September, 2023
The OC Micro-Cap Fund had a strong September quarter, up +3.7%, underpinned by an excellent August reporting season for many of our key portfolio holdings. This was well ahead of the S&P/ASX Emerging Companies Accumulation Index which was down -5.3% for the quarter. Whilst the trajectory of consensus earnings revisions was generally negative across the Australian micro-cap and small-cap market in the August reporting season, we were pleased with the results of the Fund’s holdings overall and remain optimistic about their prospects for the year ahead, notwithstanding the current global macro-economic challenges.
After a protracted period when speculative resource stocks and unprofitable early-stage biotechnology and technology start-ups performed strongly, driving the S&P/ ASX Emerging Companies Accumulation Index to elevated levels, we are starting to see this unwind. In the June 2022 Micro-Cap Quarterly Investment Review, in the middle of this speculative bubble in unprofitable early-stage businesses, we told investors we would stay true to label and persist with our investment strategy of owning quality, profitable and well managed micro-cap companies, notwithstanding this was heavily out of vogue at the time. As a reminder, our focus on capital preservation and risk management leads us to exclude most unprofitable biotechnology and resources stocks from the portfolio, other than for short-term ‘event driven’ trades. This has proven to be a prudent strategy with the OC Micro-Cap Fund having returned +6.5% over the past 12 months, which is well ahead of the S&P/ASX Emerging Companies Accumulation Index which is down -3.0% over the same period. Whilst this most recent 12 month performance number is nothing spectacular, we would remind our investors that micro-cap valuations remain depressed, and overall liquidity remains low. The investment team remains optimistic that we have a portfolio of quality names and that the Fund will bounce back strongly once confidence and liquidity returns to the emerging companies space.
Pacific Current Group (PAC; +39.4%) rallied during the quarter on the back of a non-binding indicative takeover proposal from Sydney based fund manager, Regal Partners (RPL), which immediately drew out the promise of a competing proposal for PAC from GQG Partners (GQG).
The scheme of arrangement proposal from the ASX-listed fund manager, RPL (existing 12.1% PAC shareholder), was made in conjunction with Melbourne based private funds management outfit, River Capital (existing 19.8% PAC shareholder), and comprised a combination of cash and scrip consideration pitched at a significant 50% premium to the 30-day volume weighted average share price of PAC. The interest from multiple suitors in this long term Fund holding was welcome news to the investment team as we have believed for some time that the market was incorrectly discounting the PAC share price as it built a valuable stable of (predominantly) minority interests in international asset managers across multiple asset classes. Indeed, before the RPL proposal was made public, the PAC board had already formed an Independent Board Committee for the purpose of identifying and executing on options to realise the underlying value of the business for shareholders reflecting inbound interest the board had received in the business. In developments late in the quarter, RPL and River Capital withdrew their indicative proposal citing lack of engagement from the PAC board and its lack of confidence in the process being conducted.
Furthermore, 10 weeks after its initial statement of interest in bidding for PAC, GQG has yet to publicly declare the nature of its proposal for the company although we believe it remains engaged in the process. Despite these developments, OC will continue to hold its PAC position as we are confident the process being conducted by PAC will result in a preferred bidder emerging for the company at a significant premium to current share price levels and likely closer to PAC’s stated internal view of value which is around $12.00 per share.
Embark Education (EVO, +23.3%) was a strong performer for the Fund during the quarter following its delisting from the New Zealand stock exchange, the catalyst for which was the divestment in FY22 of its New Zealand operations to an entity associated with Anchorage Capital Partners. EVO is now a ‘pure play’ Australian provider of early childhood education and care with 24 centres, strong occupancy levels and a robust balance sheet. The EVO management team is headed by industry stalwart Chris Scott who has an enviable listed track record including as the founder and Managing Director of G8 Education (GEM) where he grew GEM’s portfolio from 38 centres to over 500 pre-school education centres in Australia. EVO is experiencing some sector tailwinds including better government funding outcomes, with recent changes to the Child Care Subsidy expected to boost demand for childcare and drive occupancy, as well as strong expected net migration in the coming years which ought to boost demand for EVO’s services. EVO has a net cash balance sheet of $25m and a further $25m of debt capacity and is actively pursuing acquisitions which will materially increase the scale of the business. For instance, if EVO acquired centres on a multiple of around 4.2x EBITDA, this could add $12m EBITDA to the business which would boost the current earnings base (CY23F) by approximately 75%. Given Chris Scott’s prior track record, the execution of these acquisitions would leave the company well placed to undertake an acquisition lead roll-up strategy in the coming years which could see a material re-rate of the EVO share price.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/230930-laptop-OC-Micro-Cap-Fund-Fund-Update.pdfAugust, 2023
The OC Micro-Cap Fund enjoyed a solid August reporting period returning +1.2% for the month. This was comfortably ahead of the S&P/ASX Emerging Companies Accumulation Index which returned -4.2% during August.
The standout performers during the August reporting season included: NBN reseller Aussie Broadband (ABB, +29.8%) which was up for the month after reporting a result which included strong free cash flow and FY24 guidance that was in line with expectations. Furthermore, during August the NBN Co announced a new wholesale price regime which could improve ABB margins. Chrysos Corporation Limited (C79, +27.1%) rallied throughout August into the delivery of its FY23 result, where the company confirmed it was on track for FY24 earnings and growth expectations in line with market forecasts. Conversely life sciences device and consumables business Trajan Group (TRJ, -18.4%) sold off after reporting a soft FY23 result and outlining FY24 guidance which was below market expectations.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Aug23-OC-Micro-Cap-Fund-Monthly-Fund-Update.pdfJuly, 2023
The Fund enjoyed a strong start to the new financial year, returning +4.3% for the month. This was just ahead of the S&P/ASX Emerging Companies Accumulation Index which returned +4.0%. The Fund has delivered a small positive return (+0.1%) in a very challenging micro-cap environment over the past 12 months which is ahead of the Index (-2.3%). Pleasingly, sentiment is beginning to improve in the small and micro-cap space with valuation multiples at attractive levels and liquidity starting to show early signs of recovering.
Key contributors to the performance included: Pacific Current Group (PAC; +37.9%) which rallied on the back of a nonbinding indicative takeover proposal from fellow fund manager, Regal Partners, with a competing proposal from GQG Partners flagged as highly likely; retailers Baby Bunting (BBN; +21.1%) and Universal Store (UNI;+ 20.1%) moving higher as the market gained confidence that retail conditions were bottoming as interest rates peak; and Praemium Limited (PPS; -17.0%) which underperformed during the month following a soft 4Q23 flows update, driven by higher gross outflows as clients moved money off platform into term deposits.
The domestic economic outlook appears to be more challenging with conflicting signs as to the strength of the economy. Nevertheless, a near 50-year low unemployment rate of 3.5% and a solid (albeit falling) household savings buffer still leaves consumers in a reasonable position even allowing for near-term inflationary pressures and the lagged impact of the more recent interest rate hikes.
The August reporting season has kicked-off, although the Fund is yet to have any companies report. We remain upbeat on the prospects of our core portfolio holdings and will share further thoughts with our investors in early September once we have analysed the numbers and met with the management teams.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/230731-OC-Micro-Cap-Fund-Monthly-Fund-Update.pdfJune, 2023
Global equity markets enjoyed a solid quarter, led by a buoyant US market, with the US economy continuing to remain resilient and inflation continuing to moderate in the world’s biggest economy. Investor enthusiasm around artificial intelligence (AI) also provided a sugar hit to the big cap technology sector, with a stunning result from chip maker NVIDIA igniting the ‘animal spirits’ of investors and fuelling a mini boom in AI exposed big-tech stocks, including Microsoft Corporation and Alphabet (Google’s parent company).
Key US indices were up strongly in the June quarter led by the tech heavy Nasdaq (+12.8%), the S&P 500 (+8.3%) and the Dow Jones Index (+3.4%). Other developed world bourses to perform well included the Japanese Nikkei (+18.4%) and the German DAX (+3.3%), whilst Australia’s ASX 200 eked out a positive return of 0.4%. The Chinese equity market was under pressure on the back of underwhelming economic news with the Chinese Shanghai Composite down 2.2% and the Hong Kong Hang Seng was not immune, falling 7.3% for the quarter.
The domestic micro-cap space was mixed during the June quarter with a raft of negative stock specific news-flow from consumer facing companies and weakness in the Materials sector being balanced by more positive news out of the Information Technology and Industrials sectors. The S&P/ASX Emerging Companies Accumulation Index was down 2.5% for the quarter, with small retailers in the index particularly weak. The OC Micro-Cap Fund fared better finishing the June quarter up 1.6%.
Despite all the doom and gloom in the media, the micro-cap space bucked inflationary pressures and rising interest rates to finish the financial year comfortably in positive territory with the S&P/ASX Emerging Companies Accumulation Index up 7.4%.
Following a solid June quarter, the OC Micro-Cap Fund finished the financial year up 7.7%, just ahead of the broader micro-cap index.
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May lived up to its reputation as a difficult month for equity markets as sticky core inflation and rising interest rates began to take a growing toll on leading economic indicators across global markets. Stock markets were also jittery ahead of the US Congress’ latest legislative action to raise the government’s borrowing limits, with the gravity of a potential default further reinforcing a ‘risk-off’ bias across the back end of the month. Key global bourses including the US Dow Jones (-3.5%), the UK FTSE (-5.4%), the Hong Kong Hang Seng (-8.3%) and the Chinese Shanghai Composite (-3.6%) sold off heavily. The US tech heavy Nasdaq bucked the trend and rallied 5.8%, fuelled by a stunning result from chip maker NVIDIA which lifted sentiment to other big-tech stocks exposed to the artificial intelligence (AI) thematic including Microsoft Corporation and Alphabet (Google’s parent company).
The domestic micro-cap equity index too was under pressure throughout May. A raft of profit warnings across the retail space, including from City Chic Collective, Adairs, Best and Less Group Holdings, Dusk Group and Universal Store Holdings spooked investors and liquidity remained below average for much of the month. The S&P/ASX Emerging Companies Accumulation Index finished sharply lower for the month (-6.3%). The OC Micro-Cap Fund managed to comfortably outperform the index but still fell –4.6%.
OC Funds Management is pleased to announce the nomination of the OC Dynamic Equity Fund for the prestigious 35th Annual Money Management Fund Manager of the Year Awards in the Australian Small Cap Equity category. This recognition reflects the Fund’s strong performance and dedication to delivering outstanding results to its investors. The Money Management Fund Manager of the Year Awards is a highly regarded industry event that acknowledges excellence in the investment management industry. It is Australia’s longest-standing independent and ‘wholeof-market’ fund awards program. The Small Cap Equity category specifically focuses on funds that demonstrate exceptional expertise in navigating the dynamic and challenging small-cap equity market segment. The Fund’s nomination (alongside two other Funds) follows on from the OC Premium Small Companies Fund’s recent nomination in the Morningstar Fund Manager of the Year awards in the Domestic Equities – Small Caps category. It underscores the team’s consistent track record of success in managing small-cap and micro-cap investments over a long time horizon. It also marks the fourth time since 2018, when OC Funds Management actually won the award, that OC Fund’s has been nominated as a finalist in the Australian Small or Small/Mid Cap Equity Fund of the Year category at the Annual Money Management Fund Manager of the Year Awards.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/230531-OC-Micro-Cap-Fund-Fund-Update.pdfApril, 2023
Global equity markets rallied in April as fears of a global banking crisis moderated and investors became more comfortable that peak interest rates were approaching in key markets such as the US. Global bourses that rallied in April included the US Dow Jones +2.5% and the S&P 500 +1.5%, the UK FTSE 100 +3.1%, the German DAX +1.9%, the Japanese Nikkei +2.9%, and our own ASX 200 +1.8%. The US first quarter reporting season is underway, with roughly 45% of S&P 500 companies reporting by the end of April. Results to date have moderately surprised on the upside with earnings numbers generally underpinned by margin resilience. This has engendered some confidence that the economic slowdown that is likely coming in the US will not deteriorate into a steep and protracted recession in the world’s biggest economy.
The domestic micro-cap market too had a buoyant April with the S&P/ASX Emerging Companies Accumulation Index up +1.5% for the month. The OC Micro-Cap Fund performed ahead of the Index in April returning +3.3% for the month. Corporate activity was again in focus in the small and micro-cap end of the market with Blackmores (BKL) entering a Scheme Implementation Deed with Kirin Corporation and SILK Laser Australia (SLA) receiving a non-binding, indicative and conditional offer from Wesfarmers’ (WES) subsidiary Australian Pharmaceutical Industries. This is hopefully a sign that some confidence is returning to the space following a difficult period since the beginning of calendar year 2022.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/230430-OC-Micro-Cap-Fund-Fund-Update-v3.pdfMarch, 2023
The March quarter was a volatile period across global markets with the ongoing battle between inflationary forces and central banks continuing to take centre stage. March itself was a particularly turbulent month for equities, with steep falls early in the month brought about by regional bank failures in the US that undermined confidence in the global banking system before US and European regulators and central banks steadied the ship with a series of guarantees and liquidity backstops which restored confidence across financial markets. This led to a sharp recovery late in the month as investor concerns about a full-blown solvency crisis from mark-to-market losses on banks’ portfolios receded.
The OC Micro-Cap Fund finished the quarter down 1.5% which was behind the S&P/ASX Emerging Companies Accumulation Index which finished the quarter up 2.4%. Several of the larger stocks in the Emerging Companies Index performed spectacularly well during the quarter before they exited the Index at the March 20 rebalance.
The stocks which drove the indexes quarterly gain included Weebit Nano Ltd (WBT +132.6%) which is an early-stage developer of a next-generation memory semiconductor IP, biotech Neuren Pharmaceuticals (NEU, +66.5%), and gold producer Resolute Mining (RSG, +70.0%). These stocks added a combined 3.9% to the Index during quarter and all had market capitalisations well above our threshold of $500m for initial inclusion in the Fund.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/230331OC-Micro-Cap-Fund-Fund-Update.pdfFebruary, 2023
After a strong start to the calendar year, global equity markets retraced in February driven largely by fears that inflation will prove to be stickier and more persistent than had previously been contemplated by many investors. Increasingly hawkish central banks drove up real bond yields and most key global indices ended the month lower including the US DOW (-4.2%) and S&P 500 (-2.6%), the Hong Kong Hang Seng (-9.4%) and the MSCI All Country World Index (-1.9%).
The February reporting period was a mixed bag across the market, with divergent performance across the board from companies, often in the same sector, and few unequivocal macro-call outs. As expected, few management teams and boards were prepared to give numerical forward guidance, and most were guarded in their commentary on the economic outlook. The S&P/ ASX Emerging Companies Accumulation Index finished February down -4.2%. The OC Micro-Cap Fund performed slightly better (-2.6%) with most of our core holdings producing solid results indicating that our investment theses remain intact.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/230228-OC-Micro-Cap-Fund-Fund-Update-v3.pdfJanuary, 2023
Global equity markets had a strong start to the year with a growing view that inflation has peaked and that central bank tightening is nearing an end, as well as positive sentiment around China’s reopening, stirring the ‘animal spirits’ of market participants. Many investors, OC Funds included, entered the new year cautious on the global economic outlook with the impact of dramatic monetary tightening in 2022 yet to flow through to the broader economy and inflation still elevated. Whether this turns out to be a bear market rally remains to be seen. But many investors, nervous about being too conservatively positioned, have gone ‘risk on’ in recent weeks and, in many instances, last year’s biggest stock losers have started the year with the steepest rallies. The stock bourses that endured the steepest falls last year too were amongst the best performers in January including the US Nasdaq +10.7%, the Hong Kong Hang Seng +10.4%, and China H-Shares +10.7%.
Our own small and micro-cap indices bounced back strongly from their annus horribilis in 2022, with the S&P/ ASX Small Ordinaries Accumulation Index +6.6% (-18.4% in CY22), the S&P/ASX Small Industrials Accumulation Index +6.3% (-21.8% in CY22) and the S&P/ASX Emerging Companies Accumulation Index +7.2% (-22.5% in CY22) in January. Across the domestic micro cap universe, many of the best performing stocks during January were last year’s laggards including Sezzle Inc +55.4% (down 86.3% last year), Cettire Limited +49.8% (down 64.2% last year), and Fund holding Chrysos Corporation +42.0% (down 49.6% last year). The OC Micro-Cap Fund had a solid month delivering +3.2%, but it lagged the small and micro-cap indices. Clearly, we were not positioned for the sharp rally that left many investors, ourselves included, too conservatively positioned to keep pace.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/230131-OC-Micro-Cap-Fund-Fund-Update-v3.pdfDecember, 2022
Equity markets across the globe endured a challenging December rounding out a tough year for most asset classes. Stocks, bonds and property all suffered material falls in 2022 as the era of cheap money came to an abrupt halt with central banks ratchetting up interest rates in response to rampant inflation and reversing accommodative policies that had underpinned asset price strength in recent years. Stock markets across the globe fell steeply with several key bourses finishing at or near bear market territory including the US Nasdaq Composite (-33.1%), the US S&P 500 (-19.4%), China’s blue chip CSI Index (-21.6%), and the MSCI All-Country World Index (-19.8%).
The OC Micro-Cap Fund has likewise endured a difficult year with micro-cap industrial stocks in the eye of the storm as many companies in the space were sold down aggressively over the course of the last 12 months. The Fund finished the year down -28.4% which was behind the broader S&P/ASX Emerging Companies Accumulation Index which fell -22.5% over calendar year 2022. The solid relative performance of early-stage resource stocks during the year was the main reason the Fund lagged the micro-cap benchmark Index. Eight of the 10 best performing stocks in the broader Index were early-stage resource stocks including Core Lithium, Lake Resources, AVZ Minerals, Arafura Rare Earths, Jervois Global, Argosy Minerals, Sayona Minerals and Tietto Minerals who contributed a combined +6.1% to the micro-cap Index in 2022. Rounding out the top ten were Neuren Pharmaceuticals and Silex Systems which in our view are more speculative in nature at this juncture, are currently unprofitable, and are also above our $500m market cap threshold for Fund inclusion; these two stocks contributed a further +1.7% to the Index performance. Investors will be aware that we typically screen these types of stocks from our investment universe due to their elevated risk profiles. There are periods where this can cause our performance to deviate from that of the Index and 2022 was such a year.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/221231-OC-Micro-Cap-Fund-Fund-Update-v2.pdfNovember, 2022
Equity markets continued to recover in November after a softer than expected US CPI print and a dovish speech from Federal Reserve (the Fed) Chair Jerome Powell fuelled optimism that interest rates in the US may soon peak and that a protracted recession in the world’s biggest economy can be avoided. The domestic small and micro-cap market cruised through a relatively benign AGM season with a resurgent resources sector (S&P/ASX Small Resources Accumulation Index up 11.6%) helping to drive the S&P/ASX Emerging Companies Accumulation Index up 3.3% for the month. The OC Micro-Cap Fund had a solid month, up 0.6%, which was behind the broader index due to our limited exposure to speculative resource stocks which drove the strong benchmark return.
Aroa Biosurgery (ARX, +25.7%) traded higher during month as investors began to price in tailwinds that the business ought to be experiencing. This optimism was confirmed when the company delivered a strong interim result (March year-end) and upgraded its earnings guidance at the end of November. ARX is a soft-tissue regeneration company that develops, manufactures, sells and distributes medical and surgical products to improve healing in complex wounds and soft tissue reconstruction. Auckland based, ARX has multiple products in market (or in late stage development) and these products are developed from a proprietary technology platform being a novel extra-cellular matrix bio-material derived from ovine (sheep) forestomach. Some of the tailwinds that ARX is experiencing include reopening of its core hospital customer base in the US post COVID-19, ongoing penetration of hospitals through an expanding US based salesforce, broadening product portfolio, expanding gross margins and a weakening NZD (against sales into the US). ARX has $45m net cash and is priced by the market at an undemanding market capitalisation of $375m. We consider that this offers good value given its prospects for high growth, expanding margins and its large free cash flow generation potential. We have held ARX in the portfolio since its IPO, albeit we have taken the opportunity to trim our weighting into share price strength.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/221130-OC-Micro-Cap-Fund-Fund-Update-v4.pdfOctober, 2022
Global equity markets bounced in October following a challenging calendar year to date as optimism grew that the US Federal Reserve may soon start to moderate the pace of interest rate hikes following a further 75 basis point rise in the federal funds rate in early November.
Several other leading global central banks, including Australia and Canada, also hinted that the pace of interest rate increases could begin to slow to allow to monetary authorities time to properly assess the impact on the economy of the rapid fire monetary tightening that has been undertaken over the past six months. The markets seem to be in that counter-intuitive paradigm where bad economic news (aside from inflation) is taken as a risk on signal by equity markets participants on that basis that the emerging economic headwinds are likely bringing us closer to the point where central banks cease raising rates.
This is a difficult time to invest because sentiment remains extremely fragile, and volatility remains heightened.
The OC Micro-Cap Fund bounced strongly in October finishing the month up 5.7% which was ahead of the S&P/ASX Emerging Companies Index which finished the month up 2.9%. This was a was strong result given our relatively conservative portfolio positioning. We did use the aggressive sell-off in the September quarter to add some quality names to the portfolio which had been sold down to attractive entry points, including Aussie Broadband Limited and PeopleIn Limited. As a team, we remain attuned to the opportunity to add quality stocks to the portfolio at valuations not seen for many years and we are pleased to report we are making solid progress on that front.
Recent portfolio addition Elmo Software (ELO, +107.1%) attracted a takeover bid during the month and was a good contributor to overall portfolio performance in October. ELO is a leading vendor of integrated cloud HR, payroll and rostering/time and attendance software operating in Australia, NZ and the UK. ELO targets customers in the mid-market (>50 employees) and SME (<50 employees) segments. Late in the month, ELO announced its entry into a Scheme Implementation Deed with K1 Investment Management (K1) for the acquisition of 100% of ELO’s issued capital at $4.85 cash per share, which represented a 100.4% premium to ELO’s $2.42 undisturbed share price. K1 is a US-based enterprise software focused private investment firm which has closed 34 investments in the last twelve months and has invested in over 200 enterprise software companies since inception. ELO’s Board unanimously recommend that shareholders accept the offer in absence of a superior proposal and major shareholders representing 34.4% of ELO’s register have announced their intention to vote in favour of the proposed offer. ELO was added to the portfolio in July when we recognised it as representing excellent value (at approximately $220m market capitalisation and with net cash of $48m) versus the estimated $380m ELO has invested in the business since its ASX listing in 2016. Whilst we would have preferred to see ELO scale into being a highly profitable tech business in the coming years, we also recognise the solid premium of the K1 takeover offer and we will be accepting the bid in the absence of a superior proposal.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/221031-OC-Micro-Cap-Fund-Fund-Update.pdfSeptember, 2022
Hawkish central banks, ructions in global currency markets, sticky core inflation in the US and concerns about a global economic slow-down weighed heavily on equity markets during the September quarter. Several key stock indices across the globe re-tested their lows of June and a number ended the quarter in bear market territory including the US S&P 500, the US Nasdaq Index, the Hong Kong Hang Seng Index and the German DAX Index. The sell-off gathered pace in the month of September with the US Federal Reserve (the Fed) increasing the Fed funds rate by a further 75 basis points following another elevated inflation print with subsequent commentary from the Fed leaving no doubt as to the near-term trajectory of interest rates in the world’s largest economy. The ensuing strength in the US dollar has created dislocations in bond markets including in the UK where the Bank of England had to intervene to stabilise the GBP pound after new Prime Minister Liz Truss’ mini budget of growth measures drove the sterling to its lowest level against the greenback in 37 years.
The domestic small cap indices gave up the double-digit gains of July when a short covering rally and optimism about a potential dovish pivot from key central banks drove a sharp bear market rally. Both the S&P/ASX Small Ordinaries Accumulation Index and the S&P/ASX Small Industrials Accumulation Index finished the September quarter in the red, down -0.5% and -1.0% respectively. The OC Dynamic Equity Fund fared materially better, rounding out the quarter up +7.5%. We have for some time been significantly more bearish than the market consensus on both the outlook for inflation and economic growth and have positioned the portfolio accordingly. This has led to solid outperformance from the portfolio in this calendar year to date, which has been a tricky period to navigate equity markets.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/220930-OC-Micro-Cap-Fund-Fund-Update.pdfAugust, 2022
The OC Micro-Cap Fund returned +0.4% in August on the back of a solid reporting season for most of our portfolio holdings, continuing the positive momentum we saw in the July rebound. This was behind the S&P/ASX Emerging Companies Accumulation Index which rallied +1.7%, buoyed by the strong performance of lithium and uranium stocks in the month of August. Whilst the trajectory of consensus earnings revisions was generally negative across the Australian small and micro-cap industrials market in August, we were pleased with the results of the Fund’s holdings overall and remain optimistic about their prospects for the year ahead, notwithstanding the current macro-economic and geopolitical challenges.
Nitro Software Limited (NTO +37.4%) rallied strongly in August after disclosing a non-binding indicative proposal from a private equity consortium comprised of Potentia Capital and HarbourVest Partners to acquire all the issued capital of NTO for $1.58 cash per share. The proposal is conditional on six weeks of due diligence, exclusivity provisions and board approval. Whilst the proposal is opportunistic, Nitro reduced its guidance for CY22 Annualised Recurring Revenue (ARR) by 12% in July and requires a solid operating outcome in the second half to hit its revised guidance. NTO was a relatively small position in the Fund and we elected to sell into the private equity consortium when approached in a pre-bid raid on the NTO register at the indicative bid price. OC Funds took the view that the certainty of a 40% cash premium in the short term is likely to provide a better outcome on a risk versus return basis than banking on future ARR growth and a potential re-rate in the revenue multiple in an environment where the US Federal Reserve is hiking interest rates and may yet raise rates further than the market expects. NTO is still burning cash and any further slippage in management’s forecasts is likely to be harshly treated by the market as it would result in the requirement for further equity funding before cash-flow breakeven is reached by the company. In terms of the indicative bid, the NTO board is intent on holding out for a better offer which may or may not emerge given that the current consortium holds a substantial 19.9% blocking stake.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/220831-OC-Micro-Cap-Fund-Fund-Update.pdfJuly, 2022
Global equities rebounded in July following a very tough first half of CY23 on the back of a better than anticipated US reporting season and optimism that the US Federal Reserve could soon reduce the pace of interest rate increases as economic conditions tighten. The market shrugged off earnings downgrades and negative commentary from economic proxies like Walmart and United Parcel Service and instead focussed on the broader results period which exceeded expectations with about 75% of the S&P 500 firms reporting results that exceeded analyst estimates. It was a stark contrast to recent months with even bad news seemingly being good news with above consensus inflation in the US and large rate rises taken as signalling that the end of the interest rate tightening cycle may be nearer as long-term bond yields fell sharply.
The domestic small and micro-cap market again took its lead from the US with both the S&P/ASX Small Ordinaries Accumulation Index and the S&P/ASX Emerging Companies Accumulation index bouncing strongly from a poor start to the calendar, up +11.4% and +14.3% respectively for the month of July. Despite our cash buffer and conservative sector positioning, the OC Micro-Cap Fund enjoyed a solid rebound, up +12.3% for the month. It was pleasing to see the Fund largely keep pace with the red hot small and micro-cap market which can be attributed to some strong stock specific updates from several investments during the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/220731-OC-Micro-Cap-Fund-Fund-Update.pdfJune, 2022
The potent cocktail of rising inflation, hawkish central banks, war in Ukraine and further supply chain disruptions has seen asset prices sell off dramatically across the globe over the June quarter. Australian microcap stocks were no exception with the S&P/ASX Emerging Companies Accumulation Index down a hefty -28.1% during the quarter. There was nowhere to hide in the micro-cap space during the quarter with the sell-off broad based and brutal as investors reassessed their risk appetite as global growth expectations slowed. The OC Micro-Cap Fund fared slightly better but still posted a -25.8% return for the quarter which was disappointing. Financial Year 2022 will be remembered as a tough one for investors globally with several key offshore indices finishing the 12 months to June in bear market territory, (generally defined as a peak to trough fall in excess of 20%). These ‘bear market benchmarks’ included the Nasdaq 100 (-23.9%), the Hong Kong Hang Seng Index (-24.2%) and the Korean KOPSI Index (-29.2%)
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/220630-OC-Micro-Cap-Fund-Fund-Update.pdfMay, 2022
Global markets sold off aggressively early in May as concerns mounted that economic growth will slow as central banks hike rates to target inflation, with the war in Ukraine and China’s lockdowns adding to investor apprehension.
The key US S&P 500 Index briefly entered bear market territory (generally considered a 20% fall from peak) before bouncing back later in the month as investor fears around rampant inflation were tempered by a more moderate US April CPI print. The April inflation data showed that price rises slowed during the month leading to speculation that ‘peak’ inflation in the US may have already passed and that the US Federal Reserve (the Fed) interest rate trajectory may therefore be less aggressive than had been previously assumed. Whilst the S&P/ASX 100 Accumulation Index and broader S&P/ASX All Ordinaries Accumulation Index held up relatively well, underpinned by the solid relative performance of the big four banks and large-cap resource companies, the small and micro-cap end of the market was punished in May. The S&P/ASX Emerging Companies Index was down 7.7% for the month and the OC Micro-Cap Fund fared little better, down 7.4% over the same period. Small and micro-cap stocks came under significant pressure across the board during the month as investors reassessed their risk appetite as global growth expectations slowed.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/220531-OC-Micro-Cap-Fund-Fund-Update.pdfApril, 2022
The micro-cap industrial space, our predominant investment universe, remained under significant pressure during the month as investors continued to favour commodity stocks and more liquid larger cap industrial companies. The Fund was not immune from these pressures and finished the month down 6.6%. This was behind the S&P/ASX Emerging Companies Accumulation Index which was down 4.3%, with micro-cap resource stocks once again outperforming their industrial counterparts
The outlook for global growth deteriorated sharply during April as the reality of rapidly rising interest rates to tame runaway inflation hit home with key central banks becoming increasingly hawkish in their commentary in response to above consensus inflation prints in the US, Europe and Australia. During the month the International Monetary Fund (IMF) sharply revised downward its forecast for global economic growth from 4.4% to 3.6%, with growth forecasts in the US, the Euro Area, the UK and China all pared back as the war in the Ukraine added further fuel to inflationary pressures brought about by COVID-19 induced supply chain disruptions, with recent lockdowns in key manufacturing and trade hubs in China likely to further compound supply disruptions elsewhere.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/220430-OC-Micro-Cap-Fund-Fund-Update.pdfMarch, 2022
The March quarter was a challenging one for investors with a multitude of risks including surging inflation, tightening monetary policy, rising bond yields, the Ukraine war, Russian sanctions and soaring commodity prices conspiring to drive equity markets sharply lower across the globe. The domestic micro-cap market held up remarkably well compared to the broader market with continued strength in commodity stocks cushioning material falls across the micro-cap industrial space which came under significant pressure during the quarter. Russia and Ukraine together are major producers of gas, crude oil, coal, aluminium, nickel, copper, titanium, palladium, gold, neon gas, vanadium and cobalt and supply chain disruptions and heavy Western sanctions on Russia has seen energy and commodity prices spike sharply in recent months. Not surprisingly, resources stocks garnered significant investor support with money flowing out of high growth stocks, including technology names, into the commodity and energy names.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/220331-OC-Micro-Cap-Fund-Fund-Update-v2.pdfFebruary, 2022
The OC Micro-Cap Fund finished February down a disappointing 4.7% which was behind the S&P/ASX Emerging Companies Accumulation Index which fell 1.9%.
The strong performance of commodities once again provided a material relative headwind for the Fund during the month with the resources sector contributing +1.3% to the micro-cap index during February. Key commodity prices including crude oil, coal, nickel, and safe-haven asset gold surged higher late in the month following the Russian invasion of Ukraine driving resource stocks sharply higher as investors scrambled to increase their exposure.
The exposure of resource and energy companies is at record levels within the micro-cap index, constituting some 49% of the index at the end of February. Given the Fund’s aversion to investing in higher-risk single commodity and single mine stocks that dominate the micro-cap resources space, it was a challenging backdrop against which to keep pace with the broader index.
Inflation was once again in sharp focus driven by mounting evidence of more sustained pricing pressures across the global economy and increasingly hawkish posturing from central bankers, although the RBA remains an outlier on this. Against this backdrop, it was perhaps not surprising that the Fund's best performers in February included value names Regis Healthcare Ltd (REG, +18.5%), MMA Offshore Limited (MRM, +18.5%), and Pacific Current Group (PAC, +9.0%), whilst growth names like Telix Pharmaceuticals (TLX, -27.2%), Nitro Software (NTO, -21.4%) and Frontier Digital Ltd (FDV, -16.0%) were heavily sold-off.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/220228-OC-Micro-Cap-Fund-Fund-Update.pdfJanuary, 2022
Equity markets entered the new year with considerable momentum but swiftly reversed course and closed the month well down as concerns about the trajectory of inflation intensified and the prospect of rising interest rates precipitated a short and sharp sell-off. The domestic micro cap index was not spared with the S&P/ASX Emerging Companies Accumulation Index down 7.7% for the month of January. The OC Micro-Cap Fund fared slightly better, but still closed the month down 6.9%.
Global aviation maintenance business PTB Group (PTB, +9.3%) was up in January after pre-reporting better than expected 1H22 preliminary financial results which reflected +56% growth in PBT (excluding building sales). The key driver of this result has been strong trading conditions in the US and Asia Pacific regions. Despite expectations that the strong trading conditions would continue into the current calendar year, the Board believed it prudent not to adjust the full year outlook at this time, preferring to wait and see before any further revisions were made to the FY22 guidance. PTB has indicated that the recently acquired US facility is becoming more productive after the CEO Stephen Smith relocated to the US to add management clout in that part of the business. PTB has also pointed to rebounding activities in the Maldives which is one of the companies key tourist markets. PTB maintains, repairs and overhauls turbo-prop aircraft engines, via workshops in Brisbane, Dallas (Texas), Mesa (Arizona) and Butler (Pennsylvania). PTB enters into contracts with customers which provide engine maintenance programs for a specified level of customer flying hours. PTB specialises in turbo-prop engines which power narrow body planes that have up to 25 seat capacity. These planes are used to transport a small number of passengers to remote locations such as islands in the Indian and Pacific Oceans, including locations such as the Maldives. Longer term, we think PTB can benefit from further growth in its “power by the hour” offering in the US, in addition to a resumption of its plane leasing strategy.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/220131-OC-Micro-Cap-Fund-Fund-Update.pdfDecember, 2021
The domestic micro-cap market continued to track higher in December, brushing aside the rapid spread of the highly infectious Omicron COVID-19 variant across the globe and a hawkish pivot by key central banks, including the US Federal Reserve, to round out another positive month (+4.3%). The S&P/ASX Emerging Companies Accumulation Index also posted another very strong quarter, up 8.3%. This was well ahead of the OC MicroCap Fund which returned +0.1% for the quarter.
Over the quarter a number unprofitable resource and biotechnology stocks with market capitalisations above $500m at the start of the quarter once again rallied sharply which drove the strong Index return. To illustrate, the top five contributing stocks to the micro-cap index during the quarter were AVZ Minerals, Lake Resources, Syrah Resources, Neometals and Incannex Healthcare. None of these stocks will generate a profit in FY22 and all now have market capitalisations well above our $500m threshold for initial investment.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/211231-OC-Micro-Cap-Fund-Fund-Update.pdfNovember, 2021
The emergence of the COVID-19 Omicron variant late in the month triggered a sell-off in global equity markets which plunged most domestic equity indices into the red for the month of October. The S&P/ASX Emerging Companies Accumulation Index finished the month down -0.4%, which marginally shaded the OC Micro-Cap Fund which finished down -1.1%, with early-stage battery metals stocks once again propping up the Index.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/211130-OC-Micro-Cap-Fund-Fund-Update-v2.pdfOctober, 2021
The domestic micro-cap market continued to forge higher during October with early-stage resource stocks and biotechnology companies again leading the charge. The OC Micro-Cap Fund returned a solid 2.6% for the month which was behind the strong performance of the S&P/ASX Emerging Companies Accumulation Index which returned 4.2% in October.
Conjecture about the direction of inflation and interest rates continues to dominate discussions about financial markets and the chasm between the expectation of our central bankers and those of economists and most financial market participants continues to be stark. The past week has seen both the Reserve Bank of Australia (RBA) and the US Federal Reserve (the Fed) admit what now seems obvious; namely that inflationary pressures appear to be stubborn and will persist for longer than they originally anticipated. But neither of them is yet prepared to change their dovish stance and entertain the prospect that inflation may be more than a transitory phenomenon, despite both softening their rhetoric on inflation and the tapering of asset purchases in the past week
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/211031-OC-Micro-Cap-Fund-Fund-Update.pdfSeptember, 2021
The OC Micro-Cap Fund had a solid quarter from an absolute return perspective returning investors +5.9%. It was however left behind by the very strong performance of the S&P/ASX Emerging Companies Accumulation Index which returned an impressive +18.8% for the quarter. Prima facie this is a disappointing relative return for investors. But if we examine the actual drivers of the Index outperformance in the context of the OC investment process, we remain satisfied that the strategy continues to generate investors strong risk adjusted returns.
Over the quarter a number unprofitable resource and biotechnology stocks with market capitalisations above $500m at the start of the quarter staged remarkable rallies which drove the strong Index return. To illustrate, the top five performing stocks in the micro-cap index during the quarter were: Liontown Resource (LTR, +91.0%), Paladin Energy (PDN, +34.0%), Vulcan Energy Resources (VUL, +69.2%), Ioneer Resources (INR, +80.0%), Imugene Limited (IMU, +35.2%). None of these stocks will generate a profit in FY22 and all have market capitalisations well above $1b, despite being in the micro-cap index until the Index rebalance towards the end of September. Investors will be aware that our micro-cap mandate prevents us from investing in stocks with a market capitalisation above $500m (when we first invest). Further our focus on capital preservation and risk management leads us to exclude most unprofitable biotechnology and resources stocks from the portfolio, other than for short-term ‘event driven’ trades. Consequently, there will be times when these sectors are ‘hot’ and speculative stocks perform well and we will consequently underperform the Index. The September quarter was such an instance.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/210930-OC-Micro-Cap-Fund-Fund-Update.pdfAugust, 2021
The OC Micro-Cap Fund returned +2.7% in August, which lagged the S&P/ASX Emerging Companies Accumulation Index, which was again very strong, up 7.3% for the month. It is certainly a ‘risk-on’ environment with some of the more speculative companies in the index including early-stage lithium, uranium and biotechnology stocks performing vey strongly. Long-term investors will know that OC Fund’s is relatively risk adverse and we find this this part of the market opaque and therefore difficult to value and typically avoid it, other than for short term event driven trades.
The August reporting season was broadly positive in domestic equities with investors looking through lockdowns in NSW and Victoria to instead focus on optimism around the likely reopening of our two largest state economies once vaccine targets are met (expected to be 70% to 80% vaccination rates), which is currently projected to occur in October and November respectively. Earnings per share (EPS) across the ASX 200 grew an impressive +28% in FY21, although an elevated number (~45%) of companies still missed consensus expectations, which is well above historical averages. Few companies were bold enough to offer earnings guidance for FY22 with most pointing to uncertainty around lockdowns and government-imposed restrictions for their reluctance to forecast for the year ahead.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/210831-OC-Micro-Cap-Fund-Fund-Update.pdfJuly, 2021
The new financial year continued the positive recent momentum in Australian listed equities with the S&P/ ASX Emerging Companies Accumulation Index recording its 13th positive month out of 16 months since the COVID-19 induced sell-off of March 2020 and the S&P/ ASX 200 Accumulation Index stretching its winning run to an impressive consecutive 10 months. The OC Micro-Cap Fund started the financial year on a positive note with the Fund returning +1.6% for the month. This was behind the S&P/ASX Emerging Companies Index which was up +2.8% for the month.
Whilst July was relatively quiet from a company news flow perspective with many companies in ‘black-out’ ahead of August results, corporate activity kicked up another gear with several M&A proposals disclosed during the month including bids for Sydney Airport, Spark Infrastructure Group and Iress Limited. News headlines were dominated by the misery caused by the highly infectious delta variant of COVID-19 which has plunged much of the country back into lockdown and caused significant economic damage at a time when government subsidies and hand-outs have been substantially wound back.
The share price of long term fund holding Rhipe Ltd (RHP; +21.1%) rallied early in the month when it unveiled an agreed deal to be acquired via scheme of arrangement by global peer, Norwegian based, Crayon AS. The 100% cash deal, priced at $2.50/share, is unanimously recommended by the RHP board (in the absence of a superior proposal) and represents a healthy 30% premium to 30 day vwap price for the shares.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/210731-OC-Micro-Cap-Fund-Fund-Update.pdfJune, 2021
The OC Micro-Cap Fund finished the June quarter up +5.5%, which was behind the S&P/ASX Emerging Companies Accumulation Index (+8.3%) despite solid outperformance by the Fund in the month of June.
FY21 was in many ways an extraordinary year with markets casting aside monumental health and economic challenges brought about by COVID-19 to post equity returns which were nothing short of spectacular. The S&P/ASX Emerging Companies Accumulation Index rallied some +59.2% over FY21 which was the best return from the Index since 2007.
The OC investment team had entered FY21 with a degree of trepidation with the COVID-19 health crisis in full swing across the globe and markets trading well off their nadir of late March 2020. The coordinated policy response to the pandemic from central banks and governments globally unleashed an unprecedented wave of stimulus that ultimately laid the foundations for a global economic recovery that is still gathering momentum as we enter the new financial year.
The OC investment team drew on 60+ years of investment experience to navigate the many challenges thrown at us in FY21 and we were pleased with the performance of our Funds over the year. The OC Micro-Cap Fund returned +52.9% for FY21, which although slightly behind the micro-cap index for the financial year, was sufficient to see the Fund come runner up in the Money Management Fund Manager of the Year in the Australian Small/Mid Cap Equities category
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/210630-OC-Micro-Cap-Fund-Fund-Update.pdfMay, 2021
The domestic small and micro-cap indices finished modestly higher in May, with the focus of markets still firmly on inflation and particularly on whether the inflationary outbreaks we are witnessing are structural or transitory and the broader implications for monetary policy. The S&P/ASX Emerging Companies Accumulation Index was up +2.0% for the month, with strength in junior resource stocks and several early-stage biotechnology stocks underpinning a solid outperformance of the Index versus the OC Micro-Cap Fund (-0.5%) which has limited exposure to the more speculative end of the micro-cap stock universe.
As investors we tend to be relatively risk averse which means we can underperform the Index in a ‘risk-on’ environment when the more speculative end of the micro-cap market is running hot. We find this part of the market opaque and therefore difficult to value and typically avoid it, other than for short term event driven trades. When the ‘heat’ comes out of the market, or there is a material pull-back, these speculative stocks tend to fall disproportionately. This risk averse approach goes some way to explaining why the OC Micro-Cap Fund has outperformed its Index in most quarters since the Fund became a pure micro-cap product in September 2016 (the Fund has outperformed the Index in 95% of all quarters since launch).
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/210531-OC-Micro-Cap-Fund-Fund-Update.pdfApril, 2021
April was a strong month for equities globally and the domestic micro-cap market was no exception, with the S&P/ASX Emerging Companies Accumulation Index rallying throughout the month before finishing up +7.5%. Bond markets stabilised following the release of benign inflation data and central banks in key markets continued to talk down the prospect of rate rises in the short to medium term.
The low interest rate environment is clearly supportive of elevated stock valuations, particularly in long duration growth names, and markets across the globe responded positively to the data during the month. The OC Micro-Cap Fund posted a solid +4.5% gain in April, albeit behind the very strong Emerging Companies Index.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/210430-OC-Micro-Cap-Fund-Fund-Update.pdfMarch, 2021
Global markets continued to bounce in the March quarter with a combination of unprecedented monetary and fiscal stimulus from governments and central bankers, accelerating vaccine rollouts in most countries and positive economic data supportive of a continued upwards trajectory in stocks. Following the global lead, the Australian micro-cap index tracked higher, with the S&P/ASX Emerging Companies Accumulation Index up 3.2% for the quarter, ahead of the OC Micro-Cap Fund which returned 0.6%.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/210331-OC-Micro-Cap-Fund-Fund-Update.pdfFebruary, 2021
The OC Micro-Cap Fund enjoyed a solid reporting season finishing February up +1.1% which was behind the S&P/ ASX Emerging Companies Accumulation Index which returned +2.0% for the month. It is now just on a year since the COVID-19 pandemic spread to our shores causing significant collateral damage in the domestic equity market. Over that period, the OC Micro-Cap Fund has returned investors +57.6% which is comfortably ahead of the very strong +51.5% return generated by the S&P/ASX Emerging Companies Accumulation Index over the same time horizon.
Capitol Health (CAJ, +25.5%) delivered an outstanding interim result during the month. The management team’s focus on market share gains and cost discipline as it exited COVID-19 restrictions translated to strong HY21 earnings delivery and analysts have subsequently marked up FY21 (and beyond) earnings ahead of prior expectations. As a reminder, the OC investment team identified CAJ as a quality business which was experiencing government imposed difficulties during the depths of the COVID-19 lockdowns (particularly in Victoria) and we participated in a discounted capital raising in April 2020 at 16cps (closed February 2021 at 32cps). CAJ has a network of 63 diagnostic imaging clinics, predominantly in Victoria (but also with a presence in WA, Tasmania and SA), providing services such X-ray, Ultra-Sound, Magnetic Resonance Imaging (MRI) and Computerised Tomography (CT) to a predominantly ‘bulk billed’ client base. CAJ managed the difficult CY20 conditions well and in recent months has emerged from the lockdowns in solid shape with margins improved, market share gains won and ready to work through a backlog of GP imaging referrals which were, in many cases, put on hold during lock down. We see CAJ as well positioned to continue to execute on its strategy, with a strong balance sheet giving line of sight on further selective acquisitions and greenfield site openings. We continue to hold the stock as a core position in the portfolio.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/210228-OC-Micro-Cap-Fund-Fund-Update.pdfJanuary, 2021
Equity markets continued their strong momentum into the start of the new calendar year with most markets advancing in the early part of the month on the expectation of the vaccine roll-out and the promise of further fiscal and monetary stimulus, particularly in the US. However, early gains reversed as unprecedented retail-led speculative activity in a handful of heavily shorted US companies unnerved investors, stoking fears of asset bubbles which perpetuated a brief sell-off across most equity markets.
The domestic micro-cap index (the S&P/ASX Emerging Companies Accumulation Index) sky-rocketed early in the month and was at one stage up over 11% intra-month, before moderating to finish up +3.9%. The OC Micro-Cap Fund returned a more modest but still credible +2.7% for the month of January
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/210131-OC-Micro-Cap-Fund-Fund-Update.pdfDecember, 2020
The OC Micro-Cap Fund continued its strong recent momentum in the December quarter with the Fund finishing the period up +17.5%. This was in-line with the S&P/ASX Emerging Companies Accumulation Index which was up a solid 17.4% for the quarter.
It capped what has been a remarkable calendar year, in many respects, for equity market participants. We started the year with the panic selling of February and March as gravity of the COVID-19 crisis dawned on the market with the ASX moving into bear market territory (a retreat of more than 20% from its high), at its fastest rate ever. But this quickly gave way to a sharp and sustained recovery in markets as central banks and governments took extraordinary measures to shore up their economies and banking systems, while several credible vaccine candidates emerged offering optimism that COVID-19 may soon be in our rear-view mirror.
The OC Micro-Cap Fund itself performed strongly over the calendar year returning +43.1% for investors (S&P/ ASX Emerging Companies Accumulation Index +27.1%). Pleasingly, the Fund significantly outperformed the micro-cap index during the equity market sell-off at the commencement of the COVID-19 pandemic and then it went onto recover its draw-down and moved significantly higher over the balance of the year. Early in the pandemic we repositioned the Fund including adding companies that were resilient and innovative structural winners, who could control their own destiny and who could continue exploit their competitive advantage, taking share from lower-tech incumbents, and grow independently of the economic cycle.
Coupled with the numerous recapitalisations that the Fund participated in over the balance of the year and the myriad successful IPOs that we supported, it was a strong overall year for Fund investors.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/201231-OC-Micro-Cap-Fund-Fund-Update.pdfNovember, 2020
The OC Micro-Cap Fund successfully navigated the overwhelmingly positive vaccine news in early November to post a return of +11.8% for the month, behind the S&P/ASX Emerging Companies Index which was up
+12.9% for the month. Despite the strong headline numbers from indices domestically, it was a challenging month for fund managers given the high volatility in individual stocks as the share prices of perceived ‘opening up’ or ‘vaccine beneficiary’ companies rocketed and conversely the share prices of ‘COVID-19 beneficiary’ companies came falling back to earth. November was the Fund’s third double digit monthly return since the March lows and the Fund remains well ahead of the S&P/ASX Emerging Companies Index over the calendar year having returned +38.1% (versus +23.8% for the Index).
Childcare operators, Think Childcare (TNK; +63.3%) and Evolve Education (EVO; +88.9%), rocketed higher during the month. TNK is a high quality childcare service provider with 60 centres across the Australian market. TNK provided a market update early in November confirming it was emerging from COVID-19 in a very strong position. This update attracted the attention of not one but two bidders for the company with a low ball indicative proposal from Alceon Private Equity (at $1.35 per share) soon followed by a much more appropriately priced, non-binding indicative proposal from Busy Bees Early Learning at $1.75 per share. We remain holders of TNK pending the outcome of this corporate activity. New Zealand based, dual listed EVO has rallied hard off its lows seen through the COVID-19 pandemic, where childcare services were severely disrupted, and this rally was justified when management provided a bullish business update and interim result during November. Both TNK and EVO are now being valued some multiples higher than where their share prices plumbed the low points seen during the pandemic and it shows the rewards on offer for patient long term investing.
Mining services providers Primero Group (PGX; +29.8%) and Emeco Holdings (EHL; +36.9%) enjoyed strong share price gains during the month. PGX is now more than 5 times higher than its pandemic induced March lows where we were adding to our shareholding in this quality engineering business. PGX received a recommended cash-scrip takeover bid from another WA mining services business (and OC Funds holding) NRW at a price equivalent to $0.55 per share. Although we see this bid as a little on the cheap side, we acknowledge PGX faced other challenges (including a major contract dispute) and we will accept this bid in the absence of any other interest from counter bidders. EHL was added to the Fund as it emerged from the pandemic with a forced capital raising in August at what we considered an attractive entry level for new shareholders such as OC. Following a refinancing of its debt and a solid AGM update in November we see EHL as now more sensibly priced and a good derivative exposure for the Fund to commodity price strength, particularly in the gold and iron ore sectors.
ticker: OPS0004AU
commentary_block: Array
factsheet_url:
https://www.ocfunds.com.au/funds/oc-micro-cap/
release_schedule: Monthly
fund_features:
OC Micro-Cap Fund aims to provide investors with strong long-term capital growth by investing in micro-capitalisation (micro-cap) companies with sustainable business models and attractive investment qualities. Micro-cap companies, for the purposes of the Fund, are defined as companies with a market capitalisation of less than $350m at the time of the initial acquisition.
- The Fund is designed for investors seeking portfolio diversification and strong capital growth over the long term.
- Invests in micro-cap Australian companies with sustainable business models and attractive investment qualities.
- Number of shares in the portfolio is somewhere between 25 – 60 stocks.
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