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Brenton Saunders: ASX mid-caps offer exposure to fast-growing sectors such as battery metals

Investors should look beyond the largest ASX companies to get exposure to the market’s fastest-growing industries, argues Pendal’s BRENTON SAUNDERS

INVESTORS should look beyond the biggest ASX companies to get better exposure to the market’s fastest-growing industries, argues Pendal’s Brenton Saunders.

Medium-sized companies — known as mid-caps — tend to offer higher earnings growth than large-cap companies, often with less risk than small caps, says Saunders.

Saunders manages Pendal MidCap Fund, which invests in the 100 biggest companies outside the ASX50, where market caps typically range from around $1 billion to $10 billion.

Mid-cap portfolios tend to be less concentrated, offering access to fast-growing industries such as cloud computing, medical innovation and battery metals such as lithium.

Companies in this segment also usually feature proven management teams, time-tested business concepts, a history of dividend payments and a strong focus on their core business operations, says Saunders.

“Mid-caps — the ASX50 to 150 range — historically have done better than the ASX50 large-cap universe and better than the S&P/ASX Small Ordinaries,” says Saunders.

“It’s quite an easy part of the market to select good companies from because most of them are fairly well-established businesses, but higher growth — and there’s a huge range of sub-sectors or different industries to choose from.

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Midcap Fund

“So, you’re pretty much spoiled for choice in terms of both quality and breadth.

“It’s really the sweet spot of corporate Australia. “It’s a very useful addition to any balanced portfolio.”

Better access to lithium producers

Saunders recently appeared at a Pendal webinar alongside Ken Brinsden, the former head of lithium industry leader Pilbara Minerals and current chair of lithium explorer Patriot Battery Metals.

Lithium — a key ingredient in batteries for electric vehicles — is a good example of a fast-growing industry that can be difficult for investors to get exposure to through investing in large capitalisation companies.

“It has been the domain of relatively small companies,” says Brinsden. “Lithium was a niche industry only seven years ago so none of the incumbents are really that big.”

Lithium has become the rechargeable battery of choice for electric vehicles, laptops and mobile phones and a key part of the transition away from fossil fuels to a net-zero carbon emission futures.

“The reason that’s happened is because a lithium-ion battery carries so much more energy density than the classic rechargeable battery — that’s what motivates the expanded lithium raw material supply base,” says Brinsden.

Australia is a significant supplier of lithium to the world because it possesses vast quantities of lithium raw materials, leading to substantial industry growth in the past seven years.

Saunders says the demand for lithium is forecast to grow substantially.

Just this month, the Australian federal government announced a national electric vehicle strategy to “encourage greater use of cleaner, cheaper-to-run vehicles”.

Midcaps on
the move

Hear from lithium industry pioneer
Ken Brinsden and Pendal’s
Brenton Saunders

On-demand webinar

“Currently we have about 17 per cent global penetration in electric vehicles,” says Saunders.

“As a global average, we would expect that to gravitate towards about half by the end of the 2020s.”

Despite the growth, lithium production has long been the domain of smaller companies.

“BHP has always held the line that it’s not big enough for a business of their size. Glencore has said it’s not the kind of industry they want to get involved in.”

As a result, investors focused on the large-cap end of the stockmarket can miss out on the opportunities offered by the transition to EVs.

“In our benchmark, about 11 per cent of that total investment universe of the ASX 50 to 150 are lithium and lithium-related stocks.

“In our fund we have a 13 per cent exposure to lithium and lithium-related stocks.

“In the ASX300 small cap universe, there is a large cross section of names of very early-stage exploration and development lithium companies.

“So we’ve got quite a healthy pool of juniors starting to grow and feed up into the mid and large-cap space and become more and more investable.”

About Brenton Saunders and Pendal MidCap Fund

Brenton is a portfolio manager with Pendal’s Australian equities team. He co-manages Pendal MidCap Fund and our natural resources portfolio, drawing on more than 25 years of expertise in resources, derivatives, investment banking and private equity. He is a member of the CFA Institute.

Pendal MidCap Fund features 40-60 Australian midcap shares. The fund leverages insights and experience gained from Pendal’s access to senior executives and directors at ASX-listed companies. Pendal operates one of Australia’s biggest Aussie equities teams under the experienced leadership of Crispin Murray.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal MidCap Fund here

Contact a Pendal key account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at April 26, 2023. PFSL is the responsible entity and issuer of units in the Pendal Midcap Fund (Fund) ARSN: 130 466 581. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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