Sydney-based Ellerston Capital, an Australian equities portfolio manager overseeing $5 billion in assets, has seen its fund return approximately 29 per cent over the past year. James Barker, a portfolio manager at the firm, attributes this strong performance to a broad contribution across various industries, driven by a clear step change in earnings certainty through significant contract wins, expanding order books, and guidance upgrades. Standout performers included electrification firms GenusPlus and SKS Technologies, fitout specialist Shape Australia, and building materials supplier Wagners, with the firm anticipating further upside where this visibility continues to build.
Barker highlights a compelling opportunity in Australian small-cap stocks, noting the Small Ordinaries index returned around 8 per cent in the past financial year, significantly lagging the Russell 2000’s rise of over 30 per cent. This gap reflects the Reserve Bank of Australia’s recent rate hikes, now likely flatlined, which generally favours small-cap growth. Australian small caps currently trade at about 15 times forward earnings, a material discount to their long-run average of 17 times, presenting a value proposition compared to the ASX 200 trading above its long-run average.
The fund maintains a bottom-up stock-picking approach, focusing on businesses that can grow independently of broader macro trends. Among its less-known holdings is Cogstate, a relatively undiscovered company with most operations in the US with global pharma. The company provides a digital cognitive assessment platform crucial for clinical trials of central nervous system medicines. Another key holding is Acusensus, an Australian company whose artificial intelligence camera technology detects drivers using phones, speeding, or not wearing seatbelts. It runs long-dated government road safety enforcement programs across Australia, New Zealand, the US, and the UK, with significant growth potential in the large US market.
Ellerston’s investment philosophy emphasises identifying well-run businesses with management aligned to shareholders, strong unit economics, and long-term growth potential. Barker advises investors to look past market noise and volatility, focusing on intrinsic value to own quality businesses for the long haul. This approach helps navigate periods where share prices might diverge from underlying business performance, ensuring a focus on enduring value.
