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Contango expects market to rise 20%

Contango Asset Management is a small Melbourne-based fund manager that amongst other funds, manages the listed investment company Contango MicroCap (ASX: CTN). Since its inception in in March 2004 Contango MicroCap has generated an impressive 15.5% annual return on the underlying portfolio (note this is before fees and taxes). In comparison the S&P/ASX Small Ordinaries Accumulation Index has returned 3.7% per annum over the same period.

Given Contango’s ability to outperform the market over this long period of time they are a fund manager worth watching. Their latest Quarterly Commentary makes for interesting reading and particularly interesting is their outlook for smaller capitalisation stocks where they “remain constructive on equities and are forecasting returns for small caps of around 20% over the next 12 months.” It’s a bullish call.

Foolish insights

Before taking a look at what Contango’s team has been buying for the portfolio recently, it is worth noting how the portfolio has evolved over the past couple of years. In the past Contango MicroCap has had a large exposure to the small resource and mining services sector however since early 2012 this exposure has been significantly reduced to underweight while the weighting towards dividend yielding industrial companies has been increased.

Some of the newer additions to the MicroCap portfolio include:

  • Village Roadshow (ASX: VRL), which is a diversified entertainment company. Its businesses span theme parks including Sea World and Movie World on the Gold Coast, cinemas, film production and film distribution. The share price is up 35% in the past six months.
  • Capitol Health (ASX: CAJ) is a player in the diagnostic imaging services sector. The company has been expanding its footprint throughout Victoria and now controls 35 clinics making it the second largest provider in Victoria of services including X-ray, MRI and CT scanning. In the past six months the shares have soared 123%.
  • Vision Eye Institute (ASX: VEI) has a similar business model to Capitol Health but with a focus on ophthalmic services. The company is the largest provider of ophthalmic care in Australia via its network of consulting facilities and day surgeries. The stock price is up over 40% in the past six months.
  • Nanosonics (ASX: NAN) is a medical devices company developing products to reduce infection rates. The company is still loss-making but its revenues and hospitals trialling its products are increasing. Nanosonics’ shares are up around 52% in the past six months.

Foolish takeaway

It’s always interesting to keep an eye on what investors with impressive long-term records are buying and selling. It’s certainly not a sure way to make money though. The four stocks mentioned here which Contango has been buying recently are all up significantly which could mean the easiest gains are already gone.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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