Top Small-Cap Fund Shuns Cyclical Shares as Australia Reopens

(Bloomberg) --

An outperforming Australian small-cap fund is avoiding shares tied to the nation’s economic revival, cautious of how the recovery might play out.

Perennial Value Management Ltd.’s Andrew Smith said he’s maintained a defensive slant in his micro-cap fund since the coronavirus-induced March swoon, as he doesn’t see much upside for Australian stocks in the short term. He’s kept a low exposure to stocks that could benefit from the unwinding of lockdown measures as a Covid-19 resurgence in Victoria state weighs on the economy.

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“Given the size of the businesses and their liquidity, we’ve steered away from trying to buy companies that are cyclical and exposed to the reopening trade, because any delay can have quite a big impact,” said Smith, whose fund gained 15% this year -- beating 96% of peers -- and is mostly made of firms valued under A$500 million ($361 million).

His A$262 million portfolio now has more cash than usual and carries derivative positions that provide protection if markets tumble. Cash and derivatives made up 2.6% of the fund as of Aug. 31, according to its latest performance report.

Meal kit provider Marley Spoon AG is the fund’s top holding. Smith added the stock in March on expectations that the company would grow its international customer base amid lockdowns. The stock has gained about 1,250% since a March low. Other positions include mineral drilling service provider Swick Mining Services Ltd. and Alliance Aviation Services Ltd., an air charter operator for mining and energy workers. Both have surged in recent months.

Smith also has pre-IPO holdings as those companies typically offer good returns once they list. Mattress maker Koala Sleep Ltd. is one of the fund’s largest unlisted positions. It also holds Internet service provider Aussie Broadband Ltd., which launched its offering on Tuesday.

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