Regal Funds Management founder Phil King says the firm is already bouncing back from its ugly performance in March, and is backing small-cap stocks in the technology, healthcare and gold sectors to beat Australia’s blue chips.

Mr King’s Atlantic Absolute Return Fund declined 58.6 per cent in March as the COVID-19 crisis roiled global markets.

Speaking on a special virtual briefing for investors in the Future Generation listed investment companies alongside Rich List investor David Paradice and Wilson Asset Management founder Geoff Wilson, Mr King conceded that Regal had probably underestimated the initial impact of the pandemic.

The Atlantic fund’s focus on small and mid-cap stocks exacerbated the pain, as these stocks were hit hardest in the market sell-off that wiped 36.5 per cent off the ASX 200 between February 20 and March 23.

‘‘Stocks like Telstra and supermarkets obviously had some short-term benefits from the pandemic, but we think will struggle for growth in the longer term,’’ Mr King said.

‘‘But the good news is that a lot of the stocks that got sold off … have bounced back very strongly. And some of them are back to where they were and some of them are even ahead.’’

Mr King said the fund’s investors, who enjoyed gains of 82 per cent in 2019 and have seen returns of 23.1 per cent a year over the life of the fund, had stayed loyal. More investors had committed additional funds than had withdrawn capital, he said.

“The good news is we can bounce back. We bounced back strongly after the GFC – we were up 500 per cent in the two years after ’08 – and the early signs in April and May are very positive. We’re having two very strong months.”

But Mr King said he remained bearish on the broader outlook for the Australian market, despite the 19 per cent rally since that low in late March.

“We’re facing one of the deepest economic recessions that we’ve seen for a long, long time. I think it’s tough to see the stock market doing too well in that environment. I think it’s important to go down the curve a little bit in terms of market cap and try and invest in some of those small and mid-caps.”

A survey of Future Generation Investors found 32 per cent were bearish, 15 per cent were bullish and the remainder were sitting on the fence.

Mr Paradice said he was concerned that the market was again looking pricey. ‘‘If you look back at the equity market prior to COVID back in January and February, the equity market was quite expensive. Now it’s back up to that level, but you’ve had this massive contraction in the economy.’’

He said the common theme of strong management ran through three of his top stock picks: market darling CSL, pharmacy group Sigma Healthcare and gold miner Saracen.

Gold is also a focus for Regal, as well as the healthcare and technology sectors.

“I think actually sector exposure is much more important at the moment than country exposure,” Mr King said. “The Australian market underperformed in the bull market and we’ve underperformed this year in the bear market. And sadly, I think we’re probably going to underperform going forward.”

He said that was mainly due to the composition of the Australian market, which had high exposure to what he described as “value traps” such as banks, real estate investment trusts and infrastructure stocks, and incumbents such as Telstra and the supermarket giants, which he said were threatened by new competitors.

“Whereas many of the overseas markets have much higher weighting in healthcare and higher weightings in technology. And these two sectors are the two sectors that we think will do best in the current environment.”

Mr King nominated data centre groups NextDC and Megaport, and data group Appen as top technology picks, while named Opthea as a top healthcare pick. He also likes Saracen at the large end of the gold sector, and De Grey Mining at the smaller end.

Mr Wilson’s top picks include tech firms Infomedia and Objective Corporation, auto parts retailer Bapcor and building group John Ling. He said it was crucial to focus on companies “that have competitive advantage and can prosper in all different types of economic conditions”.

He also said the volatility on markets in recent months had underscored the value of active investors, who were best placed to help investors recover from a market shock.

“The question is how you restructure your portfolio, how you position yourself and really how quickly you make your money back.”

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