With many popular stocks looking distinctly toppy, some investors are looking for future growth opportunities in international equities or domestic small caps. Over time a well selected portfolio of small companies will outperform market leaders in terms of both business growth and valuation criteria, even after allowing for volatility risks.
For better or worse we’re living in an age which Alan Kohler succinctly describes as the “socialisation of investment” where the majority continue to buy ‘big name’ domestic companies regardless of value. A pity, as the ASX offers better opportunities including these two investment companies:
Contango MicroCap Limited (ASX: CTN)
Contango’s target is to outperform the Small Ordinaries Accumulation Index – over the past 10 year period investment performance is 16.7%pa; well ahead of the small ords (4.6%pa) and evidencing the quality of its selection process.
Strong portfolio performers over 2014 included iProperty Group Ltd (ASX: IPP), iCar Asia Ltd (ASX: ICQ), Syrah Resources Ltd (ASX: SYR) and Capitol Health Ltd (ASX: CAJ). Better known names included Slater & Gordon Limited (ASX: SGH), Village Roadshow Ltd (ASX: VRL) and BT Investment Management Ltd (ASX: BTT).
For income-orientated investors an attractive feature is the dividend policy. Being a licensed investment company (LIC) Contango reports performance after expenses and after tax (whether realised or not), whereas ASX indices only reflect gross returns without adjustments. Forward dividends are estimated at July 1 each year based on 6% of after tax net tangible assets standing at that date. Therefore 2015 dividends are predicted to be 6.8c per share fully franked.
CTN also owns the management company giving exposure to the business behind the portfolio. Separate from its own portfolio, CTN also manages other funds including International Equities (5-year return 24.6%pa) and the domestically focused Income Generator (5-year return 17.3%pa).
At $1.12 Contango MicroCap Limited is a good entry into a high growth sector of the market.
K2 Asset Management Holdings Ltd (ASX: KAM)
K2 is a fund manager seeking value opportunities in the domestic and international markets. Its more established funds have outperformed related indices comfortably over 5 and 10-year periods. Two new funds were started over 2014 and these are yet to gain traction. In recent months K2 has moved further capital from Europe and the US into China and Japan to take advantage of well priced situations in these countries.
Unlike Contango, K2 Asset Management is solely a fund manager and doesn’t hold securities on its own account. Earnings are derived from management and performance fees. With net cash of $16m the company has sufficient capacity to keep growing the business. In 2014 earnings per share came in at 7c – selling at 65c and with a potential 2015 franked yield of 7.5% this company is attractive value.
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Motley Fool contributor Peter Andersen owns shares in Contango MicroCap and K2 Asset Management