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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“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.”
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”.
“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.”
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.
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