Jack Briggs, portfolio manager of the Ellerston Australian Micro Cap Fund, highlighted the dual nature of high inflation, noting its challenges and opportunities for local companies. "Higher inflation, or stagflation, creates a range of challenges and opportunities for local companies," Briggs explained. He pointed out that infrastructure and construction-linked businesses are showing resilience, with the fund's top holdings reflecting this conviction. Companies such as GenusPlus Group, Mayfield Group Holdings, and Shape Australia Corporation are among the fund's largest positions.

Briggs used the example of construction materials group Wagners, whose shares surged 30 per cent earlier this year following stronger-than-expected earnings and upgraded guidance. The company has benefited from robust demand across its cement, concrete, and quarry operations, alongside increasing infrastructure activity in South East Queensland.

Despite broader macroeconomic headwinds, capital markets are selectively supportive of high-quality businesses. The successful IPO of SkinKandy and capital raisings by both NextDC and CDC in May underscore the market's continued appetite for AI and data centre-related investment themes.

SKS Technologies Group, another top holding in the fund, emerged as the standout performer in May. The company's share price rose by 36.2 per cent for the month, following the securing of a $22 million contract for a major retailer's new headquarters. SKS reported an updated work-in-hand figure of $355 million, with FY27 secured revenue reaching $270 million, marking a 35 per cent increase from where FY26 secured revenue stood at the start of July 2025. The company's pipeline has also expanded from $572 million in February 2026 to $1.25 billion by the start of May.

"We see SKS as a critical delivery partner for some of the major Australian hyperscale data centre providers, each with significantly increasing levels of pipeline to deliver on in the coming years," Briggs said.

Briggs noted that the volatility linked to inflation has presented opportunities to acquire stocks at more attractive prices. "Inflation linked volatility has enabled us to identify and buy stocks we like at better prices, where fundamentals remain strong but share prices have fallen due to sentiment," he stated.

However, not all holdings have been immune to market volatility. Acusensus, a technology company focused on road safety enforcement, saw its shares fall by 11.9 per cent in May, despite a positive trading update. The update included the announcement of two new operational programs in the UK and record sales pipeline growth in the US. Transport for NSW also issued a six-plus-six month extension on its mobile speed camera contract from July 1, 2026. Despite this, Briggs remains optimistic about the company's prospects. "While there has perhaps been a lack of material catalysts for the last few months, we hold the view that there is still significant upside here on the back of market leading technology," he said.

Consumer-facing businesses and those with limited pricing power are facing real margin pressure, according to Briggs. Higher costs and softer demand are likely to impact profitability in certain sectors. He emphasised the importance of deep analysis of future cash flows, requiring direct conversations with management, suppliers, and competitors, as well as the use of alternative data. "Accordingly, the fund remains focused on companies with strong balance sheets, pricing power and sustainable growth drivers," he added.

Healthcare is one sector Briggs has recently revisited. He noted that the industry has endured a challenging period over the past five years, with Covid-19 followed by inflation squeezing margins. Reduced patient mobility affected volumes, while wages rose by high single to low double-digit percentages for several consecutive years. "In our view the worst is now behind us," Briggs commented. "Over the last 12 months healthcare has come back on our radar. We like the ageing population thematic, which is driving high single-digit industry revenue growth for both diagnostic imaging and aged care. These themes continue whether there is inflation or not. Though we still think investors need to be selective."

The Ellerston Australian Micro Cap Fund – Class A Units delivered a net return of 4.7 per cent in May, outperforming the S&P/ASX Small Ordinaries Accumulation Index return of 2 per cent over the period. The fund's price-to-earnings ratio of 18.3 times for FY26 sits at a modest premium to the benchmark's 16.8 times, reflecting its tilt toward higher growth industrials and technology companies. Since its inception in April 2017, the fund has returned 16 per cent per annum (net), compared with 7.2 per cent for the benchmark.