Why this is the best time to buy small-cap ASX shares: fund manager

Ask A Fund Manager: Cyan Investment Management’s Dean Fergie tells how smaller companies have plunged in value this year but he’s remaining optimistic.

Dean Fergie, Cyan Investment Management fund manager

Image source: Cyan Investment Management

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Ask A Fund Manager

The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Cyan Investment Management portfolio manager Dean Fergie shares his thoughts on the small-cap market.

Investment style

The Motley Fool: How would you describe your fund to a potential client?

Dean Fergie: We’re a small-cap Aussie equity fund. We have a very small amount of pre-IPO in there as well, but we’re looking for what we see as undiscovered gems in the market — industrial businesses that have long-term growth prospects and we think will grow significantly faster than the overall market over the medium to longer term, being three-plus years.

MF: The market’s changed dramatically since the last time we spoke. It’s been a tough time for small caps recently, hasn’t it?

DF: Incredibly difficult, yes. 

Maybe not as challenging as the GFC, but getting up there in terms of the sentiment and the movement in share prices. There’s a lot of stocks that are off 90% or more. So there’s been a lot of money lost on paper in the past six to 12 months, for sure.

MF: Have you had nervous clients having a chat to you? Have you had to convince people to stay invested for the long term?

DF: That’s a good question. I would say 5% to 10% of investors are really nervous and worried, the fact that their investments are going down. Most, I think, appreciate that there’s volatility if you’re invested in equities and you’ve got to look at it over the long term. 

There’s obviously a handful that see a decrease in share prices as an opportunity and are buying more in. And there’s a lot of investors who just go, “You know what? It’s a long-term investment. I’m going to park it there and pull it out in five to 10 years. And I expect it’ll be more than when I invested.” I think that’s probably the right strategy.

MF: How do you see the state of play for ASX shares at the moment, and where do you see it going?

DF: The sentiment is almost as poor as it could be. Everyone’s worried about so many just different aspects of the economy. Coming into June 30, there was a lot of tax-loss selling. So there’s negative momentum. People are worried about interest rates, property prices, consumer behaviour, and the like. 

For me, when there’s overwhelming negative news, that’s usually a good time to buy. I think interest rates have gone up pretty substantially, but they’re still at historically very low levels. So I don’t see that as being as much of a risk as most investors see it.

So I’m actually pretty optimistic. I’ve been around for a long time, and I know that the market has pretty big swings. 

From what I’ve seen, because I’m not seeing underlying pessimism from the companies to which I’m speaking to, that gives me confidence that the underlying fundamentals are still intact. And that spells an opportunity in depressed share prices to make some good buys.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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