Betting on smalls and avoiding the herd

Fund manager Nathan Parkin is so bullish on small caps that he has allocated almost a third of the Ethical Partners’ $2 billion Australian share fund to the asset class.

At a time of higher inflation, rising interest rates, a stuttering economic recovery in China and talk of a US recession, it’s a bold call to be overweight in an area of the market where volatility tends to be magnified during times of uncertainty and stress.

But Parkin and co-manager Andrew Wilson are sticking to their guns. They say small-cap stocks, relative to large ones, have never been so cheap, and it’s also “contrarian and different”.

And perhaps painful?

In the past 12 months as the Reserve Bank has embarked on the fastest monetary tightening in a generation, the S&P/ASX Small Ordinaries Index has fallen 5.1 per cent versus a 0.8 per cent decline for the broader ASX 300 Index against which the Ethical Partners fund is benchmarked.

“The performance of the fund has been pretty good actually,” says Parkin in an interview from the boutique asset manager’s Grosvenor St offices in Sydney. “We’ve managed that in a way that when we think about buying these things, we try and limit the downside.”

In the financial year to date, the Ethical Partners Australian share fund, after fees, is up a net 18.6 per cent versus 13.4 per cent for the index. The fund’s strategy, which has ESG at the core of its investment process, has had Parkin and Wilson buying sharesAustralian Clinical Labs, which is trying to buy Healius, as well as Wesfarmers (they own it mainly for its undervalued lithium operations).

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