up 40% net of fees, ending November 2024.

The key though is being selective – or to use a cricketing analogy, you don’t need to hit every ball, nor does every ball need to hit the boundary.

Jennings likes companies that are:

• Founder-led: 50% of the small-cap portfolio is founder-led, while over 60% of the micro-cap fund is.
• A sustainable business model that isn’t reliant on external capital markets to fund future growth: think “really good balance sheets, so low levels of gearing or net cash, good cash flow.”

An interesting side note is that while many small-cap managers steer away from resource companies, Jennings selectively uses them where they fit his criteria, highlighting Genesis Minerals (ASX: GMD) as one opportunity he likes.

In this episode of Fund in Focus, Jennings discusses his criteria for investing in small and micro-caps, why he is angling into more cyclical stocks for 2025, and shares his favourite picks for the coming year (and spoiler, there's a few!).

Time codes

0:00 - Introduction
0:21 - How small caps have performed in 2024
1:35 - The outlook for 2025 and how Ausbil are positioned
2:40 - How the small cap opportunity compares to the past
4:19 - RBA and the opportunity set
5:23 - What makes Ausbil's approach unique
7:25 - Ausbil's cash position
8:26 - Key criteria for investment selection
10:15 - The next 10-bagger?
11:32 - How to find more information on the Fund