It’s the parody of running funds, says Merchant’s Andrew Chapman: “Everyone wants to invest when things are going well, but that’s when it’s harder to make money. No one wants to invest when things are going bad. And ironically, that’s the best time to make money.”

Mr Chapman – whose Merchant Opportunities Fund outperformed the ASX by more than 23 percentage points in the seven years to 30th June 2022* – acknowledged the market, including in the small caps space, has been “pretty bad” since early last year.

“In my view, March 2021 was really when the lights turned off. So we’re 18 months into a bear market and, given growth levels are so high globally, a recession appears to be a no-brainer,” Mr Chapman said, ahead of his appearance on Friday’s Meet the Fund Manager webcast.

“For me though, I always think a little contrarian. So, whenever there’s talk of recession and people are starting to panic, this is generally – from my experience – a good time to invest.

“I believe we’re in one of those spots now. I can’t say how much longer it will run – maybe six or 12 months – but the markets have pulled back substantially in the past 12 months where I’d suggest we probably don’t have too much further to drop.”

One thing that doesn’t change, however, is the investment strategy the Merchant Funds Management portfolio manager uses to guide his funds.

“We stick to what we know and what we do well, and that’s finding undervalued companies,” said Mr Chapman, who has skin in the game and vested interest in the funds performing.

“We’ve had a good start to this financial year – especially compared with last year, in which we were down in line with the market – courtesy of a couple of bigger investments coming to market and some pretty decent price increases.

“We’re only three months in to FY23, but the baby’s been thrown out with the bathwater in a lot of cases and that’s where we can make some money.”

So, what does Mr Chapman see as an attractive sector in the current market?

“The biotech sector is very attractive. I’ll give you a good example: UBI, a Melbourne-based company, was trading around $1 a share this time last year. It raised $30 million at 77 cents. Now it’s trading around 25 cents with a market cap of $54 million, with $45 million in the tin.

“You know, that’s a deal. And there’s so many of those examples out there.

“Investors watch interest rates going up and might see biotech getting hammered, but they often fail to realise that a lot of these biotechs are in a space where they’ve got record amounts of cash because they all raise money through the boom times.

“So if you take a long-term view, it’s a really good sector. Technology is a similar story. At the moment, many people are selling for the sake of selling and just go into cash. That’s everyone’s prerogative, of course, but therein lies the opportunity.”

The portfolio manager also flagged emerging ‘metaverse’ technology, ‘mega trends’ such as food security, and the medicinal cannabis sector as important ones for investors to watch.

Join Merchant Funds Management’s Andrew Chapman this Friday, 7th October at 12pm (AEDT), on our Meet the Fund Manager webcast to hear him talk about his favourite stocks, investment strategy, market insights and more. To book yourself in, click here.

*Past performance is not a reliable indicator of future performance.