Two stock ideas from a top small cap fund manager

Small cap fund manager Eley Griffiths Group has delivered a return to investors of 12.4 per annum on average over the past 13 years – well ahead of the S&P/ASX SMALL ORDINARIES (Index: ^AXSO) (ASX: XSO) Accumulation Index (which includes dividends) return of 6.1% over the same period.

Originally set up in 2003, the Small Companies Fund now has $458 million in funds under management. At the end of July, the fund’s top 10 holdings were:

Company Market Cap ($m) Last Price
APN Outdoor Group Ltd (ASX: APO) $1,335 $8.01
Burson Group Ltd (ASX: BAP) – now known as Bapcor $1,413 $5.74
EVOLUTION FPO (ASX: EVN) $3,979 $2.63
Fletcher Building Limited (Australia) (ASX: FBU) $6,407 $9.32
Independence Group NL (ASX: IGO) $2,319 $4.01
Iress Ltd (ASX: IRE) $1,727 $10.72
Macquarie Atlas Roads Limited (ASX: MQA) $3,084 $5.96
Mayne Pharma Group Ltd (ASX: MYX) $3,070 $2.09
Steadfast Group Ltd (ASX: SDF) $1,661 $2.21
Trade Me Group Ltd (ASX: TME) $1,924 $4.89

Source: Eley Griffiths Group

Speaking to the Australian Financial Review, senior portfolio manager Ben Griffiths highlighted two companies that the fund manager has recently bought stakes in.

The first is Orecorp Ltd (ASX: ORR), a miner with potential to earn up to 51% interest in the Nyanzaga gold project in Tanzania. According to Mr Griffiths, a recently released study showed the project could produce around 182,000 ounces of gold each year for 13 years at an all-in sustaining cost of US$798 an ounce. The current gold price is around US$1,338.40 an ounce, suggesting Orecorp will generate strong margins of around US$540 an ounce.

However, investors should note that potential costs are likely to differ widely from actual costs sustained in practice and gold miners tend to be a highly optimistic lot. Personally, I’d be giving Orecorp a wide berth.

Another company of interest is SG Fleet Group Ltd (ASX: SGF), a car leasing, fleet management and salary packaging business. Mr Griffiths says the acquisition of the largest privately-owned novated leasing player, nlc in November 2015 will make a contribution that the market is underestimating. At the time of the acquisition, SG Fleet said it anticipated 25% plus earnings per share accretion in the first full year.

Foolish takeaway

One interesting fact is that Eley Griffiths doesn’t appear to be investing much in small cap companies – with all of its top 10 holdings having market caps greater than $1 billion (see table above). Perhaps the fund is tracking the wrong index.

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Motley Fool contributor Mike King owns shares of Bapcor. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia owns shares of Bapcor. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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