September, 2023
The Trust was down 4.1% inline with the Index which was down 4.0%. Financials markets were clearly in a risk-off mode again with long term bond rates moving higher and pockets of stubborn inflation around the world.
Gold names, which were strong in the prior month, reversed their gains and stock performance outside this was mixed.
Given results were released in August, there was very little in the way of stock news. It was, however, the first chance for directors to trade post results as well as companies to commence buy-backs once the market had digested result announcements.
For our portfolio the signaling here was positive:
- 16 directors buying (2 selling)
- 8 active buybacks across the portfolio
Given the weak macro backdrop, such positive signaling from those closest to the fundamentals of the company was encouraging. We used the month to further engage with our portfolio companies on corporate strategy and governance and continued to build further conviction in the fundamentals.
The portfolio-average PE ratio of 11.2x remains at a sizeable discount to the index which is 17.0x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0923_PVSCT.pdfAugust, 2023
The Trust was down 2.2% compared to the Index which was down 1.3%. Reporting season meant significant volatility against the backdrop of weaker global markets. Our holdings in Gold names performed well in such markets with Bellevue Gold and Genesis up 16.6% and 8.8% respectively.
Given recent guidance in July from many of our holdings, the only genuine surprises were from the likes of GUD Holdings (up 21.8%) and Premier Investments (up 16.1%) contrasted by negative news from smaller positions such as Aeris Resources (down 36.8%) and Genetic Signatures (down 28.7%).
In some cases, the macro concerns were enough to distract investors from situations at companies where genuine progress was announced but is yet to be rewarded by investors. As examples, Lark (up 4.4%) with a renewed debt facility and an export deal in Malaysia, Envirosuite (down 15.2%) despite gross margins lifting from 47.9% to 51.6% and Enero (down 12.8%) despite moves to unlock shareholder value by selling their stake in OBMedia – all appear to have positive catalysts in the short-term so we expect investors to soon take note. Two new stocks made a positive impact to the Trust with News Corp (up 14.9%) and DUG Technology (up 12.9%).
The portfolio-average PE ratio of 11.8x remains at a sizeable discount to the index which is 18.1x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0823_PVSCT.pdfJuly, 2023
The Trust was up strongly in July +4.7% (net of all fees) outperforming the Index which was up 3.5%.
As mentioned in recent newsletters, there are tentative signs of renewed interest in the sub $500m market cap space, where the Trust has a large exposure. It was pleasing to see the beginning of a broad recovery in this space during the month (as an example 8 stocks in this market cap range, and held by the Trust, were up 10% for the month).
Most encouraging however was the improved earnings updates from several companies in the portfolio. Earnings guidance from Alliance Aviation, RPM Global, Flight Centre and Navigator all led to a lift in broker forecasts.
While there was no company specific news, investors also responded to stronger sector trends with EV volumes for novated leasing pushing up Smart Group and global travel trends helping Webjet.
Most of remainder of the portfolio will provide earnings updates during the upcoming August reporting season.
The portfolio-average PE ratio of 10.8x remains at a sizeable discount to the index which is 17.6x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0723_PVSCT.pdfJune, 2023
For the month of June, the Trust was up 0.8% (net of all fees), outperforming a flat Index. We continue to expect two themes to come to the fore over the balance of the calendar year, namely:
- Corporate activity/strategic interest in undervalued names; and
- Renewed investor interest in stocks below $500m market cap
Pleasingly there were signs of both in June.
As evidence of the first point the major shareholder in Navigator agreed to a placement at a significant premium to bring forward previously announced (but highly structured) acquisitions. The premium paid and now simplified structure grabbed investor interest pushing the stock up 34.3%.
Smaller stocks below $500m such as Qoria (+40.0%) and Envirosuite (+11.1%) began to appear on the broader investment radar given they offer defensive and growing revenue streams – a hard combination to find in this market. Others in this group continued to be impacted by tax loss selling. Logically this ended on 30th June, as a result we have seen a strong bounce in many names post. The portfolio-average PE ratio of 10.0x remains at a sizeable discount to the index which is 16.2x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0623_PVSCT.pdfMay, 2023
For the month of May, the Trust was down 3.6% (net of all fees), compared to the Index which was down 3.3%.
Markets were dominated by weaker China data and concerns over negotiations in the US to lift the debt ceiling. Share prices were also impacted by pockets of ‘tax loss’ selling further separating share prices of some stocks from fundamentals – with many stocks down >10% on no news flow.
This sidelined (for now) early signs of positive momentum returning to the smaller end of the market. Encouragingly, there has been more commentators noting the large underperformance and contrarian opportunity within Small and Microcap stocks. This combined with the natural end to tax loss selling by the end of June sets up the potential for a strong recovery in the sector in FY24.
Earnings updates were mixed with OFX providing guidance ahead of consensus for FY24 (stock up 28.4%) offset by one of our few consumer exposures, Universal Stores, falling significantly after highlighting weakening sales (but importantly it has a strong balance sheet).
The portfolio-average PE ratio of 10.3x remains at a sizeable discount to the index which is 16.4x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0523_PVSCT.pdfApril, 2023
For the month of April, the Trust was up 1.3% (net of all fees), compared to the Index which was up 2.8%.
Fundamental news flow was more limited in April and trading volumes were down given the holiday period.
One of our largest positions, Alliance Aviation, fell 10.4% after the ACCC knocked back the takeover from Qantas. We hold Alliance for the strong fundamental growth we see over the next 2-3yrs, its strategic positioning and good valuation. With the noise of the takeover removed we expect investors will begin to focus on these strong growth prospects and investor interest should return.
There was some offset from the turnaround in share prices for Fleetwood, Superloop and Lark – all have begun to recover from oversold levels. Cooper Energy also improved with positive refinements to the federal government gas policy and an impressive new CEO in place.
The portfolio-average PE ratio of 10.4x remains at a sizeable discount to the index, which is 16.6x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0423_PVSCT.pdfMarch, 2023
For the month of March, the Trust was down 4.1% (net of all fees), compared to the index which was down 0.7%.
Relative performance was impacted by not holding takeover targets Liontown Resources (+89.7%, we had avoided given likely cost blowouts at the project) and United Malt (+33.0%, we avoided given very high debt levels).
We expect takeover activity to continue to be a feature this calendar year and believe several of our holdings are more logical targets given reliable and growing earnings streams as well as low debt (or in most cases, no debt).
Sentiment remains poor amongst stocks below $500m market cap. By contrast, this is where we have higher levels of conviction in earnings compared to a trickier outlook at the index level.
Our conviction in the portfolio increased further during March as we did follow up meetings with our key holdings. We expect other investors and corporates will also notice these improving fundamentals in coming months.
The portfolio-average PE ratio of 9.7x remains at a sizeable discount to the index, which is 13.3x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0323_PVSCT.pdfFebruary, 2023
For the month of February, the Trust was down 4.9% (net of all fees), compared to the Index which was down 3.7%.
The market returned to a pessimistic and “glass half empty” approach in February, which in the context of continuing rate rises makes sense at an Index level but less so for those companies reporting strong fundamental improvements - such as those in our portfolio.
There were plenty of earnings updates in the February reporting season with JPMorgan reporting an average drop in earnings per share expectations for Small Cap Industrials of -1.7%. Against this, the average adjustment in consensus earnings for our portfolio was +1.0% and encouragingly +4.6% for sales.
While this was not rewarded in the short-term, we are confident this fundamental improvement cannot be ignored for long by other investors and corporates. As Warren Buffet’s mentor Benjamin Graham was reported as saying, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
Pleasingly, post results there has been director buying in 8 of our names and 2 share buybacks recommenced. The portfolio-average PE ratio of 9.7x remains at a sizeable discount to the index which is 14.1x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0223_PVSCT.pdfJanuary, 2023
For the month of January, the Trust was up 4.6% (net of all fees), less than the Index which was up 6.6%. Risk appetite was clearly increasing in the market with many of the riskier parts of the market, which we avoid, performing the best.
Despite this, we did notice investors starting to build new positions in some of our smaller names which resulted in large share price moves for names such as Experience Co., GTN Ltd, Adairs and FINEOS within the portfolio. Our smaller market cap skew was a considerable drag last year, however December and January moves in this regard have been more positive.
Only a small portion of holdings, and the Index, provided earnings updates during January with the bulk of the portfolio reporting results in February. We expect mixed results and expect that consensus estimates (which in most cases are stale) would have underestimated the impact of higher interest rates and inflation on those companies with excess debt and low pricing power. As a result, we have skewed the portfolio towards companies with low debt levels and revenue tailwinds (and/or pricing power) to offset inflationary pressures. The portfolio-average PE ratio of 10.6x remains at a sizeable discount to the index which is 14.1x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0123_PVSCT.pdfDecember, 2022
For the month of December, the Trust was down 1.0% (net of all fees) outperforming a very weak market with the Index down 3.7%. Index performance reflected macro issues as it has for much of the year. Despite this, it was pleasing to see fundamentals at a stock level rewarded, enabling the Trust to outperform. This trend is pleasing to see given we focus on picking stocks on company fundamentals, something which has been out of favour all year.
The early shift in what is driving share price performance likely reflects the absence of the liquidity forced selling which was impacting Small caps for much of the year, but also the emergence of some risk appetite. This emerging risk appetite meant investors began adding new positions for the first time this year. The initial focus seems to be on stocks with a strong earnings outlook in a tough economic environment (where our portfolio is also focused).
The portfolio-average PE ratio of 10.7x remains at a sizeable discount to the index which is 12.8x for FY24.
The aim of the Trust is to grow the value of your investment over the long term by investing in a portfolio of Australian companies that are either listed or unlisted companies found outside the S&P/ASX Top 100 Index, and to provide a total return (after fees) that exceeds the S&P/ASX Small Ordinaries Accumulation Index measured on a rolling three-year basis.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/1222_PVSCT.pdfNovember, 2022
For the month of November, the Trust was flat (net of all fees), underperforming the Index which was up 4.9%.
Markets moved higher during the month post lower-thanexpected US Inflation and hope that the size of US interest rate increases will moderate going forward.
November was busy (AGMs, results, investor days). It was pleasing to see positive reactions for key stocks; Genetic Signatures (+30%) and Lark (+22%). It was however disappointing to see holdings drift lower on no new news despite fundamentals remaining solid (Alliance Aviation, RPMGlobal). In this regard, it’s interesting to see active buybacks in 8 of our held stocks, and in addition, 8 stocks with director buying this month. This is notable and certainly supports our view on the strong fundamentals of the companies we hold.
We expect M&A to feature going forward and saw this emerge with PeopleIN, which announced a strategic review process given the excessively cheap valuation metrics and solid momentum.
The portfolio-average PE ratio of 10.7x remains at a sizeable discount to the index which is 13.9x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/1122_PVSCT.pdfOctober, 2022
For the month of October, the Trust was up 2.4% (net of all fees) underperforming the Index which was up 6.5%. The ASX followed global markets which traded higher during the month, with a betterthan-feared US reporting season and investor hope that the peak in interest rates is nearing.
The underperformance of the Trust in a strong market was despite many clearly positive updates from the portfolio. There were 12 companies providing clear evidence on which the market upgraded expectations. Investors are still gravitating to the more liquid end of the Small Cap Index and thus share price responses were largely muted. Despite this, we are encouraged as these fundamental improvements continue to build the value in the portfolio which will benefit patient investors or attract strategic interest given increasing M&A activity.
While the bulk of the remaining portfolio provided AGM updates reconfirming guidance, there were four which were negative, some of which we have now exited. We expect further company updates as AGM season stretches into November.
The portfolio-average PE ratio of 10.8x remains at a sizeable discount to the index which is 13.4x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/1022_PVSCT.pdfSeptember, 2022
For the month of September, the Trust was down 9.7% (net of all fees) outperforming the Index which was down 11.2%.
Markets sold off heavily during September with global investor sentiment adversely influenced by a hawkish Fed committed to inflation curtailment. As a result, bond rates and the US dollar moved higher – both of which impacted equity valuations. To add to the turmoil, the UK announced tax cuts and energy subsidies with no clear plan on how these would be funded, sending the Sterling down to record lows.
With macro uncertainty driving market volatility, the Trust held up well, benefiting from being underweight in Materials and Real Estate, as well as our investments in agriculture which outperformed. There was accretive acquisition activity across our holdings with announcements from Superloop, Universal Store and Viva Energy.
Several names experienced large pullbacks on no news flow, and we used the opportunity to selectively add to existing positions in Smartgroup, Event Hospitality and Credit Corp (all down >12%). The portfolio-average PE ratio of 10.6x remains at a sizeable discount to the index which is 13.7x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0922_PVSCT.pdfAugust, 2022
For the month of August, the Trust was down 0.9% (net of all fees) compared to the Index which was up 0.6%.
The month started positively with a better-than-feared domestic reporting season, but it then began to fall with macro concerns post the hawkish commentary from the Fed at the Jackson Hole summit.
We were pleased with the strong fundamentals delivered in the August full year results from our portfolio companies.
Given the mood of the market, there were many cases where these fundamental improvements were ignored – Navigator (down 15.6%) was a case in point after beating earnings expectations and demonstrating inflows and positive absolute performance (a rarity amongst its funds management peers).
Pleasingly, the market did begin to notice the improved earnings outlook at Cooper Energy (up 20.0%) as well as PeopleIN (up 9.1%).
The portfolio-average PE ratio of 10.3x remains at a sizeable discount to the index which is 15.2x for FY24.
July, 2022
For the month of July, the Trust was up 8.1% (net of all fees) behind the Index which recovered strongly up 11.4%. Markets globally reacted to optimism that the peak in the interest rate cycle is closer than previously thought, seeing capital come back into growth stocks and a high level of short covering. Our large position in Alliance Aviation was down 9.8% despite the Qantas takeover bid being live, no doubt reflecting uncertainty over ACCC approval, which remains outstanding.
Cooper Energy was also weaker, down 8.2%, as the market continued to digest the large equity raising for the Orbost gas plant acquisition, which is highly accretive.
These large weights, both with strong fundamentals and near-term catalysts, were the main drag in a sharply raising market where many of our holdings were also strong. The portfolio-average PE ratio of 10.2x remains at a sizeable discount to the index which is 14.0x for FY24
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0722_PVSCT.pdfJune, 2022
For the month of June, the Trust was down 13.4% (net of all fees) in line with the Index which was also down 13.1%.
Markets globally were very weak as concerns around inflation and interest rate expectations increased fears of a recession in major markets. We believe our portfolio is well balanced for current conditions with a mix of defensives and cyclicals that have more robust revenue streams than is appreciated by markets (and most importantly with strong balance sheets).
Given this backdrop, we saw weakness in cyclicals and resources (where we are underweight). Some other parts of the portfolio were heavily impacted by tax loss selling as market participants looked to offset the large taxable gains from the first half of the year but they were doing so in very illiquid markets causing large share price falls. Despite this, there were several encouraging fundamental updates across the portfolio in June which should lead to improving share prices as this is digested by the market. Across the portfolio, there were two buybacks announced and two accretive acquisitions – in each case earnings per share is boosted in future years but share prices are yet to respond. The portfolio-average PE ratio of 10.0x remains at a sizeable discount to the index which is 13.0x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0622_PVSCT.pdfMay, 2022
For the month of May, the Trust was down 7.5% (net of all fees) in line with the Index which was also down 7.0%.
Markets globally were very weak as concerns around inflation and interest rate expectations continued to impact growth stocks but this has now added concerns about economic health which is starting to impact the market more broadly. We have started to see a lift in takeover activity during the month but more is likely to be required before the market begins to react to the strong fundamental valuation support we see in many of our positions.
The Trust benefited from the bid by Qantas for Alliance Aviation at $4.75 per share albeit the stock was only up 7.4% for the month to $4.07 as ACCC approval is still required.
May and June are historically the largest months for tax loss selling so we expect this pressure may create buying opportunities in our current portfolio as well as via new positions. The portfolio-average PE ratio of 9.9x remains at a sizeable discount to the index which is 14.0x for FY24.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0522_PVSCT.pdfApril, 2022
For the month of April, the Trust was down 1.5% (net of all fees) in line with the Index which was also down 1.5%.
The market backdrop was generally weak with a mixed performance from Resources, while moves were mainly stock specific in Industrials (outside of a noticeable trend towards re-openers). Several high profile growth names (not held in the Trust) were materially lower on earnings updates with EML Payments, Megaport and Life360 down between 31-47%. While the Trust benefitted from not owning these names it was offset by the strong performance of Coal names in the Index (which we don’t own given our exclusion on an ESG basis).
For the Trust, the best performers were Viva Energy, Genetic Signatures, GUD and Elders. Platinum moved lower with disappointing performance given their China exposure, while less liquid names like Veem and Limeade were also a drag. The portfolio-average PE ratio of 11.9x remains at a sizeable discount to the index which is 15.2x for FY2
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0422_PVSCT.pdfMarch, 2022
The Trust was up 4.5% (net of all fees) compared to the Index which was up 5.3%. The market recovery from the weak start to the year was driven by Small Resources (+12.7%) with a more modest increase in Small Industrials (+3.0%).
We remain bullish on the medium-term outlook for most commodities but still prefer producers over developers given high spot prices deliver strong cashflow to the former but encourage increased supply competition for later. Hence our sector underweight is driven by a lack of quality developers in the Small Ords, so to gain exposure we have looked to Industrials tied to the same theme (e.g. SRG Global (+18.3%) and Alliance Aviation (+17.1%)) and have just started adding again to Mid-Cap Resources.
We were pleased to see the start of what we think will be a strong M&A cycle in Small and Microcaps with the competitive bid process for Uniti Group (+43.8%) during the month. We view many other names in our portfolio as attractive takeover targets. The portfolio-average PE ratio of 14.1x remains at a sizeable discount to the index which is 18.0x for FY23
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0322_PVSCT.pdfFebruary, 2022
The Trust was down 3.3% (net of all fees) compared to the Index which was flat.
The significant market weakness seen from January, reflecting expectations of rising interest rates, continued to impact stocks perceived as ‘growth’ but this was compounded by increased uncertainty from Russia’s invasion of Ukraine which impacted broader risk appetite.
In such an environment, investors rushed for liquidity and at times ignored the fundamental news delivered in reporting season. As mentioned last month, this creates an exciting set up for returns over CY22 as we seek out both value stocks ignored by the market and oversold growth-orientated stocks with the potential for betterthan-expected cashflow outcomes.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0222_PVSCT.pdfJanuary, 2022
The Trust was down 8.6% (net of all fees) compared to the Index which was down 9.0%. The market focused on commentary from the Federal Reserve (and other central banks) that rate rises may be needed earlier to deal with high levels of observed inflation. This impacted longer term rates and thus the valuation for companies whose forecasts for meaningful cashflow are longer dated and as such, more sensitive to higher discount rates (simplistically growth stocks); compared to companies with near term cashflow (simplistically value stocks).
Growth stocks in the US responded appropriately selling off more than value stocks. In Australia, the small caps market was less discerning with a wide spread selloff in all but the energy sector. This creates an exciting set up for returns over CY22 as we seek out both value stocks ignored by the market and oversold growthorientated stocks with the potential for better-than-expected cashflow outcomes.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0122_PVSCT.pdfDecember, 2021
The Trust was up 3.8% (net of all fees) compared to the Index which was up 1.4%. The strong performance of the Trust was reflective of both stock-specific factors as well as sector positioning. The performance over the calendar year 2021 was strong at +21.1% compared to the Index which was 16.9%.
News around the spread of the Omicron COVID variant caused the market to oscillate between pessimism and optimism during the month while also dealing with higher inflation and the expectations for higher borrowing rates.Given the uncertainty, we have constructed a diverse and balanced portfolio with an emphasis of stock-specific drivers rather than macro views.Genetic Signatures (up 36.1%) was the best performer (given higher testing volumes) followed by Western Areas (up 20.8%) following a much anticipated takeover bid.
The portfolio-average PE ratio of 12.9x remains at a sizeable discount to the index which is 18.8x for FY23. We expect the recent shift towards Value from Growth will continue and that the portfolio is well placed to benefit from this.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/1221_PVSCT.pdfNovember, 2021
The Trust was down 2.7% (net of all fees) compared to the Index which was down 0.3%.
The bulk of the weakness was despite no company news flow with some growth stocks (where we see value) coming under pressure from offshore comps – namely Betmakers Technology and Doctor Care Anywhere – in each case, we believe fundamentals are actually improving.Energy names were also weaker as oil prices were down sharply, impacting Cooper Energy (down 15.5%) and Beach (down 15.1%).
October, 2021
The Trust was up 2.3% (net of all fees) compared to the Index which was up 0.9%.The drivers of performance were largely stock specific, with a takeover offer for Class Limited (up 69.8%) and a well priced asset sale for Superloop (up 32.3%).
Some of our gold exposures also began to perform with Dacian (up 17.9%) and De Grey Mining (up 15.5%) on the back of company updates.On the negative side, we have started to build positions in new names that are under pressure such as Codan (down 21.3%) and Marley Spoon (down 31.7%) and thus, while they were a modest drag on performance in the short term, we believe the entry point will prove to be good value in the medium term. AGM season starting in October was largely positive, albeit we are conscious that good news travels fast, so a full read of the earnings health of the market is unlikely until AGMs finish in Novembe.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/1021_PVSCT.pdfSeptember, 2021
The Trust was down 0.8% for the month, holding up much better than the Index which was down 2.1%.
The outperformance was driven by a reduced exposure to Materials, with the sector down 5.4% for the month. Energy by contrast performed well, with Cooper Energy up 20.0% but still a long way of previous highs.
In Industrials, we benefitted from the takeover bid for Smart Group (+18.8%) as well as ‘re-openers’ such as Viva Leisure (+49.0%) and Viva Energy (+11.2%).
Our portfolio remains skewed towards those companies likely to benefit from an ultimate re-opening of the Australian economy, with a clear roadmap now in place for New South Wales. This is balanced to some degree with more defensive holdings in Healthcare, Telecommunications and Gold.
The portfolio-average PE ratio of 12.7x remains at a sizeable discount to the index which is 19.4x for FY23.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0921_PVSCT.pdfAugust, 2021
The Trust was up 4.0% for the month of August, compared to the Small Cap Index which was up 5.0%. The Trust and the Index were driven higher by continued enthusiasm for Lithium and other battery mineral stocks – for example, Pilbara Minerals (a large Index constituent not held) was up 26.0%. Pleasingly, our exposures – Orocobre (+11.2%) and Calix (+39.6%) made a strong contribution to the Trust and we used the strength to lighten both namesThe portfolio-average PE ratio of 13.0x remains at a sizeable discount to the index which is 18.7x for FY23
Risk appetite remains elevated particularly in the battery mineral space with Pilbara Minerals (a large Index constituent not held) up 26.0% as an example. Pleasingly, our exposure via Orocobre (+11.2%) and Calix (+39.6%) made a strong contribution to the Trust and we used the strength to lighten both names during the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0821_PVSCT.pdfJuly, 2021
The Trust was up 2.3% for the month of July, ahead of the Small Cap Index which was up 0.7%.
Our exposure to the resource sector was a key contributor to performance with the soon to be merged Galaxy/Orocobre, up 27%, Austin Engineering, up 17.9%, and SRG Global, up 15.8%. Other resource exposures in the portfolio include Emeco, RPM Global and Seven Group, all up more than 10% for the month. It appears the market is finally catching on to the positive effect of higher commodity prices to mining service companies – especially those not exposed to wage inflation. By contrast, gold equities were the main area of weakness for the month.
Reporting season is shaping up to be very eventful with the market assessing what is likely to be strong results accompanied by a more cautious outlook given recent lockdowns. Mergers and Acquisitions are expected to be an increasing driver of stock specific performance with the corporate world now more willing to look at growth options and imagine a post COVID world with a backdrop of ultra low interest rates
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0721_PVSCT-1.pdfJune, 2021
The Trust was up 3.0% for the month of June, just behind the Small Cap Index which was up 3.1%.
Numbers for the financial year were strong, with the Trust up 45.0% (net of fees), well ahead of the Index which was up 33.2%. Profits were locked in across many names, and combined with dividend income, this has created a large year-end distribution of 10.96 cents per unit, which will be paid to investors in July. This should be factored into the unit price when assessing the total return.
In terms of portfolio positioning, we think it’s unlikely that the drivers of last year’s returns will be the source of performance in the coming years – hence we have rotated the portfolio to laggards offering compelling value such as Superloop, Navigator Global, Emeco and other select cyclicals. Many of these names, as well as new names such as Viva Leisure, were sold off in June’s tax-loss selling, creating attractive buying opportunities.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0621_PVSCT.pdfMay, 2021
The Trust was up 0.6% for the month of May, ahead of the Small Cap Index which was up 0.3%.
So far this calendar year, there has been several reminders of the importance of sell discipline, with the Trust avoiding large drawdowns in Kogan, EML Payments, Mesoblast, RedBubble and Perenti Global – all names we exited late last year given concerns over valuation or potential earnings risks. We don’t get all our calls right, however the above examples provide strong vindication for the research effort of the team.
We have recycled into cheaper names with a more certain earnings path – names such as MAAS Group, VEEM and SRG Global are starting to perform.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0521_PVSCT.pdfApril, 2021
The Small Cap Index was up strongly again in April, climbing by 5.0% with the Trust also up 4.9%, net of all fees. Unlike previous months, both growth and value performed well with dovish central bank commentary and strong economic data (a rare combination). Earnings commentary and domestic economic signals were positive with the feared ‘fiscal cliff’ from the end of JobKeeper yet to materialize. We continue to be positive on the domestic economic recovery and continue to add to cyclical names – albeit with an increasing aversion to business models which are set up poorly should inflation begin to pick up (a growing medium-term risk). Resources contributed the most to performance with battery material players Galaxy Resources (+55.3%) and Orocobre (+41.8%) performing strongly. In contrast, energy names were weaker with Cooper Energy (down 9.3%) and Beach Energy (down 25.7%) falling during the month – both reflecting company specific issues.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0421_PVSCT.pdfMarch, 2021
The Small Cap Index was up 0.8% during the month, however, this headline number masks a continuation of a powerful rotation (particularly in International markets) towards cyclical value and away from growth stocks; something we continue to adjust the portfolio towards. Some of our preferred value names are yet to capture attention due to lack of coverage (e.g. SRG) or transitory cost headwinds (e.g. NWH). Against this background, the Trust was down 0.7%, underperforming by 1.5%. In the medium term, we expect the shift towards value to continue and benefit the portfolio as the market becomes more discerning at identifying these names within the small cap universe that provide cyclical growth at good valuations.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0321_PVSCT.pdfFebruary, 2021
The chart below from MST summarises reporting season well; clearly it was very strong if purely looking at changes for earnings expectations for FY21. However, the strong run in share prices in recent months suggests some of this was already anticipated and priced in. In addition, many stocks benefited from government stimulus directly or from a consumer that was “cashed up” and unable to spend on travel – boosting retail sales growth to levels not seen in decades.
The market began to look through some of these one-off drivers with a noticeable rotation to stocks and sectors which had a poor CY20 but are well positioned for a recovery in CY21 – media and travel are two obvious sectors.
We also rotated the portfolio towards those benefiting from a reopening of the economy, but prefer the attractive valuation of less obvious names outside of media and travel – with new names added from the Industrial and Financial sectors. These new names were funded by reducing Marley Spoon (+23.5%) after a strong result. We added to holdings which are set to benefit from increased Infrastructure spending – such as SRG Global (+8.9%) which rallied after earnings beat 1H guidance and avoided COVID related disruptions evident for other contractors. SRG appears to have turned itself around over the last 12 months, having now increased full year guidance on three occasions.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0221_PVSCT.pdfJanuary, 2021
Markets drifted higher for most of January, only to see a sharp sell-off towards month end erode all gains, resulting in an Index drop of 0.3%. Pleasingly, the Trust outperformed the benchmark to deliver a 1.2% positive return net of all fees.
Towards month end, much was written about heightened speculation in certain stocks and sectors in the US, and we are seeing pockets of this speculation in the Australian market. We won’t add to the noise here but such activity and detachment from fundamentals make us nervous about the overall market direction. As a result, we have increased our downside protection via index-linked derivatives while maintaining holdings in our portfolio companies, given strong investment fundamentals and stock-specific catalysts. The focus now shifts to reporting season in February with some of our holdings already de-risked having pre-announced pleasing results in January (eg. Genetic Signatures, Navigator, MoneyMe and Marley Spoon).
The portfolio average PE ratio of 14.7x remains at a sizeable discount to the Index which is 18.8x for FY22.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/0121_PVSCT.pdfDecember, 2020
The rotation in the market towards value and cyclicals continued in December with Resources and Mining Services in particular strong contributors to performance. Standouts were IGO Ltd (+37.4%), SRG Global (+18.6%), Oz Minerals (+15.7%) and Alliance Aviation (+11.0%). Company specific positive news during the month enabled some of our more defensive growth names to still perform despite the pro cyclical backdrop.
Marley Spoon (+32.4%) recovered post encouraging guidance, Metcash (+17.3%) announced a strong 1H profit and Genetic Signatures (+12.6%) won their first US customer. The Trust was up 5.7% (net of fees) compared to the Index which was up 2.8%.
For the calendar year the Trust was up 12.1% compared to 9.2% for the Index. The performance for the year is particularly pleasing given the dislocation to markets from COVID and the strong recovery needed in performance from the March 2020 lows. The portfolio average PE ratio of 14.0x remains at a sizeable discount to the Index which is 18.8x for FY22.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/1220_PVSCT.pdfNovember, 2020
We had been building our exposure in Mining Services for some time given the robust cashflows being generated by Resource companies and the cheap valuation of those companies that service them. Thus, it was pleasing to see the strong performance in these names as the market began to look for more cyclical exposures – we benefited from holdings in Emeco (+36.8%), Perenti (+24.9%) and NRW Holdings (+21.6%).
Lithium stocks bounced hard in the month on the back of Biden’s victory in the US election, and the expectation that future stimulus measures are likely to buoy electrical vehicle demand. Orocobre (+61.3%) was a beneficiary of this positive sentiment, albeit we were overall underweight the sector given poor balance sheets elsewhere. We reduced this underweight via the Galaxy Resources raising at $1.70 vs month end price of $2.16. Calix also performed well, (+38.4%) perhaps reflecting an increased environmental focus under Biden.
By contrast, gold names were weaker following both the gold price lower but also being used as a funding source in a ‘risk-on’ market. We exited our lowest conviction name, St Barbara, but retained Capricorn (down 5.5%) and Ramelius (down 12.7%). We were active in resources adding a mid-cap oil and a mid-cap copper name during the month.
Atomos (+58.3%) provided a succession of positive trading updates during the month. It’s become apparent that demand for Atomos’ video recording products remained reasonably resilient through the worst of the COVID period and the impacts the company felt were more reflective of retailer destocking, rather than any softness in end consumer demand. We look forward to the launching of the Ninja Stream towards the Christmas period.
Fletcher Building (+39.5%) moved materially higher on the back of strong earnings guidance with a combination of better than expected revenue and a successful cost out program delivering strong earnings growth vs previously low market expectations.
We added further to our construction exposure with the IPO of MAAS Group in December (providing a rare exposure to the regional infrastructure boom funded by government stimulus) and maintained our position in SRG Global (+14.8%) which is winning a considerable amount of contract recently.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/1120_PVSCT.pdfticker: IOF0214AU
commentary_block: Array
factsheet_url:
https://perennial.net.au/our-trusts/smaller-companies/
release_schedule: Old Commentary
fund_features:
Perennial Value Smaller Companies Trust invests in a range of smaller listed companies predominantly outside the ASX top 100 Index which Perennial Value believes have sustainable operations and whose share price offers good value. The cornerstone of this approach is a strong emphasis on company research. Aims to provide a total return (after fees) that exceeds the S&P/ASX Small Ordinaries Accumulation Index measured on a rolling three-year basis.
- The portfolio will hold in the range of 30 to 60 stocks. Typically, the portfolio holds, on average, approximately 50 stocks.
- The Perennial Value Smaller Companies Trust was the winner of the 2018 Professional Planner I Zenith Fund Awards within the Australian Equities Small Cap category.
- Suitable for investor seeking exposure to a portfolio of smaller ‘value oriented’ companies with five years or more time horizon.
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