Milford Dynamic Small Cap Fund Insights

Our Managing Director Tyson Roberts sits down with Michael Higgins to discuss the investment strategies and market outlook of the Milford Dynamic Small Cap Fund. Michael shares his thoughts on the fund's recent performance, the advantages of investing in founder-led companies, and how these companies can potentially lead to higher returns. Find out what stocks they are investing in at the moment, what has and hasn't worked in 2024 along with a sneak peek into the small cap market heading into 2025.

Tyson Roberts: Michael, it's great to have you here. Can you start by telling us about the Milford Dynamic Small Cap Fund and your investment approach?

Michael Higgins: The Dynamic Small Companies Fund is Milford’s Australian-based stock picking fund. We are an all-weather fund, which means we’re neither purely growth or value. We just want to achieve the best return for our investors and for our own capital, irrelevant of style bias. Milford ($24bn FUM) is owned predominantly by staff and we can only invest our personal capital in Milford funds, so alignment is strong. The Dynamic strategy has been operating for just over 11 years and returned 11.5% p.a. net of fees, 5% p.a. ahead of the benchmark return.

Tyson Roberts: How has the fund been performing lately? Any notable successes or difficulties?

Michael Higgins: Performance over the past 12 months for the fund has been strong, returning 24% net of fees. Key winners over the past few months have been family location safety app Life360 and pharmaceutical distributor Sigma Pharmaceuticals following its merger with Chemist Warehouse. Challenges are unavoidable in small cap investing and Flight Centre more recently has been a poor performer. We’re still confident over the long term as it is a larger, leaner and higher ROIC business than pre-COVID. 60% of bricks and mortar retail sites have been closed, offset by expansion into higher ROIC segments like luxury, cruise, corporate and independent agency. You wouldn’t know it but Flight Centre are now the 3rd largest corporate travel provider in the US!

Tyson Roberts: You've mentioned the outperformance of founder-led companies. Could you elaborate on why these companies tend to do well?

Michael Higgins: We believe having a founder’s money next to ours is very powerful. Back in August 2021 we first analysed the performance of these businesses against the broader market index and the results indicated significant outperformance. So why do founder-led, family-linked or employee-owned companies deliver performance over the long term? We’ve put it down to i) Long-term mindset – Founders are looking at establishing the business in a multi-generational timescale, ii) Skin in the game - Founders derive meaning from the challenge, identity and ethos of their work and not necessarily from the incentive package the board’s remuneration committee has devised for them, and iii) Soul in the game - The most underestimated attribute we find is the broader love of the business and the intent to continue the success they’ve had into the future.

Tyson Roberts: Can you share some examples of stocks currently in your portfolio and what you find appealing about them?

Michael Higgins: Singapore telco Tuas has been a strong performer and we’re still excited by its future. It happens to be another founder-led company, with ex-TPG founder David Teoh at the helm. He’s incredibly astute and cost conscious and has taken material market share in Singapore with a mobile plan 60-70% cheaper than incumbents. We look forward to the next 12 months as they roll out of a competitively priced broadband product across their existing client base. Regis Healthcare is exposed to the massive undersupply of aged care just when Aussie boomers are approaching retirement. The industry has been starved of capital from consistent underfunding by government. Recent funding reforms are incredibly positive for the sector and Regis is well capitalised to benefit.

Tyson Roberts: With markets near all-time highs but varying valuations, how do you view the small cap market as we head into 2025?

Michael Higgins: Despite the strong returns we’ve generated over the past 12 months we’re not getting too comfortable. While we maintain a broadly positive long-term outlook for the Australian economy and markets, we acknowledge that near-term risks, including extreme valuations, geopolitical tensions and concentrated market positions, any of which could pose challenges in 2025. Given the uncertainty, we remain disciplined in our strategy of generating strong risk-adjusted returns through the cycle. We remain deliberately well diversified, continue to selectively take profits, with a preference for high quality companies where we see absolute value.