Maple Brown Abbott to cap small-cap fund at $1.3 billion

Maple-Brown Abbott enters small cap field.

Maple-Brown Abbott will cap its new small cap fund at $1.3 billion, according to co-investment manager Phillip Hudak. Hudak and co-investment manager Matt Griffin joined Maple-Brown Abbot in April, they previously managed the AMP Capital Australia Emerging Companies fund. Hudak spoke to Industry Moves about the fund's philosophy and some of the challenges facing this sector in the current environment.

Why did Maple-Brown Abbott (MBA) decide to launch a small cap fund?

There's the potential to add significant alpha, given it's an under-researched part of the market. And I suppose from MBAs point of view, there was an opportunity to lift out an existing team that had been together for over four years, had a strong track record and the strategy has a nine-year track record of consistent performance, and there was a real opportunity to leverage MBA's strong brand and distribution capabilities.

Can you explain your investment style?

MBA is, I suppose, synonymous with traditional value investing. And I'd actually say that our investment process that we that we employ in the Australian small caps strategy is a different investment style.

We believe that earnings are central to our investment philosophy. We've defined ourselves by our earnings drive share prices investment style, and we go where the earnings go, so we're happy to go into industrials, happy to go into resources, happy to go into value and happy to go into growth as long as we can see the earnings profile over the medium term.

The other key element in our investment philosophy is we focus on a company's earnings lifecycle and where they're positioned within there. And so typically, we've focused on companies that have improving fundamentals and are in the upgrade cycle. Given the breadth and depth of opportunities in the small caps market, we believe that those opportunities can be found at any point in the investment cycle.

We also employ a sustainability framework within our investment process, not because it makes us feel good, but because we believe that leads to better returns on a risk adjusted basis for our clients.

Has there been interest by institutional investors in new small cap strategies?

Yes, the actual interest has been pretty strong. Institutional investors are always looking for investment managers and new strategies that can offer good capital returns over the long term, and also consistent forms of alpha generation, and Australian small caps really does fit that bill. But one of the biggest challenges facing institutional investors, and I suppose the sector as a whole, is the capacity constraints that you are seeing in the Australian small caps market given it's a smaller segment of the market versus the other equity asset classes out there.  

Many of the high-quality investment managers out there are either full or taking limited amounts of new money coming through. Based on our capacity analysis we have the capacity limit of $1.3 billion, but what I would say is it will change over time based on market conditions, liquidity and a number of other factors. 

What is the outlook for Australian small caps and what are some of the challenges facing the sector?  

First of all, on the medium term, the outlook for Australian small caps I believe is actually pretty strong. Australian small caps provide exposure to the high growth emerging thematics that typically you may not get a large exposure to investing in Australian large caps. The other key element of small caps is the diversification benefits, relative to say, large cap equities here in Australia, with a more diversified sector exposure and greater exposure to idiosyncratic exposures.  

And then finally, on the medium-term outlook is alpha, markets are becoming increasingly competitive, and alpha is being arbitraged away across the globe. Given the market inefficiencies that continue to remain in the Australian small caps market, this provides significant opportunity to outperform. 

On the short term, market valuations are looking more reasonable than they did earlier this year. Value was emerging for a number of high-quality businesses with sustainable business models where we actually see strong medium term outlooks coming through from there. 

What areas do you think will do well in this environment? 

In this current environment where earnings certainty in different defensive earnings streams should actually hold up pretty well, one of the key areas, which I think will hold up reasonably well is the insurance brokers. I mean, everybody can actually see premium rates increasing across the board and insurance brokers' revenue models are typically linked to increasing premium rates. So, a company such as PSC Insurance should be a major beneficiary in such an environment. 

Second, is the industry tailwinds. The travel industry has been somewhat challenged when the economy actually slows, but they've got a significant industry tailwind in the act of rebounding from the COVID blows they've seen over the last couple of years, so you're seeing a return of both leisure but more importantly, on the corporate side. And a company such as Corporate Travel Management, would be a major beneficiary in such an environment.