Premium Small Companies Fund outlook

From an economic perspective, little changed during the month to temper our bearish stance on the domestic economy. There appears to be little evidence that the east coast economy is picking up the slack as the mining boom tapers off, despite the RBA cash rate sitting at a record low of 2.00%. On a positive note, the ongoing depreciation of the Australian dollar, which is continuing to adjust to significant falls in commodity prices, will improve the profitability of domestic export sectors such as mining and manufacturing. This is likely to result in consumer shifts to non-trade exposed goods and services, which ought to be a longer-term positive for the domestic economy. We expect further falls in the Australian dollar as the economy rebalances which should stimulate domestic economic growth, although we don’t expect to see a broad-based economic recovery until mid-2016 calendar year at the earliest. Ahead of the August reporting season, we thought it would be helpful to provide investors a snapshot of the themes we’re watching and avoiding.
OC Funds Management


• Given the near-term challenges faced by the domestic economy, we retain material exposure to quality companies that can grow earnings outside of the economic cycle (eg. iSentia, Healthscope, Veda Group, Hansen).

 • The Fund has significant exposure to stocks with structural tail-winds underpinning their earnings growth (eg. APN Outdoor, Ozforex, REA Group).

• The US economy remains on track and the Fund has solid exposure to a robust US economy (eg. Fisher & Paykel Healthcare, Ardent Leisure, Aconex).

• The portfolio is a net beneficiary of a weaker Australian dollar, largely through the translational impact of companies’ offshore earnings (eg. Servcorp, BT Investment Management Limited, Henderson Group).


• We remain cautious on the domestic economy near term, and therefore remain reluctant to pay for mid-cycle stocks that may still have near-term earnings risk (eg. GWA Group, United Group, Qube Logistics)

• Despite record low interest rates, the retail sector remains challenging. We have selective exposure to consumer discretionary stocks (eg. Lovisa, Burson Group), although we remain cautious, as recent feedback suggests trading remains patchy with margins remaining under pressure (eg. Kathmandu, Specialty Fashion Group).

• We are cautious on ‘fallen angels’ with companyspecific issues, which are unlikely to be remedied any time soon, and remain vulnerable to further profit warnings (eg. Cardno, The Reject Shop, Transfield Services).


• Companies with elevated debt levels and deteriorating earnings profiles (eg. Ausdrill, Mermaid Marine).

• Structurally challenged industries where business models are under threat including ‘old-world’ media stocks (eg. Seven West Media, APN News & Media) and traditional ‘bricks-and-mortar’ apparel retailers (eg. Myer, Oroton Group).

• Mining services companies dependent on either exploration or project-based work (eg. NRW Holdings, Ausenco, Lycopodium), as mining capex spend continues to run off.

• Unprofitable or cash-flow negative companies and concept stocks that don’t have earnings.

We look forward to reporting back to our investors in early September on our thoughts and observations following financial-year-end reporting in August. During this time, we will be meeting with most of our core portfolio holdings, as well as many other competitors and potential investment opportunities. We believe the Fund is well positioned going into the results period and we remain confident in our ability to generate strong long-term investment outcomes for investors.

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OC Funds Management
OC Funds Management

OC Funds Management (OC) is a boutique small cap specialist which was founded by its investment staff and non-executive directors. OC commenced operated in December 2000 with the launch of two long only small cap Australian equity funds, the OC...


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