OC goes large with new micro-cap fund | AFR
Article and photo courtesy of Sarah Thompson and Wayne Taylor at The Australian Financial Review.
Rob Frost well remembers learning about the art of investing at his grandmother's knee.
"My godfather was a stockbroker and my grandmother was a very good investor so that got me interested very early, and I started buying and selling when I was about 13," Frost tells The Australian Financial Review.
"Nana bought a lot of blue chips like Rothmans – when it was OK to invest in stocks like that – and the likes of Woolies and Woodside, and her and I used to talk about it all the time. I can't remember not being interested and passionate about investing."
But these days Frost is playing at the other end of the market as the head of investments at OC Funds Management, which in October 2016 launched the OC Micro-Cap Fund.
The new fund was born from the company's OC Concentrated Equity Fund. After launching with $14 million under management the fund now has about $71 million and is 7 per cent ahead of the S&P/ASX Emerging Companies benchmark since launch.
But the last 12 months hasn't been the happiest of times for small and micro-cap investors, as the election of US President Donald Trump sparked a switch into large-cap stocks and blue chips. While OC is well ahead of the benchmark on a 10, five and three-year basis (incorporating the previous Concentrated Equity fund) it is 14.1 per cent behind on a one-year view in January, then recovered to trail the index by 0.8 per cent at the end of February and is now up 24 per cent on a rolling one-year basis.
Frost says the small-cap sector's safe haven status was demolished late last year, when global markets digested the Trump win.
"This occurred at a time when there were also some large small-cap mandate losses from some of our peers and hence there was a lot more selling than buying around in the small cap space over December and January period," he says.
"This was a catalyst for a significant fall in the prices of some stocks in our space, which has slowed but hasn't yet finished."
But there has been a positive – Frost has has been able to buy into stocks that OC has previously seen as being too expensive.
"It is not all bad because it has allowed us to buy some quality names at prices well below where they had been trading several months previously," he says, pointing to examples including data centre group NextDC, international student placement firm IDP Education and tech stock Altium.
The OC Micro-Cap Fund was recently awarded a mandate from the three directors of the Contango MicroCap LIC – Ian Ferres, David Stevens and Glenn Fowles.
It's not a mandate without controversy, as the Contango fund is in the midst of bitter battle between a group of shareholders and the three directors, whose spots on the board of the LIC will be subject to a shareholder vote.
Frost isn't getting involved in the spat.
"You have seen the announcements," Frost says. "All I can say is that we were approached by an independent consultant – we were not aware of who the client was."
It is understood the fund has also picked up a mandate to manage $25 million on behalf of IOOF Holdings. It means more money for OC to put towards its investment strategy.
Frost says the key to his investment philosophy is trying to understand the way a company actually makes money. The OC fund is limited to 40 stocks, which he describes as "well managed" and "relatively simple to understand".
The biggest holdings in the fund include gold producer Blackham Resources, print marketing firm Ive Group and outdoor advertising group QMS Media.
"I think a lot of people when they invest don't really understand the companies," Frost says. "They hear the concept but they don't fully grasp the key drivers so it makes it very hard to forecast and therefore value."
"We are always asking ourselves: Do we understand the business model inside out? If things go wrong – and we are very transparent with our investors – we want to be fully answerable to the people who have backed us."
When he's not studying small caps, Frost, like most Melburnians, is obsessed with sport.
"I think the low point was dragging my pregnant wife to the UEFA Euro 2016 finals in Paris last year," he laughs.