Smaller companies are on the rise says Lee IaFrate, Executive Chairman of Armytage.

You call your fund a value investor as opposed to growth, what is the distinction?

Armytage is a boutique fund – we’re not chasing the next you-beaut story or gold on the moon, we like to focus on the macro that is driving the market and watching as the effects funnel down.

One of my first mentors in the industry used to say,  “tell me where the market is going and I’ll tell you where to buy”, it’s a mantra I still use to this day.  

What is your reading of the nation’s current macro status?

I think there are a lot of positives when it comes to Australia’s economic growth, despite all the negativity you can hear from the Opposition.  

Allan Joyce recently told a conference, “if you want to see how well this country is doing, go out and see the queue at the domestic terminal” and I wholeheartedly agree with that statement.

I think the regulatory effort that was espoused by [the banking watchdog] APRA in seeking to curb alleged poor bank-lending is really taking its effect on the Australian economy. I believe the bank bashing by the socialists in the Opposition is extremely unhealthy for the economy and it renders a poor look for foreign investment. APRA and the regulars are claiming a victory but it really isn’t theirs.

If you look at the numbers you can see that unemployment is decreasing, bad debt is falling and employment continues to rise. We are of the view that the banking sector is well placed to continue to prosper from the growth of the economy.

How are the macro conditions affecting the health of small to mid caps?

We are always on the lookout for lost dogs or fallen angels.

About 12 to 18 months ago we saw Kogan (ASX:KGN) come to market with a lot of fanfare. While Armytage does not boast itself as being tech aware, we are market aware and we saw this as the new frontier, where consumers can buy directly from the supplier on the web.

As soon as the company launched it was a flop and there were many investors that bailed on day one. When we came in we looked at them objectively to see the reasons they were underperforming and saw they were still gaining targets, hitting profits and for about three months we were the only buyer in the market.

At the time it was easier to buy Kogan shares than BHP – that was the disenchantment that existed. In our opinion, the market had misread the situation and it all came down to poor investment analytics. It provided the opportunity for us to get rock bottom prices and they continued to come onto smashing results. They have recently doubled and are now more than $3.30 a share with a price target of $4 plus. 

How do you maintain your conviction amid poor market sentiment?

You have to avoid the noise and look at the numbers. In the Kogan example, they are in a sector that everyone has an opinion on, retail and online sales is always in the news and is an easy concept for people to grasp. But the noise and stupidity of the reporting had a real impact on the company’s share price and performance.

At the end of the day it doesn’t make sense to listen to the market, and the skill is to cut through the bullshit to find these fallen angels.

How do small caps stack up?

Mid, small and micros have underperformed massively against the majors of late but it is just a consequence of the market’s cycle. The bigger companies have seen growth first, and now the focus is on the mid caps, the smaller companies should follow in about three months, so we’ll see them peak around Christmas.


Lee IaFrate has been in the financial industry for over 30 years, with broad experience ranging from stock broking and funds management to principal lecturer at the Securities Institute of Australia. Lee is the Executive Chairman of Armytage.


This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.