September, 2023
The Small Companies Fund offers investors exposure to a diversified portfolio of Australian listed small companies that reside outside the S&P ASX100 Index. The Fund is benchmarked against the S&P ASX Small Ordinaries Accumulation Index and has a 19 year track of record of outperformance.
The team combines fundamental bottom-up research of companies with an in-depth qualitative assessment of their management and industry structure. Our proprietary investment process, known as SCOPE (Small Company Optimal Portfolio Evaluation), is a relative stock scoring tool that ranks stocks from highest to lowest based on their score. The portfolio comprises the best scoring stocks, subject to a number of risk constraints, such as maximum active position size (5%) and liquidity.
The outworking of this process is a portfolio that typically exhibits both growth and value characteristics that aims to outperform through the market cycles.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/205413856.pdfAugust, 2023
The Eley Griffiths Group Small Companies Fund (Fund) finished -0.3% lower in August, outperforming the Small Ordinaries Accumulation Index which decreased -1.3%. Since its inception in September 2003, the Fund has delivered a return of +9.9% per annum after fees for its unitholders.
In August, observers of the global macroeconomic landscape witnessed a potential peak in interest rates alongside further evidence of a decline in inflation. Despite Federal Reserve Chair Powell's cautious stance on inflation at the Jackson Hole summit, market analyst conceded a low likelihood of further rate hikes, and an eventual shift to potential rate cuts. International markets experienced weakness, primarily driven by concerns about China's economic slowdown and a fragile property market, with obvious repercussions for resource stocks.
Domestically, investors were trained on the reporting season. Short-term volatility persisted, and the reporting season yielded mixed results, with a greater number of companies surpassing expectations. However, there was a prevalence of FY24 profit downgrades outweighing upgrades. Consumer strength emerged as a significant topic of discussion, as certain consumer-oriented companies surpassed modest expectations, amid mounting headwinds in the retail sector. Meanwhile, cost management proved disappointing, primarily attributed to elevated interest and labour costs, both having a discernible impact on sector profitability.
The key detractor to performance was the financial technology firm Iress (IRE; -38%). A disappointing half-year result driven by cost pressures, including notable increases in tech infrastructure expenses, market data costs, and inflationary salary expenditures. IRE is currently in the midst of implementing a revamped strategy under new leadership.
In the month significant portfolio holding Boral (BLD) rose by 8%, and Carsales.Com (CAR) jumped 16%. BLD, in the building products sector, excelled with a fourfold increase in net profit during FY23, Vik Bansal's first full year as CEO. To boost profitability, Bansal focused on increasing sales volume, raising prices, and cutting costs. CAR's FY23 performance surpassed expectations. In Australia, the high demand for used cars and increasing interest in highervalue products were key drivers. Meanwhile, in North America, CAR witnessed customer growth, a rise in premium product adoption, and enhanced returns on private ads due to dynamic pricing strategies.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/204264549.pdfJuly, 2023
The Small Companies Fund offers investors exposure to a diversified portfolio of Australian listed small companies that reside outside the S&P ASX100 Index. The Fund is benchmarked against the S&P ASX Small Ordinaries Accumulation Index and has a 19 year track of record of outperformance.
The team combines fundamental bottom-up research of companies with an in-depth qualitative assessment of their management and industry structure. Our proprietary investment process, known as SCOPE (Small Company Optimal Portfolio Evaluation), is a relative stock scoring tool that ranks stocks from highest to lowest based on their score. The portfolio comprises the best scoring stocks, subject to a number of risk constraints, such as maximum active position size (5%) and liquidity.
The outworking of this process is a portfolio that typically exhibits both growth and value characteristics that aims to outperform through the market cycles.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/202143205-1.pdfJune, 2023
The Eley Griffiths Group Small Companies Fund (Fund) increased +2.7% in June, outperforming the Small Ordinaries Accumulation Index, which remained flat for the month. Over the financial year, the fund achieved a gain of +16.6%. Since its inception in September 2003, the Fund has delivered a return of +9.8% per annum after fees for its unitholders.
Global markets displayed strength in June, with positive sentiment fuelled by lower-than-expected inflation figures and encouraging economic data in the United States. The S&P 500 index surged by +6.5% and officially entered a bull market, defined as a 20% rise from recent lows. On the other hand, the local market showed a more subdued performance, influenced by the Reserve Bank of Australia (RBA) raising interest rates due to resilience in the labour market and wage pressures, thereby creating uncertainty about the ultimate peak in rates.
Contributions to performance during June included Navigator Global Investments (NGI +34%) Paladin Energy (PDN +34%) and HMC Capital (+15%).
NGI reached an agreement with Dyal Capital to expedite an outstanding payment due in 2026, which allowed for the acquisition of the remaining profit distributions from a portfolio consisting of six minority ownership interests in alternative asset managers. PDN, which holds a majority stake in the Namibia-based Langer Heinrich mine, rebounded following reports that Namibia did not intend to nationalise any natural resources as speculated in May, and there were no plans to seize stakes from existing license holders in minerals or petroleum.
Detractors to performance included Capricorn Metals (-7%), EBOS Group (EBO -13%), and Monadelphous Group (-4%).
EBO, a pharmaceutical distributor, received news that its supply contract with Chemist Warehouse would not be renewed. The new supplier offering an ownership stake in their business to the pharmacy giant as a component of the new agreement.
Looking ahead, we maintain a positive outlook for small and emerging companies. Valuations have adjusted and earnings profiles have normalised. As investor confidence in the inflation/interest rate outlook increases, we anticipate a return of capital to the smaller end of the ASX into discounted stocks, similar to that observed after the Global Financial Crisis (GFC) and the COVID-related market lows.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/202143205.pdfMay, 2023
In May, the Small Ordinaries Accumulation Index experienced a decline of -3.3%. The Eley Griffiths Group Small Companies Fund performed in line with its benchmark, finishing lower -3.2%. Since inception (September 2003) the Fund has delivered a return of +9.7% p.a after fees.
As throughout the year, investors have faced challenges such as high inflation and rising interest rates in the month. The resolution of the US debt ceiling issue in the final hour also added to the macroeconomic complexity. Negative trading updates from the retail sector, indicating a potential slowdown in consumer activity had an impact on market sentiment. A profit warning from Universal Store (UNI) triggered selling across the entire Consumer Discretionary sector (-6.4%). Portfolio holding Lovisa (-23%), which shares a similar customer profile to UNI detracted from performance.
Simultaneously, US chip-stock NVIDIA exceeded market expectations driven by surging demand for AI-related graphics processing units. This led to a significant rotation of investment from under pressure consumer/cyclical sectors into Information Technology sector (+6.9%). Tech companies with strong cash flow and exposure to AI attracted investors' interest.
Weighing on the portfolio was weakness in Small Resources (-7.1%). However, there were more positive signs for the Lithium market, with indications of restocking across the battery supply chain and increased electric vehicle sales in China.
Notable contributor to performance during the month was OFX Group (+28%). The company rebounded following the announcement of an above-consensus earnings guidance, share buyback and an acquisition.
Trading volumes decreased when interest rates began tightening in 2022, leading to decreased liquidity and sentiment, particularly in small/micro industrials. However, recent weeks have seen a rebound in trading volumes, approaching the long-run average. The economic cycle is not to be confused with the market cycle. The latter will move well ahead of time, discounting poor news and looking forward to consumer and business revival.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/200886190.pdfApril, 2023
The Eley Griffiths Group Small Companies Fund (Fund) increased 3.8% in April, outperforming the Small Ordinaries Accumulation Index return of 2.8%. The Small Ords outperformed large caps in the month, turning a corner following a period of underperformance. Since inception (September 2003) the Fund has returned 9.9% p.a. after fees for unitholders.
Market volatility subsided and sentiment improved in April. US regional bank failures were ringfenced when the US Federal Reserve established a lending program to help meet bank customer withdrawals, avoiding the need for banks to sell treasury bonds at a loss. US company earnings results season kicked off on a positive note with better than feared results.
Building Materials names Boral (BLD; +17%) and Brickworks (+12%) performed strongly in the month. Evidence inflation was trending downward and the RBA pausing cash rate hikes the catalyst. The sector has been challenged by disrupted global supply chains, higher prices, and labour shortages.
Management track record, strategy and alignment are cornerstones of our qualitative assessment process. An example of highly regarded leadership is Raleigh Finlayson, MD of gold miner Genesis Minerals (GMD; +22%) who announced the proposed acquisition of St Barbara’s Leonora assets. Finlayson built his track record by creating value for shareholders at Saracen (now part of Northern Star Resources). Recently it was revealed that GMD may face competition for the assets, which will play out in the coming months.
Biotech holding ImpediMed (+76%) backed up its +75% surge in March on the announcement the US National Comprehensive Cancer Network (NCCN) released new guidelines that bioimpedance spectroscopy (BIS) is an objective measurement tool to identify early signs of lymphoedema. IPD possesses the sole FDA-cleared BIS technology.
Detracting from returns was Champion Iron (-9%) as Chinese steel mills entered a maintenance period. As a result, resources were softer especially Iron Ore which declined 18% in the month. Gold names consolidated after sharp rises last month, Capricorn Metals eased -7%.
Equity markets look through the underlying economic conditions anticipating the next cycle. Further evidence that inflation continues its downward trajectory will endorse the view that the top of the interest rate cycle is within reach. Hence, our analysis is focused on the names likely to drive the market over the next 12-24 months.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/200265937.pdfFebruary, 2023
After increasing +6.6% in January, the Small Ordinaries Accumulation Index retraced -3.7% in the month. The Eley Griffiths Group Small Companies Fund finished -6.0% lower and since inception (September 2003) the Fund has returned +9.8% p.a. after fees for unitholders.
A collection of strong US economic data coming in ahead of expectations triggered moves across all asset classes. The data hit sentiment as it supported the view that the US Federal Reserve will be forced to stay on its interest rate tightening path. Against this backdrop defensive names outperformed, the opposite to January which saw Growth stocks rally as investors speculated peak inflation had been reached. Gold names fell and detracted from performance as the US 10yr Treasury Yields rose by >40bps.
Overall, the first half year reporting season showed top line revenue numbers remain robust. Higher costs are hitting corporate margins, especially wage inflation which is now the focus rather than labour availability. Management outlooks were generally conservative acknowledging that the economic backdrop is likely to soften. Portfolio holdings which beat earnings expectation and contributed to returns in the month were Boral (+5.8%) and Tyro Payments (+11.1%).
The Chinese re-opening trade stalled prompting Small Resources (-9.2%) underperformance of Small Industrials (-2.0%) with weakness across several commodity benchmarks and contracting companies citing cost inflation as prompting delays in capex intentions.
Looking ahead, despite the surprisingly strong US jobs data in the month, Chair of the US Federal Reserve, Jerome Powell said that the disinflationary process “had begun” and that the US was in the “early stages of disinflation” (7 February 2023, Economic Club of Washington speech). The expected gradual downward trend of inflationary data points is likely to lend support to equity markets.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/197631388.pdfDecember, 2022
Equity markets could not maintain the strength of the previous two months drifting lower in December. The Small Ordinaries Accumulation Index returned -3.7%, the Eley Griffiths Group Small Companies Fund finished -4.0% lower and since inception (September 2003) the Fund has returned +9.7% p.a. after feesfor unitholders.
Despite the US November consumer price index (CPI) print coming in below expectations and the lowest in a year, US Federal Reserve chairman Jerome Powell’s signalled that interest rate increases will continue, albeit at a slower pace. Powell dampened hopes of a Fed ‘pivot’ suggesting rates may stay higher for longer to achieve price stability, implying a return to 2% inflation overtime. (Powell’s Press Conference December 14)
Contributing to the Funds performance in the month was Champion Iron (+14.9%). The China re-opening story saw Iron Ore close +19% higher in the month notwithstanding investors debate of China’s industrial production and slowing credit concerns as the country tackles escalating Covid cases.
Lithium names retreated In December amid concerns around the sustainability of electric vehicle (EV) demand and weaker battery supply chain destocking. A rotation away from Lithium contributed to Gold’s strength as did the Bank of Japan’s unexpected reversal on its YCC policy (Yield Curve Control) which sent the USD lower triggering commodities priced in USD to trade higher. Contributing to returns in the month was Gold holding Capricorn Metals (+9.5%).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/194754237.pdfNovember, 2022
Equity markets continued to rally in November, the Small Ordinaries Accumulation Index finished +4.9% higher taking quarter-to-date gains to +11.2%. The Eley Griffiths Group Small Companies Fund increased +5.1% and since inception (September 2003) the Fund has returned +10.1% p.a. after feesfor unitholders.
In the month, buyers turned up on softer October US consumer price index (CPI) print which was accompanied by comments made by Federal Reserve Chairman Jerome Powell that the time for moderating the pace of interest-rate increases may come as soon as December (Brookings Institution speech). The pattern is bad economic news is good news for markets as deteriorating datapoints validate the central bank pivot narrative.
China taking concrete steps toward easing COVID restrictions on a path to re-opening triggered Small Resources (+11.5%) to materially outperformed Small Industrials (+2.6%). The Fund was well positioned for the broad-based rally across the commodity complex with a 24% portfolio weighting to Materials. A +27% surge in the iron ore price saw portfolio holding Champion Iron up +39%, whilst mineral sands and rare earths miner Iluka Resources gained +17%.
Supported by a rebound in the gold price (+8.3%), portfolio gold holdings De Grey Mining (+22%), Genesis Minerals (+11%) and Capricorn Metals (CMM; +24%) contributed to the month’s performance. In addition, CMM rallied +10% upon announcing the estimated production from its Mt Gibson Gold Project will increase by 32%.
Detracting from performance in the month despite delivering a solid operating update its Annual General Meeting, fashion retailer Lovisa Holdings (-4%) was weaker after sustained period of outperform
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/193123014.pdfOctober, 2022
Major developed equity markets rebounded in October headlined by US Dow Jones which recorded its best month since 1976, up +14%. The Small Ordinaries Accumulation Index gained +6.5% whilst the Eley Griffiths Group Small Companies Fund finished +5.9% higher and since inception (September 2003) the Fund has returned +9.8% p.a. after feesfor unitholders.
Markets moved higher on data released in October showing signs of inflation slowing. Global shipping costs, median rents and wages growth measured by the Employment Cost Index (ECI) all moderated in the month. US corporate earnings results proved more resilient than expected aiding the market upswing. Of the firms that had reported, 70% had beaten analyst’s forecasts (UBS Research, 2 November 2022). Domestically, the Reserve Bank of Australia (RBA) increased the cash rate by 0.25%, nonetheless equity markets rallied on commentary that rises will likely slow (Minutes of the Monetary Policy Meeting of the RBA, 4 October).
Companies with trusted leadership executing their strategy were rewarded by investors. Contributing to returns in the month was fashion retailer Lovisa Holdings (+15%) which Annual General Meeting increased the markets confidence in the new region store rollout plan. Gold miner Capricorn Metals (+13%) announced its maiden profit result after a successful first year of operations at the Karlawinda Gold Project.
Weighing on returns was NIB Holdings (-10%) which announced a capital raise to fund its NDIS market entry via acquisition, a roll-up of plan management businesses. Costa Group (-13%) downgraded CY22 earnings expectations due to adverse weather impacting citrus operations.
As company fundamentals have taken a backseat to economic and geopolitical news flow which has dominated the market narrative, no one investment style has consistently outperformed for more than two months this year. As a style agnostic manager, not being restricted by a style bias or sector exclusions, has been advantageous against a volatile backdrop.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/192223057.pdfSeptember, 2022
After two months of gains, the Small Ordinaries Accumulation Index declined by -11.2% in September. Outperforming its index, the Eley Griffiths Group Small Companies Fund finished lower -10.0%. Since inception (September 2003) the Fund has returned +9.5% p.a. after fees for unitholders.
Equities were routed when the US August inflation reading topped expectations, quashing investor confidence that a US Federal Reserve (Fed) pivot was conceivable. The Fed’s response was a predicted 75bp rate hike. What surprised the market was the hawkish "whatever it takes" commentary from Fed Chairman Jerome Powell accompanying the decision. The market sold off as a more aggressive rate tightening schedule was priced in.
Brickworks Ltd (BKW; +5.5%) contributed to returns, rising on the release its property investment arm results which were ahead of expectations. BKW performance was aided by partial ownership of New Hope Corporation which rallied on strong FY22 results and guidance that the company expects record cash generation to continue while demand outstrips supply.
Amongst the volatility, agriculture names outperformed in the month as defensive exposures. Australia's largest (and third globally) almond grower and processor, Select Harvest gained +6.1% on the release of a promising FY23 crop and pollination update whilst flagging that US shipment challenges are easing.
Sighting delays signing new clients, costs being borne in anticipation of work commencing, inflation and foreign exchange headwinds, financial services software provider IRESS Limited (-21.1%) downgraded earnings guidance ahead of its new CEO commencing.
Looking ahead, Global transport giant FEDEX, a bellwether US stock for sensing the pulse of the global economy and consumer demand, cut guidance as changing economic conditions start to bite. Similarly, Apple Inc ditched plans to increase production of its new iPhones after demand fell short of expectations. With signs of economic fragility proliferating, investors are debating when the Fed will blink and slow or pause rate hikes. At time of writing early October, the Reserve Bank of Australia bucked the global trend by slowing the pace of interest rate increases sparking a market rally.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/191306303.pdfAugust, 2022
Australia was a relative outperformer posting moderate gains compared to the retreats staged by major global equity markets in August. The Eley Griffiths Group Small Companies Fund finished +3.1%, outperforming the Small Ordinaries Accumulation Index which gained +0.6%. Since inception (September 2003) the Fund has returned +10.2% p.a. after feesfor unitholders.
The month began on a positive note with equities surging upward after the eagerly anticipated US Consumer Price Index (CPI) print announcement came in below expectations. The “risk on” exuberance was short lived after several U.S. Federal Reserve (Fed) voting members made headlines that a Fed pivot was unlikely and that further rate rises were needed to dampen inflation. Toward the end of August, the month’s steadily accrued gains took a blow with the Fed Chairman’s hawkish rhetoric at Jackson Hole confirming the Fed would continue its tightening policy until confident inflation is returned to target.
Small Resources (+5.6%) outperformed in the month, driven by strength in Lithium/Battery Materials names. At the portfolio level, IGO (+22%) contributed to returns. Sentiment towards Mining Services names turned more positive after better-than-expected FY22 results. Strong demand saw Monadelphous Group (+27%) post record revenue and a substantial new and extended contracts pipeline. Consumer Discretionary results were largely better than feared. EGG investment, fashion jewellery retailer Lovisa Holdings (+30%) was a standout.
Information Technology (-4.6%) names remained volatile with weakness over the month. Global cloud connector Megaport (-25%) gave back some ground after July’s breakneck rally.
Overall, the domestic corporate reporting season scorecard shows result ‘beats’ trumped ‘misses’ verses expectations. Better than feared was bought, whereas downgrades were punished by the market. The season highlighted the deterioration effect higher than normal buffer inventories had on cash flow. Higher operational expenditure a consistent feature with both labour and material cost inflation. Finally, management outlook statements suggested that the consumer is still spending with no sign of slowdown yet.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/190501504.pdfJuly, 2022
Global equity markets (ex-China) rebounded strongly in July. The Small Ordinaries Accumulation Index rallied +11.4% over the month, a significant outperformance against large caps which gained +5.5%. The Eley Griffiths Group Small Companies Fund finished +11.8% higher in the month and since inception (September 2003) the Fund has returned +10.1% p.a. after fees for unitholders.
There was early indication that bad news is now being discounted into stock prices. Markets pushed higher despite the US CPI report for June the highest print in 41 years, 9.1% year on year compared to the 8.8% estimate. Equities took the number in its stride failing to extinguish the “risk on” sentiment. As predicted, The Federal Reserve (Fed) raised rates by 75bp in response and whilst Fed Chair Powell’s broader messaging didn’t overly change, comments that the US economy may be showing signs of slowing were less hawkish than expected. The war on inflation is being won. The market responded by pricing in a lower peak Federal Funds rate and increasing the likelihood that rates may be eased in 2023 reflecting the impact higher rates will have the on real economy.
Locally, the Reserve Bank of Australia delivered +50bps after the Q2 CPI came in at 6.1% YoY, the highest since 1990. Once more, equity markets responded positively to the dovish post meeting statements, “we don't need to return inflation to target immediately… we are seeking to do this in a way in which the economy continues to grow, and unemployment remains low” (Australian Strategic Business Forum, 20 July 2022 Governor Lowe).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/189451368.pdfJune, 2022
The downward trajectory of global equity markets continued in June as central banks displayed a willingness to hike rates aggressively in the near term to fight inflation. This hard stance increased concerns of a swift contraction in global economic activity. Against this backdrop, the Eley Griffiths Group Small Companies Fund finished lower by 13.0% versus the Small Ordinaries Accumulation Index, which declined 13.1%. Since inception in September 2003, the Fund has returned 9.4% p.a. net of fees. The US Fed delivered a 75bp rate hike in June, the largest rise since 1994, after May’s CPI accelerated at the fastest rate since 1981 (8.6%). Chair Powell signalled another large hike in July to fight inflation “expeditiously.” Likewise in Australia, the RBA surprised markets with the largest rate hike in 22 years (50bp) to bring the cash rate to 0.85%.
The Fund’s overweight position in Materials weighed on performance with small resources retracing by 22% on weaker commodity prices and shrinking demand concerns. The price of copper, a ‘bellwether’ for the economy, dropped below $US8000 for the first time in almost 18 months and is now down 17% year to date. Developers and explorers were sold off more heavily than producers, albeit no one was immune
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/188509707.pdfMay, 2022
The Australian equity market run of outperformance relative to global peers came to an end in May. Big picture macro factors such as inflation, rate hikes and China’s Zero-COVID policy combined to weigh on the local market. The Eley Griffiths Group Small Companies Fund finished lower by 7.1% versus the Small Ordinaries Accumulation Index, which declined 7.0%.
In a down month, Small Resources (-6.0%) again outperformed Small Industrials (-7.5%), coal names were amongst the leading performers in the month as thermal coal prices rallied. Brent followed suit (+12%) aiding portfolio holding Beach Energy (+6.2%). Elsewhere, softer ferrous and non-ferrous scrap prices prompted analysts to review their Sims (-15.1%) estimates and recommendations, resulting in a softer stock performance for in the month.
Weak earnings guidance, and more generally concerns that higher interest rates could impact the consumer, dragged on housing and consumer discretionary names. Car dealer and portfolio holding Eagers Automotive (-18.5%) trading update underwhelmed investors. Notwithstanding strong demand, the lack of supply of vehicles the catalyst of the revision in profit expectations. Corporate Travel Management (-15.5%) warned that “short-term” staff shortages and pandemic variants have buffeted trading performance.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/187739844.pdfApril, 2022
Global equity markets were dragged down by the weight of big picture macro overrides in April. The Eley Griffiths Group Small Companies Fund finished lower by 4.1% versus the Small Ordinaries Accumulation Index, which declined 1.5%.
The Australian market remained among the most resilient developed equity markets in the face of rising inflation prints, expectation of higher interest rates, and the geopolitical uncertainty was too much for most major global benchmarks to fight. The S&P 500 finished April down 8.8%, China’s Shanghai Comp fell 6.3% while the Tech heavy Nasdaq posted its largest monthly decline since 2008, losing 13.3%. The Australian Small Ords Information Technology sector followed suit, falling 12.5%.
The damage experienced among US Tech stocks has been extraordinary. More than 22% of Nasdaq holdings are down 75%. High profile representatives, Robinhood and ARKK Innovation ETF remain under huge pressure down -90% and - 70% respectively from all-time highs. An inflection point in inflation, pivoting to a negative rate of change would be positive for equity markets. A continuing positive trajectory would be negative. Overall, the portfolio has maintained a significant underweight to IT.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/187143122.pdfMarch, 2022
After a sluggish start to the month, a widely anticipated 25bp hike by the US Federal Reserve (FOMC) triggered the equity market upswing. Stunning inflation prints instigated months of investor angst over the timing and pace of rate rises. Investor reaction to the eventual hike was a case of "sell the rumour, buy the fact", a reversal of the well-known adage. With a further 200 bp cumulative increase anticipated this year in the US, investors now turn their attention to whether the Fed’s action can rein in inflation at 40-year highs without hard landing the economy.
The Small Resources (+12%) once again materially outperformed the Small Industrials (+2%) in March. The Fund has been well-positioned for the broad-based rally we have seen across the commodity complex. Materials and energy stocks now account for over 26% of the Small Ordinaries Index. Strength in Lithium holdings contributed to returns in the month, Liontown Resources (+31%) extended the terms of its agreement to supply LG Energy Solution with one-third of its Kathleen Valley production which commences in 2024. IGO (+29%) a diverse green metals producer also benefitted from volatile trading in Nickel. Metal recycler Sims (+21%) traded higher with scrap prices and the release of strong 1H results. Profitless tech struggled through the month whereas quality tech was well supported with portfolio holding Iress gaining +15%.
A robust underlying economy and elevated commodity prices have meant the Australian equity market has been relatively insulated versus offshore markets and within sight of testing all-time highs. The prospect of Russia’s geopolitical isolation precluding them from exporting commodities is supportive of Australia’s significant capabilities, in particular heavy sanctions seen in Coal, LNG and wheat. This does present opportunities for Australian corporates, a fact not lost on investors. This lays bare already excessively conservative broker commodity (and earnings) estimates
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/185709459-1.pdfFebruary, 2022
Despite the volatility brought about by the Russia/Ukraine conflict and the looming prospect of a tightening cycle, including an initial 50bp move, the Small Ordinaries Accumulation Index finished steady for the month -0.1%. The Eley Griffiths Group Small Companies Fund narrowly undershot finishing -0.6%.
Overall 1H reporting season for small caps concluded with a modest negative skew with downgrades outpacing upgrades. Supply chain disruptions and labor availability were reoccurring key themes, corporate margins have been maintained by successful pass-through of higher opex in the main. Cash-burning companies were sold off on disappointing results.
IT stocks lost ground in February, doubtless influence by a heavy sell-off in Nasdaq Tech names. The detrimental effect of higher interest rates on Tech company valuations was not lost on investors. Despite the portfolio having a significant underweight position to the Information Technology sector, the start to 2022 has been deeply challenging for growth stocks. Tech and Fin Tech names which detracted from performance in the month were Life360 Inc (-36.6%), Tyro Payments (-31.5%) and Praemium (-39.3%). EGG’s position in Life360 was exited in the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/184841216.pdfJanuary, 2022
Hawkish comments from the US Federal Reserve and blistering global CPI prints saw global equity markets sell off in a volatile start to the year. The Eley Griffiths Group Small Companies Fund finished down -9.3% in line with the Small Ordinaries Accumulation Index (XSOAI) which declined -9.0%. US Fed Chairman, Jerome Powell emphasised that stronger than expected economic activity and tightening labour market has set the tone for interest rates to increase. Inflationary pressures have been mounting due to the rapid expansion of the US economy (GDP +5.5% in 2021), a tightening labour market and the debilitating effect of global supply chain disruptions. Further, futures markets are suggesting 4-5 rate hikes in 2022 and 2 in 2023 from the Fed.
Domestically, headline CPI surged in the December quarter whilst Australia’s core inflation clocked its fastest annual pace since 2014. Markets were in search of a market correction catalyst, the anxiety surrounding the FOMC’S timing and magnitude of interest rates hikes, and imminent balance sheet reduction were just the elixir for a retracement in stocks.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/183043803.pdfDecember, 2021
In the month, the Eley Griffiths Group Small Companies Fund (SCF) gained +2.3%, outperforming the Small Ordinaries Accumulation Index (XSOAI) which finished up +1.4%. The fund returned +21.7% versus the XSOAI +16.9% in 2021. The XSOAI retraced as much as -4.5% in early December as news of the fast-spreading Omicron variant continued to weigh on risk appetite. As fears around the severity of the Omicron variant moderated, domestic markets staged a characteristic year end Christmas rally. Aiding the positive sentiment was commentary from Fed Chairman Jerome Powell, talking to the strength of the US economy which settled investor angst that a faster cadence of interest rate hikes might derail the economic recovery.
Tech, high beta and growth stocks were sold off in December spurred on by hawkish central bank commentary and worse than expected inflation prints, leading to predictions of earnings and multiple compression. The portfolio’s balanced positioning across structural growth and cyclical stocks hedged out much of the fall out of the phenomenon witnessed. Notable moves from Sims Metals (+14%) and Iluka Resources (+17%) offset softness from Life360 (-20%) and Pinnacle (-5%).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/182011277.pdfNovember, 2021
In a volatile end to the month, the Eley Griffiths Group Small Companies Fund (SCF) returned -0.35%, in line with the Small Ordinaries Accumulation Index (XSOAI) which declined -0.31%. After posting solid gains midway through the month, two events triggered domestic equity markets to sell-off into month end. First was the discovery of a new COVID-19 variant Omicron in South Africa and its risk of derailing the economic revival. Whilst the World health Organisation has reported no deaths from Omicron, it could take weeks to determine how effective current vaccines and other treatments might be against it. While the WHO stress it is too early to draw conclusions, indications are that the new variant, while highly transmissible, may be less virulent.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/181260039.pdfOctober, 2021
In the month, the Eley Griffiths Group Small Companies Fund (SCF) increased +2.4%, outperforming the Small Ordinaries Accumulation Index (XSOAI) which returned +0.9%.
The volatility seen in September tempered as concerns that one of China’s largest property developers Evergrande would collapse were alleviated when debt commitments were met. Furthermore, reporting of strong US corporate earnings helped dispel fears of slowing global growth.
Domestically, the resilience of the labour market and rapid reopening of the economy appears to have resulted in a materially higher-than-expected Q3 CPI data (2.1%) the highest since 2015. In response the market priced in several interest rate hikes for 2022, defying the RBA’s forward guidance of no rate hikes until 2024. The RBA subsequently withdrew this expectation on Melbourne Cup Day
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/180358499-1.pdfSeptember, 2021
In a volatile month, the Eley Griffiths Group Small Companies Fund (SCF) finished down -3.3%, compared to the Small Ordinaries Accumulation Index (XSOAI) which declined -2.1%. Contributing to September’s weakness were fears that one of China’s largest property developers, China Evergrande Group, would fail under $300 billion in liabilities and leave 1.5 million buyers waiting for finished homes. The People’s Bank of China has been steadily tightening property market restrictions to rein in ballooning prices and household debt driven by rising urbanisation. The government announced they would introduce policies to avoid a hard property market landing vowing to ensure a “healthy property market” and protect homeowners’ lawful rights.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/179510046.pdfAugust, 2021
In a strong month, the Eley Griffiths Group Small Companies Fund (SCF) climbed +6.0%, outperforming the Small Ordinaries Accumulation Index (XSOAI) which gained +5.0%.
Small caps firmly outpaced large caps which gained +1.7% in the month. In a reversal of July, the index strength was driven by the Small Industrials (+5.8%) overshadowing a softer Small Resources (+0.7%) performance, surrendering much of the gains of last month. A -15% plunge in the Iron Ore price (-45% from May’s highs) sent shockwaves through the commodities sector. The weakness in Iron Ore was likely triggered by a build-up in Chinese portside inventories and a pledge to curb steel production from a number of mills. Detracting from the portfolio’s performance were Mineral Resources (-13%) which gave back a wedge of July’s gains, whilst Sims (-8%) momentum stalled despite announcing FY21 earnings guidance had been exceeded
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/178629678.pdfJuly, 2021
The Eley Griffiths Group Small Companies Fund (SCF) increased 2.4% in July outperforming its benchmark, the Small Ordinaries Accumulation Index which finished +0.7%.
The performance of the Small Ords in July was dominated by the Small Resources (+7.4%) sector. Several EV battery material names struck record highs, for the SCF portfolio, Pilbara Minerals (+22%), IGO (22%) and Mineral Resources (+17%) contributed to the month’s performance. Coal names rebounded, whilst investors’ appetite for mining services names turned positive with portfolio holdings Seven Group (+14%) and Monadelphous (+3%) adding value for unitholders
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/175737195.pdfJune, 2021
The Eley Griffiths Group Small Companies Fund increased 5.0% in June outperforming its benchmark, the Small Ordinaries Accumulation Index which finished +3.1%. Small caps added +0.9% to its outperformance of large caps, finishing up a robust 33.2% or 5.3% ahead of the ASX 100 for FY21.
The Fed worked to a hawkish tilt in the month, signalling tapering and ultimately putting tightening back on the table to avoid overshooting the targeted inflation band. The modified narrative flattened the US yield curve by 23bp, triggering moves across a range of asset classes. In equity markets, growth stocks came back into fashion clawing the Small Cap Tech sector back into the black (+3%) for FY21.
Leading Small Cap sectors for the FY21 were Consumer Discretionary (+37%), Financials (+35%) Telecommunication Services (+31%) and Materials (+23%).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/174050476.pdfMay, 2021
In May, the Small Ordinaries Accumulation Index (XSOAI) finished up +0.3% recovering from a -3% deficit intra-month. Outperforming its benchmark, the Eley Griffiths Group Small Companies Fund (SCF) returned +0.5%. Aided by soaring iron ore prices and solid bank earnings results, large caps outpaced small caps with the S&P/ASX100 Accumulation Index rising +2.6%. The big miners and banks lifted the benchmark to a record high.
The pro-cyclical rotation maintained momentum, spurred on by dazzling US inflation data and comments made by US Treasury Secretary Yellen on the conceivable need for rate hikes. Investors reduced Growth/High PE exposure (Information Technology; -6%) favouring an allocation to value, cyclicals names, and golds. Gold stocks of all ilk rebounded strongly through May as the physical gold price drew support from a meltdown in cryptocurrency (Bloomberg Crypto Index -24% after being +35% mid-month). EGG gold portfolio holding SSR Mining performed well in May (+21%) with investors encouraged by the company’s quarterly highlighting stronger production, free cash flow and improved balance sheet metrics. Coal stocks also recovered sharply after firm export markets for coal (both thermal and coking) bid prices higher notwithstanding the Chinese Central Government rhetoric on commodity price kerbs.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/172499559.pdfMarch, 2021
The Eley Griffiths Group Small Companies Fund (SCF) finished broadly unchanged, +0.1% for the month after undershooting the Small Ordinaries Accumulation Index (XSOAI), which finished +0.8%. Big caps outpaced small caps, with the S&P/ASX100 Accumulation Index +2.5%, benefitting from bank share price strength on better macro conditions (credit growth, deposit tailwind, excess capital) and a steepening yield curve. Defensive sectors shone during the month with Real Estate names performing strongly, up +4.5% by month end, followed by a good showing from Consumer Staples (+3.1%). Materials (notably gold and metal’s names) was the worst performing sector over the past month, returning -4.9%, followed by Industrials (-4.8%) and Financials (-2.8%).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/170557006.pdfFebruary, 2021
In February, the Eley Griffiths Small Companies Fund (SCF) finished up +0.57% in the month underperforming its benchmark, the Small Ordinaries Accumulation Index (XSOAI) which increased 1.55%. On a simple ‘results Beats/Misses’ metric, February’s half year corporate reporting season was one of the best in many years. A benign confession season (in the prior month) was likely the best lead indicator of a positive reporting season. Despite this, unless management offered a meaningful surprise to earnings or outlook, many names traded lower given the solid hard rally we saw in preceding months. On average small Industrial EPS estimates for FY22 were downgraded by around 3%. Industrial names fell 8.5% whilst the Materials sector finished up 3%. Investors were quick to cut exposures to gold, coal and mining services names during the month with this having an adverse impact on several portfolio holdings.
Telecommunication Services backed up January’s strong performance, rallying 3.9%, followed by strong showings from Financials (+6.7%) and Consumer Staples (+3.7%).
Contributing to the portfolio’s performance was Vocus Group (VOC; +22.3%) which received an indicative proposal from Macquarie Group Infrastructure and Real Assets (MIRA) and Aware Super to acquire the business, attracted to VOC’s vast fibre infrastructure network. Jewellery and accessories retailer Lovisa Holdings (LOV; +36.3%) bounced on its H1 results release despite reporting declining revenue and profits. The bull case for LOV is predicated on a sizable global rollout opportunity, a vaccinated consumer, and a conservative funding position. It is encouraging to note a 12% same store sales growth YOY in the first 7 weeks of the calendar year.
Weighing on performance in the month was metallurgical coal producer Coronado Global Resources (CRN; -17.2%). CY20 financials has been largely pre-reported, what caught investors off guard was a higher-than-expected cost forecast. We added to our position amidst the share price weakness. Your manager remains a believer in the global reflation trade. A rapid recovery in global economic activity combined with structural deficits across many commodities will manifest itself in higher prices across hard and soft commodities, longout-of-favour small cap resource stocks will be natural beneficiaries of this phenomenon.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/168838152.pdfDecember, 2020
Domestic equity markets navigated surges in global Covid-19 cases and fresh local outbreaks to finish the month in positive territory. In December, the Small Ordinaries Accumulation Index (XSOAI) edged higher +2.8%, +1.8% ahead of the ASX100, extending its YTD outperformance to +9% or +26% from the 23 March low. The Eley Griffiths Small Companies Fund (SCF) returned +3.2% outperforming its benchmark.
Last month’s vaccine news ignited an aggressive rotation into Cyclical/Value names at the expense of Growth/Tech & Covid-19 Stay-At-Home beneficiaries. Investor preference for Value continued into December, yet at a more subdued pace compared to November’s whirlwind shift. Gold which suffered its worst month of the year in November, staged a recovery in December.
Value names which led performance for SCF in the month were Credit Corp Group (CCP; +25.0%) and Peet (PPC; +16.5%). CCP, Australia’s largest debt purchaser, rallied on Christmas eve on announcing the acquisition of the Australian purchased debt ledger (PDL) book of Collection House Limited (CLH). CCP has a strong track record of deploying capital on favourable terms for its shareholders and this transaction brings increased earnings visibility and an upward revision to earnings growth forecasts for FY21 and beyond. PPC, a residential land developer, is benefitting from increased demand for new homes due to record low mortgage rates and the Government’s HomeBuilder stimulus package. In December, investors were also reminded that strategic interest in the business remains.
Select Harvest (SHV; -10.7%) Australia’s largest almond grower, fell during the month as it became clear the ten year low in almond pricing was likely to endure into CY21. The recent strength of the AUD also resulted in negative earnings revisions. Whilst these two headwinds are likely to persist, we see significant upside for SHV when the almond price, which currently sits below cash cost of production in California (80% of global supply), recovers.
After a 27% rally in November, IDP Education (IDP; -20.4%) fell as speculation of a large sell down from Education Australia, a global reacceleration of Covid-19 and deteriorating Australia/China relations crystalised profit taking. We believe the latter is overplayed and that much like CCP, IEL will have the opportunity to deploy capital to further entrench itself as the dominant player in a very attractive and fragmented industry. As we commence CY21, an array of lead indicators are confirming our preference for more economically sensitive stocks. With Copper at $3.50/lb, Iron Ore >$150/t, Brent $55/bbl, the AUD heading toward an 8 handle and global growth set to surprise to the upside (again) in CY21, we have increased the portfolio’s commodity and cyclical exposure to levels last seen in 2016. We are fully invested with cash sitting at 3%
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/163881152.pdfOctober, 2020
The Small Ordinaries Accumulation Index (XSO) achieved a positive return (up 0.5%) in October which contrasted the negative trend of global equity markets. The Eley Griffiths Small Companies Fund (SCF) returned 0.5% in line with its benchmark. After slumping in September, Financials recovered +5.5%, followed by Consumer Discretionary (+1.7%) and Consumer Staples (+1.7%). Healthcare was the worst performing sector over the past month, returning -8.6%, followed by Communication Services (-2.3%) and Energy (-1.0%).
Equities rallied through the first half of October (XSO up ~7% by the 19th) following the release of a Federal Budget that offered meaningful tax relief for consumers and businesses alike, including the extension of JobKeeper/Seeker programs and the unveiling of JobMaker. Also supportive for equities was dovish commentary from the RBA Governor Philip Lowe which opened the door to further policy easing and purchasing of longer-term bonds.
The final weeks of the month were impacted by news of record rises in coronavirus cases in the United States and parts of Europe. As a result, investor apprehension spiked on news that fresh lockdowns may cripple the global economic recovery. Adding to the risk-off sentiment were concerns a US stimulus package would not be agreed upon before the election and signs of a tightening US Presidential race which might raise the prospect of an unworkable US Congress.
Contributing to performance in the month was financial holding and investment platform Netwealth Group (NWL; +13.8%) which made record highs following the release of an impressive first quarter update. Better than expected net inflows (up 29% PcP) confirmed that NWL continue to grow at the expense of rivals HUB24 (HUB) and Praemium (PPS).
In a positive sign for domestic economic health, vehicle sales began there long awaited recovery across all Australian states and territories ex-VIC. Eagers Automotive, (APE; +18.7%) pushed higher on a compelling trading update highlighted by NPAT jumping 45% PcP. Combining with enhance revenue was evidence of a reducing cost base which has been achieved from efficiencies derived from its merger with AHG in August 2019.
Annual general meetings dominated newsflow throughout October with seemingly above average levels of scrutiny directed to agendas, notably remuneration reports and management incentive structures. Updates in the main were positive, reflecting a prevailing buoyant consumer discretionary environment. Automotive after-market group and EGG holding Bapcor (BAP) spoke reassuringly about trading for the first quarter of FY21. Stocks whose share prices had overreached fared less well with their management commentaries, such as Temple & Webster (TPW; -15.4%), Adairs (ADH) and Baby Bunting (BBN). Cloud interconnector Megaport (MP1; -16.3%) declined in line with tech sector weakness late on in the month. Investors were also underwhelmed by the company’s Q1 update, namely moderate revenue growth.
Looking ahead, as borders begin to reopen the Reserve Bank deputy governor declared Australia is technically out of recession with the September quarter showing modest growth. As flagged by the RBA Governor, on 3 November the RBA reduced the cash rate to 10bp and announced $100bn quantitative easing (bond buying). Finally, the world (and markets) await the outcome of the US election and whether Washington will face policy gridlock issues.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/161071680.pdfticker: EGG0001AU
commentary_block: Array
factsheet_url:
https://investmentcentre.moneymanagement.com.au/factsheets/mi/n6x4/eley-griffiths-small-companies
release_schedule: Monthly
fund_features:
Eley Griffiths Group Small Companies principally invests in shares of Australian companies listed on the ASX that fall outside the S&P/ ASX 100 Index and some cash. The Investment Manager is an active manager who makes decisions about buying and selling investments of the Fund on a daily basis. The Fund aims to outperform the S&P/ASX Small Ordinaries Accumulation Index over a rolling 3 year period.
- Number of stocks : 35- 55 stocks
- Benchmark : S&P/ASX Small Ordinaries Accumulation Index
- Asset allocation targets: Australian & New Zealand Equities (95%), Cash 5%
manager_contact_details: Array
asset_class: Domestic Equity
asset_category: Australian Small Cap
peer_benchmark: Domestic Equity - Small Cap Index
broad_market_index: ASX Index Small Ordinaries Index
structure: Managed Fund