There are a couple of reasons why keeping an eye on the holdings of small cap fund managers is a worthy exercise. First up, fund managers conduct extensive research into companies – often combining company analyst research from investment houses with their own research to come up with a portfolio for clients. Secondly, when a fund manager allocates a percentage of portfolio holdings into a small company – a small company is buoyed by buying activity from that fund manager (provided that inflows into the fund are greater than outflows).

So with this in mind, we’ve surveyed the holdings of a couple of small cap managers for stock ideas moving into 2013.

The list below comprises the top ten holdings from Aberdeen Australian Small Companies Fund as at the end of November 2012:

SP AusNet, BWP Trust, ARB Corp, Brickworks, Iress Ltd, SMS Mgmt & Tech Ltd, Cabcharge Australia, Ramsay Health Care, Invocare, IOOF Holdings.

Its biggest holding is gas and electricity supplier SP AusNet (SPN), which is up some 20% this past year. Defensive by nature, stocks like SP AusNet can continue to boost profits amid a weak economic backdrop.

The second biggest holding is BWP Trust, which incidentally won the 2012 A-REIT of the Year Award by Property Investment Research (PIR). The award is based on financial performance, corporate governance and other financial metrics – and BWP stood out from the pack for delivering strong performance and consistent distributions in both good as well as difficult markets. BWP’s biggest tenant is Wesfamer’s Bunnings. BWP is up 29% over the past year.

Getting excited over last year’s performance is pretty pointless if you don’t own the stock. What’s important is looking out for potholes in the road ahead, which brings us to companies like Brickworks and Cabcharge.

The issue for Brickworks is the sector it operates in, building materials. While lower interest rates help stabilise housing demand – the property market isn’t exactly in boom times. This means that Brickworks must work hard to maintain earnings.

Late last year taxi operator Cabcharge lost two of the four NSW bus contracts it held; additionally, its credit card surcharge fees may be cut from 10% to 5% (based on an independent review into Victorian taxi industry reform). Nevertheless, the Aberdeen team continues to hold Cabcharge saying: “We continue to hold our position in the company because of its technological know-how and dominant market share.”

Not surprisingly, stellar performer Ramsay Healthcare is on the manager’s list. This stock has been a screamer for shareholders – particularly throughout the global financial crisis. The private hospital operator has reaffirmed guidance for financial year 2013 for earnings per share growth of 10-12%. Aberdeen states: “We continue to hold our position in this company because of its dominant Australian market share, successful entry and growth prospects in the UK, and favourable industry demographics.”

The top holdings for the Investors Mutual Australian Smaller Companies fund from November 2012 include:

Energy Developments, Amalgamated Holdings, Coventry Group, Salmat, Prime Media, Reef Casino Trust, Ridley, Goodman Fielder, Sky City, MaynePharma.

An interesting pick is Energy Developments, which forecasts EBITDA growth of 11-19% for FY13, aided by the carbon tax legislation. Energy Development’s clean energy solutions – such as its Land Fill Gas and Waste Mine Gas – will benefit from the renewable energy target. Investors Mutual also claims that project expansion – such as the additional 53MW gas fired power station being installed at Xstrata’s McArthur River mine (servicing a new 20 year power purchase agreement) will boost earnings.

Goodman Fielder is another big bet for the fund manager and one that has paid off handsomely as a new management team at Goodman repositions the company – shuts down bakeries, sells its NZ milling assets – in order to improve its balance sheet and streamline the business. The company aims to be an innovator and brand manager across baking, spreads and dressings. “While it is early days in this repositioning the initial signs are encouraging,” the fund manager says.

The Perpetual Smaller Companies Fund’s biggest bet is on childcare provider G8 Education, which operates in a high growth industry with few competitors. G8 Education recently settled its acquisition of Pacific Group childcare and education centres in Victoria and Queensland – purchased out of existing cash reserves.

Another interesting bet is STW Communications Group, a marketing content and communications services group – specialising in advertising, design digital, public and government relations – which is rapidly snapping up competition to boost market share in an industry that’s under pressure. The company boasts 75 operating companies. Perpetual says: “STW is well managed and does not have any of the problems faced by many other media companies.”

For gold bugs, Perpetual has its sights on Alacer Gold. Its Alacer’s Copler mine that Perpetual likes. “This very large 10 million ounce resource has low production costs, a long life and is expendable,” it says.

The manager’s top ten holdings at November 2012 are:

G8 Education, New Hope Corporation, TPG Telecom, Mirabela Nickel, STW Communications Group, Henderson Group, Alacer Gold, Mineral Resources, Brickworks, Prime Media Group


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