Lex Hall: Callum Burns is MD and Portfolio Manager of ICE Investors. They manage the SGH ICE Fund. It's had a pretty good record over the last 16 years since its inception. So, I thought I'd catch up with Callum today to see what the secret is. 

Callum, welcome to Morningstar.

Callum Burns: Thank you, Lex. Very pleased to be here today.

Hall: Now, small caps have shone over the past 12 months. Why did the conditions suit these types of companies?

Burns: Well, I think one of the things we need to look at the base effect. Obviously, the market fell quite a lot and it created an attractive base on which the companies—their share prices could appreciate. But I think what we've found is that many of the companies in small cap land are actually high-quality companies than what we see in the top 100. So, in the sort of slightly more difficult operating conditions we saw, and I think slightly is understating it somewhat…

Hall: Indeed.

Burns: …the superior quality of these companies was able to shine.

Hall: OK. And what's the sort of definition for people for a small-cap company?

Burns: Yeah. Well, our industry is quite unusual in that a small cap is defined as a company that's outside the top 100. And believe it or not, the largest small cap is circa $7 billion. But put that in a better context, the 10th largest small cap is around the sort of $5 billion mark. So, something can be called a small cap and it can still actually be quite a sizable and substantial company.

Hall: OK. I mentioned performance at the start. Since 2006 you have returned 11.5 per cent versus 6.79 per cent for the S&P/ASX 300 Accumulation Index. Who have been some of the good performers over the past year, Callum?

Burns: Over the last 12 months, Temple & Webster has been a great performer for us.

Hall: The online furniture store?

Burns: That's exactly right. We think that's a developing franchise. Although, we do have a lower position in the company than what we once did in response to the share price going up so high. Pinnacle has been a really good result for us. And sort of more at the sort of standard operating end of business, EBOS, the pharmaceutical distributor, has also been a good contributor. But I really sort of hesitate to pick out three because the facts are, there were about 15 to 20 companies that actually contributed.

Hall: Sure, sure. Yeah, I think in your note you single out Mainstream Group, which is a funds administrator; Cleanaway Waste Management, which has been in the news for quite a bit; women's fashion retailer, City Chic Collective; and also another company that's been in the news, EML Payments, for example.

Burns: Yeah. Well, I mean, EML Payments has obviously been a very interesting situation with what has been happening there. But it's interesting when you look at that overall list of companies, you sort of say, well, what binds them together. Well, they're what we call business franchises, companies with an economic moat around them. So, all of those companies in our assessment, they've all got assets that are difficult to replicate. They're all managed so that the customers are sticky and there's a valuation piece we look at as well, which…

Hall: Yeah, that's what I wanted to sort of ask you actually, your strategy for finding overlooked or unloved companies. So, yes, you mentioned competitive advantage and…

Burns: Yeah. So, everything we do is rooted in trying to find a company with a sustainable competitive advantage and then pay the right price for it. So, the way we determine the competitive advantage is, as I mentioned before, companies that have assets that are difficult to replicate and then those assets are being managed so that customers are sticky. So, that's what creates the economic moat that makes it hard for competitors come in and take…

Hall: OK. We'll do a subsequent video in which we drill down into a few names, but just let's finish on opportunities. Where is your fund seeing opportunities at present?

Burns: Well, we're seeing opportunities in many areas. The way we work, we (add) a lot of shoe-leather and it's really hand-to-hand combat finding company-by-company. So, again, we will talk about these a little bit later. But for example, EBOS, Australia's largest pharmaceutical distributor, due to certain nuances in its location and where many shareholders are located is very under the radar. Another company, PSC Insurance, which is an insurance broking chain that we think has a lot of potential. And another one that's sort of the technology end of the spectrum, Catapult, which is athletic performance monitoring. So, they arise in all sorts of places. And as I said, it's a game of shoe leather, finding these one by one.

Hall: All right. Well, we'll drill down, as I said, into those three names. But for the time being, Callum Burns, thank you very much for your time.

Burns: It's my pleasure. Thank you.