Rewards and risk can be high

Victor Gomes, co-portfolio manager in the Australian small companies team, UBS Asset Management

Investing in small companies, especially in highly specialised sectors such as technology, should not be an endeavour pursued either lightly or in a part-time manner. While the rewards are potentially high, so are the risks. We recommend investing via a professionally managed fund.

If you are looking to back some strong trends, NextDC is worth considering. As time goes on we will consume ever-larger volumes of data on our mobile devices. Additionally most business software is moving to “software-as-a-service” (SaaS) over the web. This all translates to significant growth in demand for cloud-based (or data centre) storage and processing. NextDC has the largest footprint of vendor-neutral data centres in Australia and should see significant growth.

Other beneficiaries of the trend include TechnologyOne, Aconex and WiseTech Global. All three businesses are either regional or global leaders in their field.

Australia has historically also done well in medical devices (think ResMed and Cochlear). In this sector we believe both AirXpanders (a “better mousetrap” tissue expander for use in breast reconstruction) and ImpediMed (a bioimpedence device used to measure body mass/ fluid composition as a precursor to many serious disease conditions) have some merit. Both companies are very early stage and mostly “pre-revenue” so are very high risk. Nevertheless they have strong medium-term growth prospects.

However, they will only make for good investments if the price paid for them is below their assessed intrinsic value. It is this aspect of the technology sector that provides investors with their greatest cautionary challenge.

(All the companies are owned by the UBS Australian Small Companies Fund at the time of writing.)