September, 2023
Our fund had a tougher month in September, with net returns of -4.01%. As background, US stocks also trended downward, with each of the three key equity indices finishing the month down. The S&P closed the month -4.9% lower, the Dow Jones fell -3.5% and the tech-heavy NASDAQ lost -5.8%. Gold fell -4.7% in September to US$1,848.63/oz. In contrast, crude oil finished the month substantially higher than it began. The key US WTI crude closed the month +8.6%. The rise in oil prices over the month came as Saudi Arabia and Russia extended their current cuts through to the year-end. The S&P/ASX Small Ordinaries fell -4.04% during the month. All sectors except for Energy ended the month lower, with Real Estate and Consumer discretionary stocks the biggest laggards. The Energy sector tracked oil higher to end the month up 15%.
The bond market currently dominates
Normally equity market participants quickly glance at daily bond prices upon arriving at work in the morning, say 'that' nice, and go on to their far more exciting jobs. However, in volatile times, bond markets dictate the direction of equity markets. To suggest US bond markets have had a tough three years is an understatement. The ultimate, super liquid, safe haven asset; US 10-year treasury bonds, have lost 25% of their value in this period.
Forces driving bond yields
The bond market now has a laser focus on the consequences of Covid-induced increased government spending. How quickly inflation can be tamed is key. Higher energy prices point to continued upside risk for inflation. The crude supply demand equation may have also changed in the Middle East over the weekend. There are fears over the size of US debt; the US Treasury is issuing massive quantities of debt to fund government programs whilst at the same time the Federal Reserve is reducing its own holdings. President Biden's seizure of Russian assets last year has resulted in foreign accounts having less appetite for holding US treasuries. Hence, the pool of bond buyers has shrunk. The case for lower yields rests on two main forces: i) a disinflationary recession in the US would force yields lower and ii) perhaps US treasuries now offer a relatively attractive valuation vs other asset classes. A third swing factor is the actions of the very large pool of savers who have been used to earning almost no interest on their deposits. This demographic is much older and might be one of the reasons economic activity is holding up as well as it is.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-September-2023_website.pdfAugust, 2023
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-August-2023_website.pdfJuly, 2023
The Fairview Emerging Companies Fund recorded a 3.39% gain during July, finishing flat with the ASX Small Ordinaries Accumulation Index.
Inflation coming down but market volatility went up July continued its historical record as being a strong month for the small cap index to deliver the 2nd best July performance in the last seven years. However, it was a tale of two halves with the first half of the month delivering all of the month’s return. Volatility was elevated, with July seeing as many +/- >1% trading days for the small cap index as the previous three months. Macroeconomic data and central bank interest rate decision making was the cause for the upturn in volatility. Conflicting US employment data saw the US Treasury 10-year bond yield finish flat (after dropping 40bps intra month), whereas domestically the Reserve Bank of Australia (RBA) left interest rates unchanged for the second time since April (at the time of writing the market is currently pricing a 0% chance for a September rate rise, while it’s a 17% chance for the US). While inflation remains elevated compared to pre-COVID levels, since Australia’s annual CPI peaked in December 2022 at 7.8% it’s continued to trend downwards. This saw a rotation from defensive stocks into ‘risk on’ lossmaking, as well as cyclical, companies.
Everyone’s asking . . . what’s next for China?
This downward inflation trend has been consistent in many countries but not China, which claims no inflation. The Chinese post-COVID economic recovery hasn’t met expectations, with barely any growth in the last three months. Following their July Politburo meeting, expectation is rising that the Chinese Government will take action to stimulate the economy. Interestingly, despite the ASX Small Resources surging to be up over 6% midmonth, it finished flat and underperformed the industrials peer by nearly 5%.
Smalls outperform big caps
More broadly Aussie small caps outperformed their ASX100 peers, while in offshore markets the NASDAQ continued its recent strength (+4%) to be 17.5% higher over the last three months, with the US small cap index (Russell 2000) delivering two strong consecutive months (+14% over that period) as investors regain more confidence in the stability of the US regional banking system (as an aside they carry 70% of the US commercial real estate debt).
Resources struggled
Starting on the negative side of the ledger, the ten worst performing stocks in the small cap index were resource companies. The fund held no exposure to these companies. Half of the companies (Deep Yellow, Talga Group, Lake Resources, Sayona Mining, Ioneer) were pre revenue, while half were exposed to lithium. The worst performing lithium company was Core Lithium, who reduced FY24 production guidance by 20% and FY25 guidance by 50%, due to materially lower recoveries than outlined in the feasibility study. Another lithium company, Patriot Battery Metals (PMT), received the first ‘short report’ in the small cap space for quite some time. As a reminder a short report is essentially a ‘research report’ published by a hedge fund that has sold shares in the company in the hope their published document will create further downward pressure on the target company’s share price, thus magnifying the hedge fund’s profits. PMT’s share price fell 13% over the month but after month’s end, the company countered the report with a solid maiden resource estimate and attracted strategic interest (via US giant Albemarle) for its Quebec-based hard rock lithium deposit. Resource quarterly updates were also a feature of the month with overall gold sector production guidance shrinking and costs rising. We were pleased with the operational execution of the fund’s gold companies and their relative share price performances.
June, 2023
The ASX Small Ordinaries Accumulation Index finished flat in June, while the Fairview Emerging Companies fund exceeded the benchmark by 1.48%. Over the 2023 financial year, the fund recorded a 14.90% gain and outperformed the index by 6.45%.
A positive return for Small Caps FY23 was a welcome return to the positive for small caps after a tricky FY22. Looking into the history books, FY23 was an average year for the ASX Small Ordinaries Accumulation Index, delivering a return bang on the 33 ½ year financial year average of 8.4% (but above the median of 7.7%).
The ASX Small Industrials Accumulation Index recorded a 9.5% gain during the 12-month period versus the Resources Index at 6%; this was in part a reversal of the Industrials’ FY22 performance. Notably, since the COVID low (23 March 2020), the ASX Small Resources Accumulation Index has greatly outperformed the Industrials equivalent, due to the strong price gains from old and new energy-based commodities; lithium spodumene (+10x), oil (+2x) coal (+140%) and nickel (+80%).
On a sectoral basis over the last year, Healthcare and Industrials were the best performers. Interestingly, the outperformance of profitable vs loss making technology companies has been stark over FY23 with the S&P ASX100 Technology sector up 40% (Wisetech +110%) vs the small cap tech sector’s 5% gain. Regardless, the fund generated solid unitholder returns from the sector during the 12 month period.
Featuring amongst the top 10 best share price performers over the year were Biotech (Neuren Pharmaceuticals, Telix Pharmaceuticals), Lithium (Liontown Resources, Leo Lithium), as well as two gold names and a few technology companies. In contrast, the laggards included an eclectic array of sector exposures ranging from baby wear retailing to resource developers and casinos.
Overall, the fund’s strike rate was pleasing, with several of the top 10 best performers held in the fund and none of the key laggards.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-June-2023_Website.pdfMay, 2023
The ASX Small Ordinaries Accumulation index unwound its April gain to fall 3.3% in May. It was the tenth worst May performance in the index’s 33-year history. While the Fairview Emerging Companies Fund exceeded the benchmark by 2.3%, it wasn’t enough to deliver a positive absolute return for unitholders. Over the last 3 months the fund has outperformed the index by 6.1%.
The big nations wobble
Macro concerns influenced markets with high inflation and rising interest rates a factor. China’s post-COVID economic revival is spluttering in a global backlog of consumer inventory (excluding cars) with Chinese youth (age 16-24 year olds) unemployment tracking at 20%, four times the national rate. The US Government bumped up against their debt limit for the 19th time since 2003 and the prospect of a default added weight to a risk off sentiment. It’s a little odd given the track record of a default is low, and they’ve raised the ceiling over fourfold to $31 trillion in 20 years.
Technology shines
All this amounted to a capital rotation away from cyclical to defensive sectors and Technology. The small cap tech sector was the best performer rising 5.7% while the NASDAQ was equally strong, extending its lead to be up nearly 25% so far in 2023. NASDAQ-listed Nvidia, a 95% market share leader in chips for machine learning, shone another light (after ChatGPT) on the emergence of AI (Artificial Intelligence) when it reported “surging demand” and gained more than the total ASX Small Ordinaries market cap in a day. Undoubtedly, AI is following in the path of other technological developments (eg. digitisation, cloud computing, SaaS), and while there are few obvious first order small cap ASX beneficiaries, there certainly will be companies that benefit, if for no other reason, than to enhance labour productivity in a world where certain economies are struggling with labour availability. Technology is currently an overweight position in the fund.
Resources challenged
The ASX Small Resources index underperformed its industrial peer by 5.3% in May. Commodity prices were generally weak. Having posted a 130% gain in CY22, the Newcastle thermal coal price is among the worst performers so far this year (down 60%). Both lithium and uranium have seen recent pricing improvements while the gold price was unable to hold early month gains once the US debt ceiling was raised and certainty was restored. Further gold supply will be constrained as junior explorers’ ability to raise capital for drilling is currently restricted.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-May-2023_Website.pdfApril, 2023
Pleasingly our unitholders outperformed the market, with the fund’s absolute return above 4% for the month. The S&P ASX 200 increased 1.8%, driven up both by tech stocks and, of all sectors, the down and out REIT sector. Looking at the critical US market, earnings outperformance lifted the S&P500 Index +1.5% in April. This is despite the banking turmoil and concerns over a US recession. Gold rose across the month, up +1% as central bank demand supported price levels. Copper was the big disappointment on the London Metals Exchange, falling 5% in the month. Among the best performers inside the ASX S&P Small Ordinaries Index were Telix Pharmaceuticals (up 54% on stunning quarterly Illuccix sales) and Codan (up 36% due to its relative cheap valuation being finally noticed). Syrah (collapsed -37%, primarily from graphite production problems) and Novonix (-22%) were the worst laggards.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-Report-April-2023-Website.pdfMarch, 2023
The Fairview Emerging Companies Fund rose 1.63% during March exceeding the ASX Small Ordinaries Accumulation index by 2.35%.
The benchmark was down more than 5% intra month but recovered well in the last 2 weeks to finish 0.7% lower. While the small cap index recorded an electric start to the March quarter, with January up over 6%, it lost momentum in February and March to finish the period 1.9% higher. This compares to the ASX100 Accumulation index which rose 3.5% over the three months.
The financial system wobbles… Causing elevated asset class volatility around the world was the demise of several financial institutions (Credit Suisse, Silicon Valley Bank, Signature Bank and First Republic Bank) for a variety of reasons, but certainly higher funding costs didn’t help them. Concern of a tightening in global financial liquidity was eased when the US and Swiss Governments took preventative measures. But it was enough of a wobble for investors to believe peak interest rates were nearing. Bond yields dropped sharply with the 10 year yield for Australian and US treasuries dropping ~50bps.
Gold shines… Falling bond yields, the prospect for a falling US dollar in a peaking rate backdrop, and financial market instability was a healthy trifecta for the US$ gold price to record its best monthly gain (+8%) in 2 years, towards all-time highs of $US2,000oz. While the portfolio provides investors with exposure to gold, it’s not an active position. Overall, the 16 small cap gold companies comprise 8% of the index.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-Report-March-2023-Website.pdfFebruary, 2023
The focus of the February 2023 reporting season was on management comments regarding calendar 2023 year to date trading. Downwards EPS revisions far outweighed upgrades in the month. The Small Ordinaries Accumulation index was down -3.7% in February, underperforming the S&P/ASX100 by -1.3%. Small Industrials were off a relatively benign -1.7%, alas Small Resources were slammed down a dismal -9.1%. Fairview’s portfolio weight in resources weighed on performance, resulting in a month of underperformance vs the index.
Forgiving market for some
Due to the highly uncertain domestic economic outlook, trading updates for the first weeks of calendar year 2023 were more important than usual. GUD was up +28% for the month, despite slightly missing consensus estimates. Management spun a positive 2H23 outlook statement, propelling GUD’s share price rally. Auto sector stocks, especially fund holding APE Eagers, outperformed as buoyant car sales and strong margins with few discounts were rewarded by investors. Travel stocks were also generally higher with European leisure a standout recovery market. Our key fund travel sector holding, Webjet, reports out of cycle but hopefully reinforces this message when it reports in May as it is significantly exposed to the European travel thematic.
but not for the retail sector
The worst performer in the month was Temple and Webster (-38% vs index). This online retailer reported a soft 1H23 result, but more importantly a decline in year-to-date trading. This slide in the share price occurred despite reaffirmation of full-year EBITDA margin guidance by a well-respected management team. Citi Chic (- 26%) was once again among the under-performers. The apparel retailer fell after also reporting an uneven start to 2023 trade and residual inventory concerns. Housing and real estate listing exposed stocks also had a tough reporting season: GWA, Pexa, Domain, Beacon Lighting, Wagners, Fletcher Building and Adelaide Brighton all underperformed.
Resources key detractor
Generally, in February there is not as much attention on resource stocks, industrial stocks steal the limelight. However, last month gold and lithium stocks had a very choppy ride. Sentiment in the sector has turned cautious. This is due to both gold and lithium market prices softening, as well as development projects facing higher capital estimates. Production cost inflation remains stubbornly high.
January, 2023
Consumer stocks do it tough
The S&P/ASX Small Ordinaries rose +6.5% for the month of January 2023, outperforming the S&P/ASX 200 rally of 6.2%. The S&P/ASX Small Resources Index outperformed Small Industrials by 3.3%, driven by Chinese reopening. Alas, our fund underperformed the index in January. Interestingly, within the resources sector, energy stocks were rather weak, in contrast to the bulks and metals sectors. Value outperformed growth, especially those beaten down value stocks that had been smashed in calendar year 2022. Westgold (WGX.ASX) was the biggest gainer in the S&P / ASX Small ordinaries, up 39% in the month but still down more than 50% from its highs of 2022. Citi Chic (CCX.ASX) was also up strongly (+36%) but still only one tenth of its share price high in September 2021. As the market grapples with another February reporting season, one question is paramount.
The potential 2023 recession – will it occur?
A recession is defined as two consecutive quarters of negative GDP growth. The last one in Australia occurred in 1991-92. During this 31-year period, at least seven recessions were forecast by the economists of the day. A couple of economists (now grumpily in their retirement) seemed to gloat in gloomy predictions. Thankfully, they were wrong. We have been the lucky country in an economic sense for a very long time. With home loan rates up and house prices declining, it seems the next generation of economic doomsayers are in full voice. A couple of factors; employment and savings also need to be considered.
Some excellent historical analysis of Australian household savings rates from George Tharenou, UBS Australia, throws up some interesting charts. The first chart shows that the consumer is still in robust health after the Federal and State Government handouts during the pandemic. Even though cumulative excess savings are declining, the sheer amount of the savings buffer dwarfs anything pre Covid.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-Jan-2023_Website-Version.pdfDecember, 2022
Consumer stocks do it tough
The Small Ordinaries Accumulation index fell -3.7% over the month of December, with all sectors finishing the month lower. This fall was driven by the surge in Chinese COVID case numbers and further hawkish Federal Reserve commentary late in the month. Consumer Discretionary and Information Technology were the laggards, dropping 5%, while the Consumer Staples and Communications Services were relatively stronger. The AUD vs US$ closed flat over the month of December as it became apparent that markets were pricing in the RBA being too dovish in the first half of 2023.
US equities fell -5.9% over the course of December, with all sectors finishing in the red. Similar to Australia, the Consumer Discretionary sector saw the largest decline of -11.3%, as consumers reduced spending. There was increased investor uncertainty following the Federal Reserve’s reiteration of its tightening trajectory throughout 2023.
Everyone talking gold
The gold price rose 3.1%, finishing above US$1,800 an ounce at the end of December. Despite a poor calendar year for gold equities, bullion increased 1% from the start of January 2022. In mid-December, gold reached its highest level since July as two themes dominated. The first was that the US Fed would temper interest-rate hikes following lower than forecast US inflation data. The second was China’s chaotic rapid reversal of its Covid Zero policies.
Citi Chic sale, from $5.50 to $0.48 in 12 months
In terms of individual stocks in the S&P ASX Small Ordinaries index for December, there were some clangers. Poor old City Chic (CCX) fell 51%, this is after a 32% drop in November. We do not own it and would need to see clarity on the company’s inventory position to revisit. Ioneer (INR) fell 41% after environmental concerns for an endangered flower around its proposed mine site were raised. In contrast, two stocks commonly found in the doghouse; Perenti (PRN, was up 18%) and St Barbara (SBM, up 25%) were the month’s sector winners. St Barbara still delivered a shocking 2022 calendar year return though, down 64%.
November, 2022
The ASX Small Ordinaries Accumulation Index delivered a consecutive positive month for just the second time this calendar year, rising 4.92%, to be 11.38% higher so far this quarter. The Fairview Emerging Companies fund underperformed the benchmark in November by -1.49% but remains ahead over most other timeframes.
Once again, asset classes were influenced by US Federal Reserve comments that they could potentially slow rate hikes “as soon as December.” This, along with another ‘dovish’ 25bp rise by the RBA saw bond yields track lower, aiding strong global equity market performance. The Hang Seng index rebounded sharply (+26%) after two weak months, when China announced support for their ‘fragile’ property sector. The $A bounced hard against the $US, up 5%, recording the biggest monthly gain in two years. Most commodity prices rose(excluding oil), prompting the Small Resources index to outperform the Industrials.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-Nov-2022_Website-Version.pdfOctober, 2022
The Fairview Emerging Companies Fund rose 7.98% during October which was 1.52% above the ASX Small Ordinaries Accumulation index.
Along with nearly all global equity markets, the small cap benchmark roared back to life after a weak September (-11%) to record its sixth best October in history.
A central bank pivot? Aiding the buoyancy in equity markets during the month was the surprise by the Reserve Bank of Australia to raise rates at a lower level (25bps) than expected. This was interpreted that other central bankers could soon follow in a ‘pivot’ towards lower rate rises, marking the peak of this current round of monetary tightening. US Federal Reserve Chairman Jerome Powell reiterated their steadfast resolve to reduce inflation to below 2%. Notably, some market participants continue to interpret certain soft economic data (i.e. earnings risk) as a positive sign the rising rate cycle will finish sometime in CY23. At the time of writing, most economists expect the Australian cash rate to peak around 3.6% in Australia (75bps higher than the current level) sometime in 2023. The UK Prime Minister Lizz Truss’s resignation after just 44 days in office was also taken as a positive sign her potentially inflationary fiscal measures would be scaled back. US corporate earnings announced during the period also proved resilient, albeit certain components of FANMAG (Facebook, Amazon, Netflix, Microsoft, Apple, Google) were weak towards month end, signaling tempered advertising and cloud usage demand. We’re comfortable these factors aren’t drivers for the Fund’s technology holdings.
China COVID lockdowns suppress commodity prices Elsewhere, China didn’t celebrate President Xi’s extended reign at its October National Party Congress as hoped, with COVID lockdowns continuing to plague the population and their economic growth. The Hang Seng index fell 15% in October, after dropping 14% in September. With exception to the oil price, key commodity prices were all weak with the iron ore price falling another 6% to be down 14% for the last three months. The ASX Small Resources index trailed the Industrials by 3.6%. Thankfully, the Fund derived sound outperformance from its resources exposure.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-Oct-2022_Website-Version.pdfSeptember, 2022
The Fairview Emerging Companies fund outperformed the benchmark by 0.69% in a weak and volatile month for equity markets. Over the quarter the fund gained 0.19% which was 0.66% ahead of the index.
Big market falls The ASX Small Ordinaries Accumulation Index fell 11.20%, recording its second worst September on record, behind the GFC. It is the eleventh time the small cap index has posted a monthly 10%+ fall. Currently it feels like a semi-regular event given the 13% index drop in June, but thankfully, it doesn’t happen often - a less than 3% occurrence in the index’s 381-month history. If you exclude the GFC, it happens less than 2% of the time.
Currency wobbles but US $ strength Central bank hawkishness, persistent inflation and continued speculation of a rate-driven recession rolled through the month. Notably, the UK Government triggered a further 5% index fall in the last week of September when new fiscal measures to boost the economy was seen as only adding to their inflationary woes. The UK Government 10 year bond yield catapulted from 2.9% at the start of the month to an intra month high above 4.3%. (It was close to zero two years ago). The British pound to the US dollar fell to levels not seen since the mid-1980s when the US Federal Reserve started raising rates to combat President Reagan’s tax cuts. The safe haven status of the US dollar (and not, cryptocurrencies as some speculated pre pandemic) has been a real feature this calendar year with the $A down 12%. This is aiding Australian exporters and those companies translating $US-denominated earnings. But it's not great for importers who experience a higher cost of goods (such as Retailers). The $US gold price has dropped 15% over the last 6 months but is flat in $A terms. The gold price is performing inversely to $US movement. Many gold stocks were weak during September, a slight headwind for the fund. Overall, Energy & Materials were among the better small cap sector performers.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-Sep-2022_Website-Version.pdfAugust, 2022
The Fairview Emerging Companies fund outperformed the benchmark by 1.53% during the month.
The ASX Small Ordinaries Accumulation Index rallied 2% in the final two days to finish up 0.6%. It was another volatile month with the market up over 4% during the earlier half and down 1.5% towards the latter stages. Driving the initial market movement were hedge funds covering their short positions, a return of retail investor interest ‘meme stocks’ (those heavily marketed on social media channels) and a broader capital reallocation towards stocks with higher beta (more leveraged to share market movements.) That changed when the market became skittish about what the US Federal Reserve would say about interest rate movements at their meeting (on 25-27 August). Comments the Fed would continue their tightening policy until inflation returned to their target, spooked investors. In our minds, the Fed’s comments were consistent with expectations, and the equity markets just gave up some of the month’s earlier exuberance.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-Aug-2022_Website-Version-v2.pdfJuly, 2022
July demonstrated the volatility of the small caps vs the top 100 on the upside. The Small Ordinaries index was up +11.4% in July, easily outperforming top 100 by +6.1%. Small Industrials were up +11.8%. Small Resources were up +10.2%. It was the beaten down growth names that dominated in July with some staggering upward moves. Health Care was the best performing sector, up +22.7%, followed by Information Technology (+17.7%). The top performer in the month was ZIP (+146% vs index). This company which we admit would be hard pressed to enter our portfolio, due to continuing cash needs, rose after announcing it was ending its planned merger with Sezzle. The worst performer in the month was Nuix (-32% vs index) which fell after guiding for FY22 EBITDA of A$10-12m, down materially from the A$66.7m EBITDA reported in the PCP (Previous Corresponding Period).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-Jul-2022_Website-version.pdfJune, 2022
US Equities finished June with the S&P500 down -8.4%, representing the worst first half since 1970. All sectors finished the month lower, with Energy (-17%) and Materials (-14%) the laggards. The ASX 200 finished the month down -8.9%. The decline brings the index to a -10.2% loss for the financial year, just the third time this past decade that Australian investors have incurred a negative return. June was not a great time to be a small caps investor, with losses magnified vs large caps.Inflation and labour supply
We think the direction of inflation is currently the key issue for capital markets. Simply put, equities do well when inflation declines. It seems that the focus of the media is always on food and energy prices. These are important, but they are not the critical factor for inflation. Western democracies are services dominated economies. Hence wage growth is the most important factor we monitor to see where real inflation is heading. A recent powerful upwards driver to wage growth, especially in Australia, is that the economy is still pump primed. This is due to the tail end of the massive government stimulus and full employment, with widespread labour shortages. A lack of migration for two years has ensured this.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-Jun-2022_Website-Version.pdfMay, 2022
The key US market index, the S&P 500, finished flat for the month. This result masked some intense daily moves. In Australia the ASX S&P 200 was off 3%. Alas in a risk off month, the dominant equity market themes were the Price Earnings ratio derating and a flight to liquidity. Hence the ASX S&P Small Ordinaries Accumulation Index was down -7.0%. The performance was similar between the two key subsectors. Small Industrials were down -7.4%, whilst Small Resources were down -6.0%. Energy was the best performing sector in May, up +6.7%. Consumer Discretionary was the worst performing sector over the past month, down -7.6%. So inflation is not that transitory?
We look back fondly on 2019, the issues the world faced at that time now seem so very benign. (US Presidential impeachments and Venezuelan political turmoil). We now face a world that is not accustomed to shortages and is really struggling to adapt. This is not helped by: • Coalescing trade blocs that will march back globalisation.
• Recovery from a virus that resulted in the greatest human vocational migration in history and changed the labour supply dynamic to favour labour over capital. • Western countries starting a politically popular energy transition that could be more traumatic than expectations.
• A war started by an autocrat who wants to recreate the glories of the imperial past. • And worst of all, potentially hunger in vulnerable, food importing countries.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-May-2022_Website-Version.pdfFebruary, 2022
February was an extraordinary month. We witnessed the Bank of England deliver its first back-to-back rate rise in nearly two decades, the US printed its biggest inflation number (+7.5%) in forty years, the oil price pushed through the US$90/barrel level for the first time since 2014. And that was all before the devastating February 24th invasion of Ukraine by Russia. In conjunction, the earnings season was underway. Given the context, the ASX Small Ordinaries index performed resiliently, finishing flat (-0.01%). The Fairview Emerging Companies fund finished slightly behind the benchmark.
Given the backdrop of such a big devaluation of equity markets in January, investor behavior toward company earnings announcements during February was always going to be interesting. It didn’t disappoint with extreme share price reactions witnessed, especially around the time of Ukraine’s invasion. Among the more notable price movers on the day of the result were City Chic Collective (-30%), Appen (-28%), Tyro (- 26%), and BWX (-26%). A common trait was that all carried relatively high valuations. Value stocks continued their recent outperformance versus growth and in the US, are now up 13% comparatively over the last quarter. Resources performed strongly during the month due to a surge in commodity prices. The energy was a standout performer, with the index up 10%. Over the last three months, the WTI oil price rose 45% and the Newcastle thermal coal price climbed 80% higher. Despite this, we’re yet to see the usual media commentary about the strain that $2+/litre petrol prices will have on household budgets. The portfolio carries its largest energy sector exposure for several years. In contrast, the small company information technology sector fell 13% during the month and is now down 23% this year.
Overall, the ratio of meaningful (+/-2%) EPS downgrades to upgrades within the ASX Small Industrials was consistent with the ten-year average. Pleasingly, Fairview fared better, and overall, the team was satisfied with the portfolio companies’ performance. Albeit one company was excited when the investment thesis was no longer valid due to a change in management’s focus towards heavier spending to drive revenue growth.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/184841296.pdfJanuary, 2022
It was a tough start to the year with the Small Ordinaries Accumulation Index posting its worst January performance since the GFC, and the second worst on record, to finish down 9.0%. A correction of this magnitude has occurred once every two years on average over the last 31 years, or much less if you exclude the GFC. The Fairview Emerging Companies fund was not immune, slipping 1.4% below the benchmark. Alas, while we had reduced risk in the portfolio for such an event, this was not enough.
The US Federal Reserve’s signalling for an earlier start to the quantitative tightening cycle spooked the market. A rise in the US interest rate could now come as soon as next month with some anticipating as many as five interest rate hikes in 2022. It is not only the US, according to Bloomberg, the G7 central banks are anticipated to add just $US330bn to their balance sheets in 2022, a sharp decline from the $US8trn added during the last two years to support their economies. The RBA Governor has conceded an interest rate rise in Australia is now a possibility in 2022, but household indebtedness (debt to income) could provide a cap. The rate the current household savings pot is spent will be influential.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/183910163.pdfDecember, 2021
A strong end to a strong year The Fairview Emerging Companies Fund ended the year well, delivering an absolute return of 2.2% in December, which was 0.7% above the benchmark. The December quarter outperformance was 3.1%. Over the year the Fund delivered an absolute gain of 27.2%, which was 10.3% higher than the ASX Small Ordinaries Total Return Index. Pleasingly, the Fund outperformed in almost all months and was able to continue a track record of drawdown protection in the two months the market’s return was negative. In summary, we consider it a solid year for unitholders, and continue to seek a market where the fundamentals matter more than the macro. Equity markets withstood an array of challenges
Overall, the benchmark recorded its third best year in the last decade (only surpassed in 2017 and 2019, both 20%+) and 10th best year since the index’s inception in 1998. A remarkable achievement given all the competing forces of the COVID variants, infections, inflation and the prospect for rising interest rates, as well as the extraordinary capital shift from governments to households stimulating demand and straining an already shaky supply chain. The grounding of the enormous Ever Given vessel in the Suez Canal certainly didn’t help and nor did a drought in Taiwan, curbing semiconductor chip production even further in an already tight market. While the Australian sharemarket delivered superior gains to Asia (e.g. Hang Sang -15%), the US and European equity markets were stronger. Interestingly, while the NASDAQ rose 21% during 2021, the S&P ASX 200 information technology sector was the weakest of all Australian sector groups and the only negative performer, falling 2%.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-December-2021-Website-Version.pdfOctober, 2021
October was a good month for Fairview unitholders relative to the ASX S&P Small Ordinaries Index. The month was generally positive for key international equity markets. The S&P 500 climbed 7.0% off the back of a strong US earningsseason. These earnings were fuelled by US consumersreopening their wallets and listed companies demonstrating pricing power to cope with rising costs. In comparison, the ASX 200 declined ‐0.1%. This underperformance was partially driven by Australian 10‐year bond yields rising 59bps to 2.08% during the month. Consequently, Australian banks also lifted their fixed rate loans substantially (in % terms).
Among the ASX S&P Small Ordinaries, the best performers were Bubs Australia (+45%), Aurelia Metals (+26%) and Australian Ethical Investments(+24%). The worst performers were EML Payments(‐24%), Infomedia (‐21%) and Codan (‐ 21%). This time last year Codan was one of Fairview’s top five positions. We sold our remnant minimum weight position during the month
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/180945784.pdfSeptember, 2021
Offshore markets were firmly focused on rising US bond yields. Investors were also intrigued by numerous Chinese Communist Party authoritarian decrees. The ASX Small Ordinaries Accumulation Index was off ‐2.1% in September. This was largely due to the ASX Small Resources Index tracking down ‐5.4%. This large drop was partially countered by energy, the best performing resources sector in September, up 15.1%. Materials (mainly bulks and metals mining) in contrast was the worst performing sector over the past month, returning ‐7.8%.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/179797382-1.pdfAugust, 2021
August was a great month for unitholders on an absolute basis. Alas, we finished slightly behind the benchmark due to our lithium sector weight in the fund. Looking offshore, the biggest news of relevance was the plummeting iron ore price, down 25% in the month. Generally offshore equity markets were mixed to slightly up, continuing the trend of a very strong calendar 2021 year-to-date.
Equity markets in Australia were dominated by August reporting season. The ASX S&P Small Industrials Index was the best performer, beating the large caps and small resources indices. The technology sector was the standout in the Small Ordinaries Index. It surpassed its nearest sectoral competitor by 10%. Companies reported many more beats than misses to consensus forecasts, specifically at a ratio of 2.33 to 1, which, according to UBS, is the second-best ratio on record. However only 16% of companies provided hard number guidance, reflecting the uncertain outlook. Despite the 5% rally in the month, FY22 EPS expectations for ASX200 industrials stocks reporting in August were trimmed by 1.3%
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-August-2021-Final-Website-Version.pdfJuly, 2021
The Fairview Emerging Companies Fund rose 0.9% during the month, outperforming the Small Ordinaries Total Return Index by 0.2%.The benchmark continued its impressive run, stringing together gains in the last six months consecutively to be up 11.8% over the period. It is surpassed by the ASX100 which has now delivered ten consecutive positive monthly returns
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-July-2021-Website-Version.pdfJune, 2021
The Fairview Emerging Companies Fund outperformed the benchmark by 0.4% during the month and 7.5% over the financial year. A slightly higher level than the average annual alpha generated over the Fund’s 12+ year history. The ASX Small Ordinaries Total Return Index experienced a buoyant month in June, rising 3.1%. This marked the biggest monthly performance for a June period in 12 years. It also capped off a very strong year which saw the small caps record a 33% gain over the 12-month period, beating their large cap peers by 5%. Overall, FY21 was the second-best year for the Small Ordinaries Total Return Index in the indices’ history (since March 1997), second only to 2007. This is hardly surprising given the pandemic’s impact on markets leading into the 2021 financial year and the subsequent recovery phase
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-June-2021-Website-Version.pdfMay, 2021
During May, the Fairview Equity Partners Emerging Companies Fund’s return was 1.3%, outperforming the benchmark by 1.0%. It was a month of two halves and was always going to be interesting given the share market’s buoyancy in April, which saw the ASX Small Ordinaries Index up 5%. -The month started soggy with the Index down 3.7% by midMay but did a Steve Bradbury and recovered to finish slightly ahead (+ 0.27%).
The NASDAQ had its weakest performance in nine months at -1.4% (vs -5% in Sept 2020). Domestically, the ASX200 Technology Index reversed its April strength to deliver the weakest performance (-10%) since the onset of COVID in March 2020. The share prices of Nuix, Nearmap and Infomedia were all down more than 10%. Since the market lows of 23 March 2020, the technology sector retains the mantle as the best performer (ASX200 +128%) due to the acceleration to cloud computing, whilst the government stimulated consumer discretionary sector retains 2nd place (118%).
For completeness, the ASX200 Technology Index is flat since November when encouraging vaccine news emerged. The $A recorded its highest month end finish for nearly 3 ½ years but has stubbornly stuck within the US$0.77-0.78 band so far in 2021. This is a welcome counter to input cost pressures for importers (including retailers). Commodity prices performed strongly with thermal coal and iron ore recording double digit gains during the month. The $A gold price had its best month in over a year yet remains 15% off its August 2020 high.
On the flipside, small cap darling, EML Payments delivered a major surprise to the market by reporting the Irish regulator is investigating its license – an important ingredient for the company to grow its regional fintech/neobank presence. The share price fell 50% on the day of the announcement. This stock was not held by the Fund. The key portfolio disappointment during the month was Costa Group who provided an AGM update that foreshadowed a 1H21 result only marginally ahead of the prior corresponding period. In contrast, CSR, Eclipx, Elders, United Malt Group and Virgin Money were among portfolio companies to announce respectable results during the period, prompting solid analyst earnings upgrades.
There are few positives from the Melbourne lockdown, but clearly the vaccination take-up rate has accelerated which will support the prospect of a less interrupted economic recovery as well as the chance for international borders to reopen. In the meantime, the household saving rate continues to fall from its lofty high of 22% in mid-2020, the Federal Government’s May budget was more stimulatory than expected, and the A$65bn not being spent on international travel continues to wash through the domestic economy. All this is aiding retailers as they cycle the excessive growth rates experienced last year. In fact, of the 30+ small cap companies to see meaningful (+2%) analyst earnings upgrades during May, over a third were consumer-facing.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/173989247.pdfApril, 2021
Equity markets raced out of the blocks in April with the ASX Small Ordinaries Index peaking at an intra-month 6.5% gain before ending 5.0% higher for the month. It was the third best April performance for the Index in the last 19 years. The Fairview Equity Partners Emerging Companies Fund returned 4.8% net of fees in the month, slightly underperforming the index by 0.2%. The Fund is 4.3% ahead of the Index over the last quarter.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Fairview-Monthly-April-2021-Website-Version.pdfMarch, 2021
The Fairview Equity Partners Emerging Companies Fund returned 1.09% net of fees to Fairview unitholders in March, outperforming the index by 0.3%. To us, Geopolitics dominated the month. A fraught and rancorous China vs USA summit in Alaska sent US stocks higher whilst Chinese tech stocks were crushed. Domestically, industrial stocks easily outperformed resources as both iron ore and copper prices retreated in March. We were expecting more stock price action in other areas especially far more chatter on the ending of JobKeeper than occurred and more inbound M&A activity from offshore.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/March-2021-Fairview-Report-Website-Version.pdfFebruary, 2021
The Fairview Equity Partners Emerging Companies Fund returned 5.44% for the month of February, outperforming the benchmark by 3.89%. Fairview unit holders hopefully enjoyed February with a return to some sort of normalcy that Australians have become used to, i.e. a lockdown in Victoria and relative freedom for the rest of the country. Offshore the US S&P500 provided a 2.61% return whilst the tech heavy NASDAQ was up 0.93% for the month. The domestic reporting season and rising bond yields were two key themes for the month, not much else seemed to be in focus.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/168838298.pdfJanuary, 2021
From the almost flat numbers in the table above it seems that January was rather unexciting – it was anything but. Offshore the US S&P was down 1.1% whilst the Nasdaq was up marginally. By far one of the most interesting events in global markets in recent times occurred during January - Gamestop. US retail Reddit investors loaded up on short sellers and absolutely hammered them. We really don’t like short sellers as, until January 2021, they seemed so damned invulnerable, sniping at stocks often from deep camouflage provide by their sponsoring broking houses. As a long only fund manager, we have previously suffered from short seller reports on portfolio holdings; Credit Corp Group (CCP) and Corporate Travel Management (CTD) come to mind. Both stocks suffered greater than 30% downward moves on the day the report was published. Thankfully, both recovered as ultimately these short seller reports test the quality of a company’s business model and both CCP and CTD are strong.
Short sellers are a necessary part of the equity market ecosystem and reduce illiquidity, which is always Fairview’s biggest bane. So, in that respect they are welcome to be present in their new chastened form. One consequence of this Reddit revolution is that hedge funds will be more discreet and pay higher premiums for their short positions. Ultimately, this phenomenon adds to market volatility in the US market, the pre-eminent equities market that provides direction to all other markets. After calendar 2020 we were hoping for less volatility, that seems to be wishful thinking.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/January-2021-Fairview-Report-Website-Version.pdfDecember, 2020
The Fairview Equity Partners Emerging Companies Fund outperformed the benchmark by 1.4% as the Fairview team experienced a welcome return to outperformance in December. Offshore markets generally traded higher as the first vaccinations were administered in the UK and US and a degree of certainty returned to the volatile US political landscape. The technology heavy Nasdaq was the key offshore index standout, up 5.7%. Back home, a 20% plus price surge in iron ore and renewed investor interest in lithium were December’s ASX sectoral highlights. As a result, the ASX Small Resources Index delivered 8.7% within the month.
There was a small relative bounce from value back to COVID beneficiary stocks. These stocks had been harshly dealt with in November (including Fairview core positions BAP, CDA and MP1). Unlike November, the largest percentage individual price moves were very stock specific. Mesoblast was the worst performer (-46%) in the ASX Small Ordinaries due to a halted COVID therapy drug trial whilst Citi Chic and IGO (both holdings) were the stars, up 46% and 37% respectively. Each of these two companies announced transformative acquisitions in December.
A health crisis that stayed that way The early decisive actions by the US Federal Reserve saved the world from a financial crisis in 2020. A breathtaking 26% year-on-year growth in US M2 money supply was enacted. The Fed’s firm commitment to corporate bond buying, which is effectively a put option on bond markets, showed how well learnt were the lessons from the GFC.
The global economic and political situation is still volatile. We are stock pickers and prefer to leave complicated economic forecasts to those who are far better resourced and experienced to get it wrong. To us, key risks are vaccine effectiveness in new COVID strains, the health of the new US president and his government’s ability to enact legislative change, especially in relation to US corporate taxation. Unresolved issues are the stance of the US Federal Reserve considering its stunning monetary expansion in 2020 and what impact this has on the US dollar.
One fundamental question
There is a good chance that many key economies will recover in sync this calendar year, primarily due to the enormous stimulus deployed in 2020. This is positive for materials companies. Fairview’s index, the ASX Small Ordinaries, has an abundance of choice versus large caps and has the added advantages of leverage and focus. Any hints of increased US corporate tax rates could de-rate the technology sector, which will flow into the relevant stocks back in Australia. As we enter 2021 a fundamental question must be asked by stock pickers: Are individual companies’ prospects better or worse than at the same time last year? Has this situation been altered favorably by decisions that corporate management made during calendar 2020? It does not seem that long ago that many corporates culled their employee numbers. Many ran lean mid-year 2020. Individual companies are reporting that they have enjoyed productivity gains due to their employees working more efficiently from home and being ‘on tap’ 24/7.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/164033383.pdfNovember, 2020
The Fairview Equity Partners Emerging Companies Fund delivered a 6.6% return in November and underperformed the benchmark which posted a 10.3% return. It is not where we wanted to be for unitholders, but we will continue to stick to our well-defined investment process.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/162917126.pdfOctober, 2020
A month of two halves
In an ‘another’ extraordinary month the Fairview Equity Partners Emerging Companies Fund finished down 1.07% and 1.53% below the benchmark in October 2020. While it is something we clearly seek to avoid, it was only the third time in the last two years the Fund underperformed by more than 1%. Unfortunately, despite our best endeavours, it does happen.
October delivered a tale of two halves with the ASX Small Ordinaries Index up nearly 6.5% by mid-month only to give up most of that momentum, to finish the month up 0.5%. Driving the equity markets higher were a combination of US fiscal stimulus optimism and a strong US earnings season. However, rising COVID infection rates and dwindling hope for a pre-US election stimulus, undid a lot of the gains.
AGM updates start
First quarter trading updates were mostly positive, especially amongst the domestic retailers (e.g. Super Retail, Nick Scali, Temple & Webster), but share price reactions were not. Understandably, management teams remained cautious to ‘crystal-ball’ the future, preferring to avoid talking about full year earnings guidance. McPhersons Limited, a portfolio holding, was an exception to this trend. It reported an excellent start to the year with 20-30% first half earnings growth, but then guided the market to more muted full year growth. The share price fell 7% on the day. The ratio of meaningful (+2%) EPS upgrades vs downgrades for our portfolio companies during the month was pleasing.
IPO season in full swing
IPO company quality generally fades as the vintage matures, but in this season, it has been unique (like most things this year). We have seen a flurry of companies whose lifecycles have accelerated due to altered consumption patterns. Given the infancy of some businesses, determining structural or cyclical drivers has been tricky. Most have been too small and do not meet our strict liquidity criteria (average $75m raised by each of the 12 companies). For now, we will wait and watch as they adapt to life as publicly listed companies – history suggests there will be disappointments. Like overseas markets, mergers and acquisitions have also kept the investment bankers active, but mostly at the bigger end of town (Hub24 was among the most active small caps).
US election nearly over
Finally, to a topic that could be with us for a while longer than we had hoped – the US election. At the time of writing, the likely outcome is for Joe Biden to become the 46th US President but the Democrat powers will be somewhat handicapped by the prospect of a divided congress (known in January). This presents equity markets with a ‘goldilocks’ situation with additional, albeit restrained fiscal spending, the prospect for lower inflation for longer, lower technology sector regulation and reduced chances of a return to high corporate taxes. Jefferies, an American investment bank, notes since 1989 the average S&P500 Index gain has been 34% in periods of a divided government with a Democratic President (vs 23% under unified governments).
Business investment will be key
Meanwhile, we look forward to more news of a potential COVID vaccine (more stumbles in October by J&J and Eli Lilly), which will be very welcome in all corners of the globe, but especially the Northern Hemisphere where cases continue to skyrocket (40% more cases in October vs September). Thankfully, it appears Australia has a clearer health path. Business investment decisions will be interesting to observe, as will global currency movements, especially after the RBA’s 18th interest rate cut in a row (it was the 10-year anniversary since the last rate rise). For many companies, it is still a wait and see approach.
ticker: ANT0002AU
commentary_block: Array
factsheet_url:
https://fairviewequity.com.au/our-fund/resources/
release_schedule:
fund_features:
The Fairview Equity Partners Emerging Companies Fund invests in an actively managed portfolio of mainly small cap equities listed, or expected to be listed, on the Australian share market. The Fund aims to earn a return (after fees) which exceeds the S&P/ASX Small Ordinaries Total Return Index (Benchmark) over rolling five-year period.
- Accommodate traditional fundamental bottom-up research, focusing on company analysis, business structure, management ability, and earnings durability.
- Adopts no single method for company valuations.
- Portfolio of 50-60 stocks, with a growth tilt and typically with turnover of around 60%-80%.
- Asset allocation ranges : Australian Shares (90% – 100%), Cash and Cash Equivalents (0%-10%).
manager_contact_details: Array
asset_class: Domestic Equity
asset_category: Australian Mid Cap
peer_benchmark: Domestic Equity - Mid Cap Index
broad_market_index: ASX Index MidCap 50 Index
structure: Managed Fund