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Speakers of the calibre of David Knoff, the expedition leader stranded with his team in Antarctic during COVID, can regularly be heard at this global institution that places a premium on knowledge, not qualifications.
Never waste a crisis, positioning for recovery
After what has been a tumultuous year for the entire world, it’s time to plot a course for the future, both 2021 and beyond. According to Sam Twidale, Portfolio Manager of DNR Capital’s Emerging Companies strategy, markets may be ‘underestimating the extent of the recovery’. We recently caught up with Sam to understand how he has navigated this environment for investors in his smaller company strategy in a market he described as ‘highly inefficient’ and prone to consistent overreactions, both positive and negative.
Thankfully, the word ‘pivot’ was not raised during the discussion, with the word becoming synonymous with 2020 as companies around the world were forced to finally embrace technology and connect more with their customers.
On the year that’s been Twidale flags his biggest lesson as the continued focus on the ‘fundamentals’ of businesses and the need to disregard short-term news flow. Anyone involved in financial markets will appreciate how difficult this was in March, with markets moving 7% in a single trading session, but ultimately those who could see through the crisis were able to deliver. This was reiterated, according to Twidale, but the fact that ‘even shares of really high-quality businesses were indiscriminately sold off, despite their being no material change.
Turning to 2021 and beyond, he is remarkably bullish; ‘it is not a matter of if we recover from this crisis, but when’. Even with the vaccine-led recovery, there remains further scope for a continued rebounding, flagging ‘pent up demand’ for everyone from in-person dining, bricks-and-mortar shopping (yes people still do that) and travel. Investors and markets always struggle to appreciate the future, but DNR are looking to what the environment is for corporates and households in 2022 and making decisions accordingly.
Twidale offers a proviso, being that the ‘strong outperformers over the last year are unlikely to be the same companies leading the market higher over the year ahead’. In terms of quality, return on invested capital is a key factor in their investment process, combined with a company that is in an industry leading position. For instance, the fund recently sold its position in Zip Co Ltd (ASX: Z1P) after seeing a less attractive risk-reward outlook and increasing competition.
The emerging companies strategy capitalised on the crisis and sees commodities as a leading sector into 2021 and beyond. The sector is expected to benefit from a decade of ‘capital discipline’ or reduced investment in supply and an incredibly rebound in demand as an infrastructure-led recovery spreads across the globe. Deterra Royalties (ASX: DRR) which owns royalty payments over one of BHP’s (ASX: BHP) iron ore mine, was recently spun out of Iluka Resources (ASX: ILU) and has been added to the portfolio. It will likely benefit from more companies selling these ‘passive income streams’ to focus once again on acquisitions.
Looking towards the new year, DNR believe the rotation will move from value vs. growth or cyclical vs. defensive themes to sectors dominating and leading market returns. They see underappreciated opportunities in companies that are ‘likely to emerge from the pandemic with even stronger competitive positions’ flagging the likes of Lovisa (ASX: LOV) and Corporate Travel (ASX: CTD) as two who have used their relative strength to expand market share.
Never waste a crisis.
Sam Twidale is Portfolio Manager of the DNR Emerging Companies Strategy.
