As we look ahead the key questions for markets is how long will global economies remain closed for business, and what will demand look like on the other side of the valley? The March quarter was challenging for investors and the global macro backdrop remains highly fluid and uncertain and we are yet to form a clear picture around the duration of the shutdowns, the extent of the economic impacts or the effectiveness of the policy responses.

In the coming weeks and months, markets will need to digest a deluge of bad news headlines as COVID-19 fatalities spike, economic data deteriorates and unemployment surges around the world. Markets do attempt to look forward, however such uncertainty will likely mean that volatility will stay elevated.

As active managers, we expect market volatility to create individual stock investment opportunities and we will be working as hard as ever to uncover the best risk-reward prospects.

Our small caps positioning

Against a rapidly evolving macro backdrop, the Montgomery Small Companies Fund exited March with nearly 21 per cent cash and we believe the portfolio is relatively well positioned to manage the downturn as we see it today.

Across the market capitalisation spectrum, 36 per cent of the portfolio is invested in companies with a market cap. exceeding $1 billion and another 12 per cent is invested in companies above $500 million, while only  9 per cent of the Fund is invested in the sub $250 million market cap bracket.

Although we expect the recent sharp sell-off to present some outstanding money-making opportunities over the medium-term, for now we have positioned the portfolio relatively defensively.

We will continue to make changes on a dynamic basis, as you would expect us to. We will undoubtedly have investments that will be challenged in the short-term, but overall, we feel the portfolio is positioned to take advantage of the opportunities that are being presented.  We have the cash reserve and flexibility to make those decisions when the time comes.

Four of our investment exposures include:

• Telecoms & Datacentres – companies like Spark (ASX:SPK), NEXTDC (ASX:NXT) and Macquarie Telecom (ASX:MAQ) have long life assets, excellent competitive positioning and annuity revenue streams that we expect to continue, largely uninterrupted through a tougher economic period.
• Utilities – these assets literally keep the lights on, and whilst we expect there will likely be lower demand for power, and weaker power prices, these businesses have significant long-term asset backing, strong cashflows, resilient capital structures and competitive positions that will not be degraded during a downturn.
• Growth Technology – Appen (ASX:APX) is a company we like, its business model is particularly well placed considering its crowd workforce is set up remotely, and demand from the big global tech players should hold up relatively well.
• Resources – including Gold. Our resource investments have very strong balance sheet positions (net cash) as well as portfolios of competitive cash generating assets. Our gold miners are generating strong margins and are all Australian based, positioned to generate strong cashflows from the combination of high gold price and weak Australian dollar.

Our research is focussed on what signposts will ultimately guide our decision to redeploy capital, into the best risk-reward opportunities.

There are plenty recapitalisation opportunities as corporates address their need for equity to see them to the other side of this crisis and expected economic recovery.  The fund is well positioned with cash ready to fund the best of these opportunities or to take advantage of low prices for stocks that can make it there under their own steam.

The Montgomery Small Companies Fund own shares in Spark, NextDC, Macquarie Telecom and Appen. This article was prepared 07 April 2020 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.