Investors should look beyond the largest companies on the Australian Stock Exchange to get exposure to the market’s fastest growing industries, such as lithium and gold.
Importantly, midcaps tend to be under-represented in Australians’ portfolios and a specific allocation is shown to improve portfolio outcomes.
Mid-caps have outperformed both the S&PASX50 and the Small Ordinaries over the past 10 years and are also more likely to provide exposure to M&A activity, with 13 completed acquisitions in the ASX51-150 in the last five years compared to just two in the ASX50.
We believe it’s an easier part of the market to select good companies from because most of them are fairly well-established businesses, but with higher growth, and there’s a huge range of sub-sectors or different industries to choose from.
So, you’re spoiled for choice in terms of both quality and breadth – it really is the sweet spot of corporate Australia.
Lithium and gold
Lithium and gold production are two examples of the types of investments that mid-cap investors can take advantage of.
Lithium is a fast-growing industry that can be difficult for investors to get exposure to through investing in large capitalisation companies – as a young industry, most of the incumbents are smaller companies.
BHP has always held the line that Lithium is not big enough for a business of their size. Glencore has said it’s not the kind of industry they want to get involved in. As a result, investors focused on the large cap end of the stockmarket can miss out on the opportunities offered by the transition to EVs.
Lithium has become the rechargeable battery of choice for electric vehicles, laptops and mobile phones and a key part of the transition away from fossil fuels to a net zero carbon emission futures.
Australia is a significant supplier of lithium to the world because it possesses vast quantities of lithium raw materials, leading to substantial industry growth in the past seven years.
In the ASX300 small cap universe, there are a large cross section of names of very early-stage exploration and development lithium companies — so we’ve got quite a healthy pool of juniors starting to grow and feed up into the mid- and large-cap space and become more and more investable.
Gold is another segment that offers promise for mid-cap investors, with the gold price set for gains as interest rates and bond yields peak this year.
Mid-cap gold producers are well placed for gains as the gold price rises because their production costs are largely fixed. This operating leverage can deliver outsized lifts in profits from the same amount of gold production.
Large caps are a harder way to play gold because their portfolios typically don’t grow or change much – so the only exposure you get is through the gold price. Smaller companies are generally explorers, single asset developers or early-stage producers that have binary risk associated with them – that makes them, for us, harder to invest in.
Companies like Northern Star, Evolution Mining, Perseus and SSR Mining are typical mid-cap stocks – they have volume growth, they’re still very profitable, most of them are paying dividends, and they are fairly simple companies for the most part. They are also highly attractive acquisition opportunities for larger companies.
The mid-caps segment of the market features companies with proven management teams, time-tested business concepts, a history of dividend payments and a strong focus on their core business operations.
It’s a very useful, performance enhancing addition to any balanced portfolio.
Find out more about how Pendal can help investors access more ideas and more potential in Australian Midcaps.
Important Information: This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current at April 24, 2023. It is not to be published, or otherwise made available to any person other than the party to whom it is provided. PFSL is the responsible entity and issuer of units in the Pendal MidCap Fund, ARSN: 130 466 581 (Fund). A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.
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