Montgomery Small Companies Fund and Investing for the Longer Term « ROGER MONTGOMERY

Montgomery Small Companies Fund and Investing for the Longer Term

We all know that stock markets don’t move in a straight line, and stock markets have for the past two years. Thinking back to some of the major events that investors and stock markets have had to deal with, we can list a global pandemic, massive monetary and fiscal stimulus in response, lockdowns like never seen before, then reopenings, constraints of supply coupled with high demand, a Russian invasion of Ukraine, maintaining inflationary pressures across the world, rising interest rates and meanwhile businesses are adapting to the changing environment but ultimately try to provide the best products or services to their customers and generate profit growth.

I call this last period two years because the Montgomery Small Companies Fund (the Fund) has been managing client money for quite a bit during this period (inception 9/20/19). What a roller coaster ride this has been. More recently, the Fund has underperformed the S&P/ASX Small Ordinaries Total Return (TR) Index over the past six months by around 9%. The long-term performance is satisfactory as it generated a return of 43.94% compared to the benchmark index of 23.26%, after fees.

However, two and a half years is still not long term and only halfway through the recommended period of five years and more, equity investors should consider holding an investment of this type.

If we look at Figure 1 below, we can see that the Fund’s returns have been strong both in absolute terms and on a relative basis. The comparison chart includes both the S&P/ASX Small Ordinaries TR Index and the commonly known S&P/ASX 300 TR Index, which is the total return (TR) of the ASX’s top 300 stocks with dividends reinvested. Interestingly, the small cap index and the top 300 index showed roughly the same performance over this period.

Figure 1. Total return of $10,000 invested at fund launch (9/20/2019)

These Fund returns since inception have placed it in the top half of all managers in Morningstar’s category group of Australian small and mid cap managers who fall into a “mixed” category, meaning they may have growth and value characteristics. Why this is interesting becomes apparent when we examine Figure 2, which illustrates the returns of both the S&P/ASX Small Ordinaries TR Index and the S&P/ASX 300 TR Index as well as the average manager return from the Morningstar peer group. of Australian small and mid cap mixed managers over a period of 22 years (the longest data available).

Figure 2. Total return of $10,000 invested on return on 04/04/2000

Now it’s important to note that past returns are not a good indicator of future returns and I’m sure the next 22 years will be different, but what is observable is that the average Morningstar Australian category manager Mid/Small Blend has significantly outperformed both the Small Cap Index and the Large Cap Index (S&P/ASX 300 TR Index) over this 22 year period.

In fact, the average manager’s investors in this category earned a 10x return on an investment of $10,000 to achieve a return of $100,672. So while there have been significant market events over the past 22 years, including the most recent difficult six-month period, investors have been well rewarded by their average active manager in this category.

Finally, when we look at the fundamentals of the Fund at the end of March 2022, as shown in Figure 3. We see that the sales growth of our portfolio is almost three times that of the market. Our earnings before interest, taxes, depreciation and amortization (EBITDA) and our net profit after taxes (NPAT) are growing more than four times faster than the market (compared to 1.9 and 1.7 respectively 6 months ago). However, what is more interesting is that our enterprise value and price gains have moved from a slight premium to the market to a discount to the market.

Figure 3. Montgomery Small Companies Fund Portfolio Characteristics

Based on the portfolio measures above, we believe the Fund’s portfolio represents an attractive level of value by its historical standards. Investors can gain exposure to what Montgomery considers a portfolio of growing, quality companies at a price below the market. So even though the portfolio has underperformed the benchmark lately, we see latent value in our underlying holdings, which should provide it with a good opportunity to outperform going forward.


Scott joined Montgomery Investment Management in 2013. Scott joined the company from BlackRock Investment Management, where he was Managing Director, responsible for retail in Australia for 12 years.

This post was written by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The main purpose of this article is to provide factual information and not to provide advice on financial products. Furthermore, the information provided is not intended to provide a recommendation or an opinion on a financial product. However, any commentary and statement of opinion may contain only general advice prepared without regard to your personal objectives, financial situation or needs. For this reason, before acting on any of the information provided, you should always consider its suitability in light of your personal objectives, financial situation and needs and should consider seeking independent advice from a financial adviser if necessary before making any decision. This post specifically excludes personal advice.

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