UBS invests in digital innovation and aged care
Small caps offer greater opportunity for disruption and growth.
At its Small Cap Roundtable in Sydney earlier this week, UBS portfolio managers revealed some of the pivotal and profitable stocks the firm has invested in as part of its Small Companies Fund.
UBS portfolio manager Stephen Wood says the overwhelming feedback from planners is that "growth is incredibly hard to find, particularly within the large cap space, like the banks".
But given the current global climate of low economic growth, Woods says small companies continue to provide opportunities to invest in businesses with long term organic and structural growth.
Small caps are a key source of significant innovation and productivity growth for Australia's economy, often in combination with new technologies and processes. As a consequence, small companies have generally grown earnings and capital value at a faster rate than larger companies over time.
So where does UBS invest?
"Recently we've had significant profit upgrades from AP Eagers, Australia's equal-largest car retailer. Micro-cap fund Motorcycle Holdings is another success story," Woods says.
"These results have re-affirmed that the vehicle market is very strong and obviously cheap financing is helping this along."
Software and services make up a significant share of the fund's holdings. Two of UBS' biggest overweights (expected to outperform the market) are Technology One and NextDC.
Aged care is another industry where Woods' believes there are some "genuinely fabulous" operators who are aged-care first and "a little bit edgy second".
"We own significant portions in companies like Gateway Lifestyle, Ingenia Communities and Summerset, a New Zealand company," he says.
"Around that same theme, Mayne Pharma completed a company-transforming transaction at the end of June. In the Australian bio-tech pharmaceutical space, companies like ImpediMed are matching the success we've seen in other active security positions, such as Sirtex Medical."
ImpediMed is an Australian-developed technology. It measures fluid buildup in your body. It uses a technology called bio-impedance, where by running a low, electrical current through a patient's body, resistance is measured which determines the amount of fluid.
Earlier this week, ImpediMed entered into a five year clinical trial with US-based Mayo Clinic to explore the accuracy of its fluid status technology on cardiology indicators, including the prevention of heart failure.
What are the key themes steering investment?
UBS portfolio manager Victor Gomes says there are four key themes that guide stock selection and portfolio management: digital, demographics, materials and energy/environment.
"APN Outdoor fits into that digital theme," Gomes says.
"Not only is there structural change but the whole digitisation of the outdoor media space is delivering significantly greater utility. Over time it could potentially become a proxy to broadcast media, in that you get broad market coverage immediately and you can't avoid it. People still want to go out."
UBS has also invested in advertising company oOh! Media, which specialises in billboards, mobile, retail and experiential marketing.
Other notable investments include The a2 Milk Company, which sells non-discretionary products including milk and baby formula, and Trilogy Natural Skincare.
Gomes stresses that with large caps you don't get the same range of opportunities in different sectors and areas of innovation and disruption that you get by investing in small companies.
"There are so many alternatives, which is a hallmark to small caps, allowing you to transition exposure away from bigger, mainstream businesses," Woods says.
If you're interested in growing your wealth, take a look at our in-depth comparison guide to find the most profitable path for investment: shares or superannuation.
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