His firm may have missed out on a potential billion-dollar position, or even payday, from the GameStop phenomenon, but David Paradice insists he’s “sleeping very comfortably at night” because of moves his stockpickers are making.

Paradice Investment Management, the boutique investment firm Paradice manages and ­majority owns, had shares in the video game game seller roughly in the middle of 2020, only to sell out.

The firm’s holding was via its global small cap fund — managed from Denver by Kevin Beck — and was mentioned in its September 2020 quarterly report to investors as having had “an eventful quarter”.

In hindsight, that is nothing compared to what has happened recently, with GameStop catching the eye of retail traders posting on the Reddit WallStreetBets platform as being shorted by hedge funds and then, in response, the traders buying up the stock en masse to push its share price up to stratospheric levels.

A weekend news report said Paradice was potentially missing out on a valuation of about $1bn by no longer holding GameStop, though any final profit would depend on if and when the firm had sold any or all of its stock in the suddenly popular company.

The PIM global small cap fund lost 4.95 per cent last year, against a 2.22 per cent return for its benchmark, though the fund was up 16.7 per cent for the December quarter to outperform its benchmark by 2.43 per cent.

GameStop shares quadrupled in value between June and ­December last year, suggesting PIM may have made a profitable exit. But GameStop has surged more than 1700 per cent since January 1 as the short squeeze took hold.

While Paradice would not say when PIM sold out of GameStop, he did tell The Australian he was more than happy with his firm’s long-term approach to investing that is based on heavy analysis of financial measurements such as cashflow, gearing levels and return on assets.

“For any stock we buy it has to be about the underlying fundamentals of it, and capital preservation as well. We are the ‘steady Eddies’ of the market. If we’re beating our benchmarks then we’re doing well I think. We don’t want to be losing money though.

“We do a lot of investing on behalf of the big superannuation funds and, while they are big institutions, we’re representing the mums and dads out there (who have their super) with them. So we never want to be surprising them with any of our moves.”

PIM manages about $17bn on behalf of its super and investment fund clients, with Paradice having made his name over the past three decades as one of Australia’s most successful small-cap investors.

Asked if he thought the market was fully priced at the moment after a big run since mid-March last year, when COVID-19 saw share prices tumble, Paradice noted that interest rates remain low, so “where are people going to put their money”?

“But there’s signs inflation is out there again and, with the economy showing signs of recovery, maybe you’ll see rates go up eventually.

“You are seeing big shifts in valuation though, with technology stocks, shopping centres, e-commerce and that sort of macro thing. I also think the upcoming [company profit] reporting season will be interesting, too.

“A lot of company valuations have been going up but if they disappoint there will be significant downside for them.”

While most of PIM’s funds are concentrated on small and mid caps, Paradice is contemplating a wider global equities offering to complement the global small cap fund and the emerging markets fund that has performed impressively since its May 2019 inception.

Managed from San Francisco by recruits Edward Su and ­Michael Roberge, the emerging markets fund beat its benchmark MSCI Emerging Markets Net Total Return Index by 10.21 per cent in 2020.

The company has recently bought an Indian local search engine, Chinese cloud services, data centre and online healthcare companies and a Brazilian software firm, to complement stocks it holds such as Taiwan Semiconductor and Jack Ma’s Chinese digital giant Alibaba.

Ma attracted the attention of the Chinese government with public comments about the local regulatory system and banks, and the float of his Ant Group was cancelled.

While Alibaba share fell towards the end of last year, Su and Roberge wrote in their December quarterly report: “If history is any guide, when the Chinese government has previously cracked down on a company, the company has been quick to adjust to placate the government thus allowing them to emerge from the penalty box. We believe Alibaba will experience a similar progression.”

 

Paradice Investment Management is a founding Core Fund Manager and returning Conference Fund Manager.

This article was originally posted on The Australian here.

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