September, 2023
The DNR Capital Australian Emerging Companies Fund decreased -5.14% (net of fees) in September, underperforming the S&P/ASX Small Ordinaries Total Return Index by -1.10%. Since inception, the Fund increased by 10.36% p.a., outperforming the Index by 8.83% p.a. (net of fees).
Equity markets declined through September, primarily due to the surge in global bond yields. Over the past few months, long-term bond yields have seen a significant rise, reaching new cycle highs. For instance, the 10-year government bond yield in Australia has now surpassed 4.5%, driven by the aggressive tightening of monetary policy by the major central banks. Persistent high inflation due to a robust economy and rising oil prices has also led central banks to signal that interest rates are likely to remain "higher for longer." This scenario presents a more challenging environment for equity markets, with concerns surrounding the potential effects of elevated bond yields on global growth.
In September, rising bond yields posed challenges to market valuations, particularly affecting longer-duration growth stocks, which generally underperformed value sectors. This impacted the Fund’s holdings in the Consumer Discretionary sector, which contributed to the underperformance versus the index during the month. This included holdings like Tabcorp Holdings (TAH), Lovisa Holdings (LOV) and Breville Group (BRG), which saw share price declines of 10% or more during the month. Despite the uncertain earnings outlook in the short-term, we continue to see considerable long-term value in these opportunities, with valuations and earnings expectations having significantly rebased lower over the past year.
The Energy sector was one of the few sectors that outperformed the Index during the month, benefiting from higher oil prices driven by constrained supply and resilient demand. This saw the Fund’s holdings in Whitehaven Coal (WHC) and Beach Energy (BPT) outperform during the month, with both companies rebounding from depressed valuations. We continue to see attractive opportunities across the Energy sector, with the market too pessimistic on the outlook in our view. The transition towards renewable energy is likely to take many decades given the cost and technological constraints involved, with traditional energy still necessary during this transition period. Despite this resilient demand outlook, investment in new supply has been curtailed in recent years, resulting in tight markets for traditional energy commodities.
We believe that the Australian small-cap sector is currently offering compelling opportunities for longterm investors who are willing to look beyond the near-term uncertainty. Following the recent sell-off, this sector has underperformed large caps by nearly 20% over the past two years. Valuations have also declined, with many high-quality small-cap stocks now trading at significant discounts relative to comparable large-cap stocks, despite what we see as their superior medium to long-term growth potential. Earnings expectations have also adjusted downward, with the forward earnings per share (EPS) for the index now below pre-COVID-19 levels, following a recent 15% aggregate downgrade. This is a stark departure from the scenario of two years ago when valuations and earnings were at peak levels, often described as 'priced for perfection'.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-32.pdfAugust, 2023
The DNR Capital Australian Emerging Companies Fund decreased -3.24% (net of fees) in August, underperforming the S&P/ASX Small Ordinaries Total Return Index by -1.93%. Over the last 12 months, the Fund increased by 1.01%, outperforming the Index by 2.13% (net of fees).
Equity markets experienced a volatile month during the August reporting season, with outsized share price moves as investors reacted to a mixed set of earnings announcements. Contributing to this volatility was a market characterised by significant dispersion in valuations, earnings expectations, and sentiment, as investors continue to deal with a highly uncertain macro environment. It was surprising to see the extent of the outperformance of many growth-focused companies in the Index where the Fund is underweight, with valuations for a number of barely profitable companies reaching extremely elevated levels. The lack of valuation discipline creeping into some sectors of the market also seems at odds with the current higher interest rate environment.
Key positive contributors during the month came from holdings in the Consumer Discretionary sector including Breville Group (BRG), ARB Corporation (ARB), Lovisa Holdings (LOV) and Tabcorp Holdings (TAH). With many consumer companies selling off earlier in the year, and investors cautiously positioned, these companies recovered following better than feared earnings releases.
The main disappointment during the month was Iress (IRE), which explains all the Fund’s underperformance versus the Index. Its shares fell sharply following weaker earnings guidance, with the restructuring being undertaken by new management weighing on profitability more than we had anticipated in the short-term. We discuss IRE in further detail below.
Financials sector holdings like Credit Corp Group (CCP) and Pinnacle Investment Management Group (PNI) also detracted from the Fund’s performance, giving back some of the prior month’s strong gains.
Reviewing reporting season overall there were several key takeaways. Firstly, despite concerns around the outlook for the global economy, consumer exposed companies were some of the strongest performers during the month.
Demand has generally proven to be more resilient than feared, with results coming in ahead of conservative expectations. There are also signs of inflationary pressures starting to ease, with several companies highlighting the early signs of falling raw material costs and lower freight rates. In recent months, we have been highlighting the opportunities emerging in the Consumer Discretionary sector. Share prices have fallen significantly, valuations have de-rated, and earnings are being downgraded, offering compelling entry points for quality businesses with attractive long-term outlooks. The fact that inflationary pressures are easing is also positive, as this suggests that risks to margins have started to stabilise.
One such opportunity in the Fund is BRG. Despite uncertainties in the near-term environment, the FY23 results underscored the company's ability to sustain margins while reinvesting back into the business.
Management’s focus on research and development is resulting in a healthy pipeline of new products, which will help to drive sales growth in the coming years. In the structurally growing coffee category, the company is building strong market leadership globally with a range of premium coffee machines. Geographical expansion is also firmly on the company's agenda, with a particular focus on Asia, commencing with the South Korean market. We believe that BRG is a great example of a business building economies of scale, allowing it to further reinvest and strengthen its market position over time.
Some of the challenges facing the mining sector were evident during the recent reporting season. Mining is a sector we have become more cautious on in recent months, with the latest reporting season highlighting some of our concerns. This includes the challenges associated with delivering a significant pipeline of new projects at a time of labour shortages, capital cost inflation and falling revenue due to weaker commodity prices.
We expect this challenging outlook could continue. A significant amount of capital has come into the sector in recent years, especially in commodities exposed to decarbonisation like lithium. This is set to result in supply expanding materially in the coming years. We also believe that industry forecasts around decarbonisation may prove too optimistic in the short to medium-term, leading to lower demand forecasts.
IRE was the main disappointment for the Fund during reporting season, with its shares falling significantly after downgrading earnings guidance. Following mismanagement and suboptimal capital allocation decisions by the previous management team, the new management team is looking to turn the business around with a private equity style mindset. The new strategy is to reinvest in the core wealth management business which has been neglected, and to exit non-core assets which are diluting returns. Management has already sold MFA for $52m and is on-track to divest the platform business, with proceeds from both sales being used to de-lever the balance sheet. The company is also exploring other non-core asset sales such as mortgages and UK wealth.
The business generates over $600m in revenues yet has a cost base close to $500m. We believe there is ample opportunity to right-size the business and achieve similar margins and returns profile that align favourably with those of its publicly listed peers. Transformations are rarely linear, and we have used the share price weakness to add to the portfolios position. If management can execute on its strategy, we see material upside to the current share price, with the shares now trading on the lowest price to sales multiple since its IPO in 2001 (1.9x sales).
We continue to look for strong bottom-up investment opportunities, in quality companies trading at attractive valuations. Key positions are currently across the Consumer Discretionary, Financials, Industrials, Technology and Energy sectors. The short-term bias of many investors is resulting in a range of de-rated quality opportunities, especially in companies experiencing some uncertainty in the short-term, yet where the longterm outlook remains attractive. We believe that taking a longer-term view on these opportunities will be rewarded, especially once the uncertainty around the outlook for the economy and earnings improves.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-31.pdfJuly, 2023
The DNR Capital Australian Emerging Companies Fund increased 6.45% (net of fees) in July, outperforming the S&P/ ASX Small Ordinaries Total Return Index by 2.91%. Over the last 12 months, the Fund increased by 11.19%, outperforming the Index by 10.42% (net of fees).
Equities posted strong gains during July, despite ongoing uncertainty surrounding the outlook for the global economy. Falling inflation is providing optimism that the major central banks could be nearer the end of their tightening cycle, increasing the potential for a soft landing. Although risks around the lagged impact of tighter monetary policy remain, for now, this is being outweighed by a fairly resilient global economy. Unemployment remains low, with household budgets benefiting from higher wages and falling inflation. The positive surprise with falling inflation is that it hasn't been accompanied by a substantial weakening in the labour market, raising hopes that the hard landing scenario expected by many investors over the past year could be avoided.
With elevated cash holdings and generally cautious investor positioning, this positive sentiment saw equity markets recover strongly through July. Small caps marginally outperformed relative to large caps, with the S&P / ASX Small Ordinaries Index increasing 3.5%, versus the ASX 100's 2.8%.
We continue to see the opportunity for further mean reversion over time, especially as investor confidence progressively returns. Small caps have significantly underperformed over the past 18 months, with valuations falling to more attractive levels. However, we note that a selective approach is still required, with pockets of overvaluation persisting; this is especially the case in the defensive sectors and in the more speculative/unprofitable business models across sectors like Health Care, Information Technology, and mining exploration. Once again, this highlights the importance of focusing on quality business models at attractive valuation entry points.
During July, the more cyclical sectors like Financials, Consumer Discretionary, and Energy outperformed the ASX Small Ordinaries Index. In previous months, we have discussed the opportunities emerging in these sectors. Although the near-term outlook remains uncertain, our focus has been on identifying quality business models that have seen share prices and valuations fall to attractive levels. Although the outlook for earnings continues to be challenging in the nearterm, the opportunity for long-term focused investors is to identify where this is already being priced in.
During July, the Fund's performance benefited from the recovery in several of these holdings bought earlier in the year; including Credit Corp Group (CCP) and Breville Group (BRG), two of the Fund's largest positive contributors to performance during the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-30.pdfJune, 2023
The DNR Capital Australian Emerging Companies Fund increased 2.85 % (net of fees) in June, outperforming the S&P/ ASX Small Ordinaries Total Return Index by 2.82%
For the 2023 financial year, the Fund returned 10.6% (net of fees), outperforming the benchmark’s return of 8.4%. Small caps continued to underperform relative to large caps, with the ASX100 returning 15.1% over the last 12 months. This underperformance reflects investor positioning and highlights the potential for mean reversion in small caps once investor confidence improves.
Equities posted strong gains in the face of continued economic uncertainty from higher interest rates and geopolitical tensions. Softer inflation prints, domestically and in the US, suggest we may be closer to a peak in interest rates. Additionally, despite the inverted yield curve signalling a potential recession, economic data continues to demonstrate resilience.
Key contributors to the Fund’s performance in June came from positions we have been rebuilding in the hardest hit sectors such as Financials. Credit Corp (CCP) rebounded as we believe shares were already pricing in a recession scenario, trading at its lowest historical valuation range. Pinnacle Investment Management (PNI) outperformed with its suite of active fund managers well positioned to attract flows as conditions improve. Key detractors came from the Consumer Discretionary sector, such as Lovisa Holdings (LOV).
This sector appears to be facing the most headwinds from continued cost of living pressures. However, it presents an opportunity for long term investors willing to look through near term volatility. Despite suffering substantial share price declines, the consumer space saw further downward pressure due to sell reports issued by brokerage firms. We maintain our view that the consumer space is starting to throw up attractive opportunities for long-term investors, and we continue to actively seek investments within the sector.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-29.pdfMay, 2023
The DNR Capital Australian Emerging Companies Fund decreased 3.74% (net of fees) in May, underperforming the S&P/ASX Small Ordinaries Total Return Index by 0.48%. Over the last 12 months, the Fund decreased by 1.76%, outperforming the Index by 4.01% (net of fees).
Contributors
• Tabcorp (TAH): held its investor day during the month, reiterating its 2025 growth targets. The company is poised to gain significant advantages from regulatory changes, including increased corporate bookmakers taxes. These changes will effectively remove the structural disadvantage TAH faces, enabling them to compete on a level playing field.
• Allkem (AKE): announced a merger of equals with Livent, creating a leading global lithium chemicals producer. This strategic move combines diverse assets spanning various jurisdictions, thereby establishing a robust and vertically integrated business model.
Detractors
• Whitehaven Coal (WHC): recent decline can be attributed to the retracement of thermal coal prices back to their long-run average. WHC has over half its market capitalisation in cash, and the onmarket share buy-back continuing, with 18% of its outstanding shares to go.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-28.pdfApril, 2023
The DNR Capital Australian Emerging Companies Fund increased 3.53% (net of fees) in April, outperforming the S&P/ASX Small Ordinaries Total Return Index by 0.75%. Over the last 12 months, the Fund decreased by 0.87%, outperforming the Index by 8.56% (net of fees).
Contributors
• IPH (IPH): the company updated the market about its recent cyber-breach, indicating minimal client impact and that no data from IPH’s document management system was compromised (where sensitive pre-filing patent information lies). Market sentiment lifted on the news of the minimal effects on client losses.
• Breville Group (BRG): reaffirmed guidance of EBIT for the full year of between $165m - $ 172m.
• Whitehaven Coal (WHC): ended 31 March 2023 in a net cash position of $2.7bn, representing nearly half of its market capitalisation. WHC will recommence the on-market share buy-back now that the required blackout period has ended.
Detractors
• Deterra Royalties (DRR): reported royalty receipts for the March quarter of $59.9m, 32% above the December quarter, due to higher realised prices over marginally lower sales volumes.
• PEXA Group (PXA): shares consolidated gains from the prior month. Whilst property listing volumes are currently subdued, we can expect them to improve as we move past the fourth quarter of 2023.
• Telix Pharmaceuticals (TLX, no holding): shares rose strongly for the month as its prostate imaging cancer drug, Illuccix, reported sales up 27% for the 1st quarter of 2023.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-27.pdfMarch, 2023
The DNR Capital Australian Emerging Companies Fund decreased by 0.28% (net of fees) in March, outperforming the S&P/ASX Small Ordinaries Total Return Index by 0.44%. Over the last 12 months, the Fund decreased by 6.38%, outperforming the Index by 6.81% (net of fees).
March was volatile for equity markets, with fears of another banking crisis breaking out after the runon deposits and subsequent collapse of Silicon Valley Bank (SVB) in the US. Fears quickly spread to the solvency of Credit Suisse, which led to a hastily arranged weekend merger with UBS. The focus on the fragility of the banking system certainly brought back memories of the Global Financial Crisis, with investors fearing the risk of contagion across the banking sector. The potential for tighter credit would be negative for growth, compounding investor concerns of a recession. These events saw the small cap sector selling-off sharply, with the benchmark falling over 5%. Government measures were then announced to stabilise the banking sector, including guarantees for SVB depositors, helping ease investor fears of a wider banking crisis. The market proceeded to recover nearly all the month’s earlier losses.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-26.pdfFebruary, 2023
The DNR Capital Australian Emerging Companies Fund decreased 4.91% (net of fees) in February, underperforming the S&P/ASX Small Ordinaries Total Return Index by 1.21%. Over the last 12 months, the Fund increased by 0.14%, outperforming the Index by 8.11% (net of fees).
Equity markets gave back most of the strong start to the calendar year as attention turned to reporting season. Results came in below expectations with earnings misses outweighing earnings beats. Weaker results came from the Consumer Discretionary sector with soft trading updates reflecting a cautious consumer due to cost of living pressures. The more resilient results came from Consumer Staples as consumers traded down, as well as Information Technology companies with recurring revenues. A key theme coming out of reporting season was difficult operating conditions. While supply chain pressures have eased, wage price growth presents a key challenge. Wages are growing at the fastest pace since 2007 and presents a concern for the Reserve Bank of Australia (RBA) that the Australian economy remains overheated despite ten consecutive interest rates rises.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-25.pdfJanuary, 2023
The DNR Capital Australian Emerging Companies Fund increased 4.66% (net of fees) in January, underperforming the S&P/ASX Small Ordinaries Total Return Index by 1.90%. Over the last 12 months, the Fund increased by 5.65%, outperforming the Index by 10.09% (net of fees).
The new calendar year has started strongly for equity markets, with investors taking a more constructive view on the growth outlook. For now, Europe has avoided the worst-case scenario from the energy crisis brought on by the Russia-Ukraine conflict. Helping the situation was an unusually mild winter, which reduced energy demand and limited the impact of constrained supply. China’s re-opening has boosted sentiment towards the global economy, with the potential for pent-up demand to be unleashed following the removal of COVID-19 restrictions. The continued easing in the rate of inflation has also been supportive, providing central banks with flexibility to pause the aggressive interest rate hiking cycle. This is leading investors to speculate that the “Goldilocks scenario” could be unfolding (moderate growth and low inflation), favouring a more risk-on approach towards equities.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-24.pdfDecember, 2022
The DNR Capital Australian Emerging Companies Fund decreased 5.75% (net of fees) in December, underperforming the S&P/ASX Small Ordinaries Total Return Index by 2.02%. Over the last 12 months, the Fund decreased by 6.74%, outperforming the Index by 11.64% (net of fees).
Equity markets came under pressure during the final month of the calendar year, with concerns around a deteriorating growth outlook as the risk of a recession increases, and the negative impact this will have on earnings going forward. Despite the elevated cash weighting (18.15%). the Fund underperformed the Index during December, with weakness in the more cyclical holdings weighing on the relative performance.
The materials and energy sectors were the main detractors during the month, including Allkem (AKE), IGO (IGO) and Lynas Rare Earths (LYC), which partially gave back the strong gains posted over the past year. Although commodity prices are likely to remain volatile in the short-term, we continue to see positive longterm outlooks given the growing demand and tight supply for decarbonisation exposed commodities. PEXA Group (PXA) also fell, with the distribution of Link Communications 43% holding in the company impacting the shares in the short-term, as well as concerns around weaker property transactions due to higher interest rates. Positive contributors included Stanmore Resources (SMR) which trades on an extremely low valuation, and the Fund’s more defensive holdings like Iress (IRE) which outperformed the falling market.
Over the past year equity markets have corrected sharply lower, primarily due to the impact of tighter monetary policy and higher interest rates on equity valuations. With the risk of a recession increasing as the global economy feels the effect of this tighter policy, the focus is now firmly turning to the deteriorating outlook for earnings during a potential recessionary environment.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-23.pdfNovember, 2022
The Index followed up the previous months gain with another strong performance, finishing up 4.92% during
November. The Fund underperformed the strong market, reflecting its overall more defensive positioning.
This follows a strong period of outperformance, with the
Fund significantly outperforming the Index over the past year in what has been a difficult period for the market.
During November the Fund’s key outperformers came from the commodity related sectors, including
Whitehaven Coal (WHC), Beach Energy (BPT) and
Deterra Royalties (DRR). These companies remain on attractive valuations, generating significant free cash flow and with strong balance sheets. Detractors included the more defensive holdings like IPH (IPH) and
Iress (IRE), which lagged the market gains. PEXA Group (PXA) also underperformed the market, with the recent sell down by Link Group weighing on its shares in the short-term.
Despite concerns around the outlook for the global economy, investors have been encouraged by recent signs that elevated inflation levels may have peaked, which could allow central banks to slow the pace and size of further interest rates hikes. This has seen the market recover strongly from the recent low in early October. Although we would caution that there remains considerable uncertainty surrounding the extent to which inflation will moderate, and the ultimate destination of interest rates.
Although valuations have adjusted lower, we believe there are still risks surrounding the outlook for certain sectors of the market. In particular, the downward pressure on earnings from more restrictive monetary policy and a slowing economy is still to play out. This has also not yet been reflected in market expectations in our view, presenting the risk of negative earnings surprises. As a result, we continue to take a more selective approach in the Fund, with more attractive opportunities likely to emerge as these risks become more evident.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-22.pdfOctober, 2022
The DNR Capital Australian Emerging Companies Fund increased 6.93% (net of fees) in October, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.47%. Over the last 12 months, the Fund increased by 0.94%, outperforming the Index by 19.25% (net of fees).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-21.pdfSeptember, 2022
The DNR Capital Australian Emerging Companies Fund decreased 6.21% (net of fees) in September, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 4.99%. Over the last 12 months, the Fund decreased by 4.94%, outperforming the Index by 17.62% (net of fees).
The small ordinaries index was hit hard during the month closing down 11.20% on the back of global central bank tightening. The Fund fared better, falling 6.21% given the more defensive holdings, overweight energy and higher levels of cash. IPH (IPH) benefited from its resilient earnings and tailwinds from an appreciating US dollar. Whitehaven Coal (WHC) continues to generate strong cash flows and is seeking shareholder approval to buy back a further 25% of its shares outstanding. The key detractor came from Iress (IRE) falling 20% during the month after downgrading earnings. Timing delays in the conversion of the sales pipeline and higher supplier technology costs were the key drivers. IRE is trading at the lower bound of its historical valuation ranges, generating high levels of recurring revenue and a 5% dividend yield should provide a favourable risk/reward setup.
Global markets reacted negatively to central bank developments. The US Federal Reserve (Fed) increased rates by 75bp in response to a stronger than expected inflation print. In the press conference Fed Chairman Jerome Powell dashed any hope of a Fed ‘pivot’ (cutting rates) by pledging to get inflation back to its 2% target even if it requires economic hardship. The Bank of England reversed course on its quantitative tightening plans by purchasing back bonds in response to market turmoil. UK bonds fell, sending yields rising, fuelled by forced selling from pension funds. Many UK pension funds employ leverage to match liabilities, and the sudden spike in yields required them to post more assets as collateral. Domestically, the RBA increased the cash rate by 50 basis points to 2.35%.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-20.pdfAugust, 2022
The DNR Capital Australian Emerging Companies Fund increased 6.50% (net of fees) in August, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 5.92%. Over the last 12 months, the Fund decreased by 1.51%, outperforming the Index by 13.15% (net of fees).
The Fund performed strongly during the August reporting season, increasing 6.5% versus the broadly flat result for the small-cap benchmark. Contributing to this performance were the Fund’s holdings in the materials and energy sectors. These companies continue to benefit from robust demand for commodities, as well as a lack of new supply after many years of underinvestment. Management teams are also staying disciplined, with sensible capital allocation decisions seeing significant cash flow being returned to shareholders. Valuations remain attractive, especially relative to the wider market. Through the reporting season, the Fund also benefited from positive updates from its holdings in Lovisa Holdings (LOV), IPH (IPH) and Monadelphous Group (MND). These updates reinforced the strong bottom-up thesis for these opportunities, and we have provided a more detailed discussion on these companies below.
Reviewing the reporting season overall, there were several key takeaways. Despite concerns around a weakening global economy, consumer demand has generally been more resilient than feared. With revenue holding up well, and most companies having been successful at raising prices to offset inflationary pressures, the earnings crunch many investors had been expecting did not materialise. However, with central banks still committed to hiking rates to bring inflation rates down, we believe conditions could become more difficult going forward. This was reflected in more cautious outlook commentary from most management teams, with the next 6-12 months likely to be a key test for earnings.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-19.pdfJuly, 2022
The DNR Capital Australian Emerging Companies Fund increased 5.88% (net of fees) in July, underperforming the S&P/ASX Small Ordinaries Accumulation Index by 5.55%. Over the last 12 months, the Fund decreased by 3.63%, outperforming the Index by 7.30% (net of fees).
The small-cap index bounced sharply during July, with companies that saw the brunt of the recent sell-off topping the leader board. Across sectors, it was a reversal of recent trends, with growth companies like technology and consumer discretionary outperforming. There were also signs of short covering, with many of the more speculative business models bouncing higher following the significant share price falls in prior months. With the Fund more exposed to value/defensive holdings that did not fully participate in the rally, and a higher cash weighting, this led to the underperformance versus the index during the month. This follows several months of material outperformance, with the Fund’s drawdown significantly less than the index this calendar year.
The main catalyst for the rally appears to be the view that inflation has now peaked, allowing the major central banks to slow the pace of interest rate increases. Bond yields have already fallen in line with this view, with the 10 year yield in Australia falling more than 100bps from the high of around 4.25% in June. In the short-term, the path forward continues to remain uncertain in our view. Whether inflation reverts lower, or whether it stays more persistent given the structural changes to the economy post the COVID-19 pandemic, remains open for debate. There will be elements of cyclical inflation that unwind as the economy slows. However, across commodity markets we expect structural shortages to reappear as demand recovers, with a lack of investment in new supply still the critical issue. The focus on trends like decarbonisation, increasing self-sufficiency in supply chains and energy independence are all very inflationary in nature. As a result, we continue to look for companies that can deal with persistent inflation pressures.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-18.pdfJune, 2022
The DNR Capital Australian Emerging Companies Fund decreased 8.64% (net of fees) in June, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 4.45%. Over the last 12 months the Fund decreased by 4.94%, outperforming the Index by 14.58% (net of fees).
During June, the key contributors to the Fund’s relative performance were the more defensive holdings. This included IPH (IPH), a leading provider of intellectual property services, and Iress (IRE), a provider of software to the financial services industry. Both companies benefit from recurring revenue streams and resilient margins. Beach Energy (BPT) also positively contributed to the Fund’s performance, with the unfolding energy crisis highlighting the constrained supply following a long period of underinvestment in traditional energy markets. Negative contributors were some of the more cyclical holdings, which fell on concerns around slowing economic growth.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-17.pdfMay, 2022
The DNR Capital Australian Emerging Companies Fund decreased 2.87% (net of fees) in May, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 4.14%. Over the last 12 months the Fund increased by 10.89%, outperforming the Index by 15.45% (net of fees).
Over the past year, this investment thesis has largely played out. Lithium prices have recovered well ahead of expectations given the growth in electric vehicles, especially this calendar year with prices increasing over 500%. Significant new capital is also entering the sector, a reversal from several years ago when new capital was scarce.
This means that supply is set to expand significantly in the coming years. Although demand continues to grow strongly, we are becoming increasingly concerned that industry forecasts could prove to be too optimistic, especially considering the higher costs and the impact of slowing growth on consumer demand. Consequently, we have reduced the Fund’s exposure to lithium in recent months, retaining only small positions in several of the high quality producers.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-16.pdfApril, 2022
The DNR Capital Australian Emerging Companies Fund decreased 2.23% (net of fees) in April, underperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.73%. Over the last 12 months the Fund increased by 15.39%, outperforming the Index by 12.48% (net of fees)
Positioning for an environment of higher inflation and higher interest rates is one of the key challenges now facing equity investors. The persistent inflationary pressure evident across the global economy, is a risk we have been highlighting for some time. Labour markets have continued to tighten, with historically low unemployment rates pushing wages higher. Commodity prices have increased to multi-decade highs, with supply shortages and strong demand. Some of the key structural drivers of inflation are also reversing in a post COVID-19 world, with a much greater focus on security of supply and self-sufficiency across supply chains. The conflict in Ukraine and Russia is only compounding this issue, tightening supply chains further.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-15.pdfMarch, 2022
The DNR Capital Australian Emerging Companies Fund increased 6.67% (net of fees) in March, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 1.41%. Over the last 12 months, the Fund increased by 23.80%, outperforming the Index by 14.12% (net of fees).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-14.pdfFebruary, 2022
The DNR Capital Australian Emerging Companies Fund increased 0.33% (net of fees) in February, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.34%. Over the last 12 months, the Fund increased by 15.33%, outperforming the Index by 10.31% (net of fees).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-13.pdfJanuary, 2022
The DNR Capital Australian Emerging Companies Fund decreased 7.61% (net of fees) in January, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 1.39%. Over the last 12 months the Fund increased by 24.44%, outperforming the Index by 17.79% (net of fees).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-12.pdfDecember, 2021
The DNR Capital Australian Emerging Companies Fund increased 2.33% (net of fees) in December, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.92%. Over the last 12 months the Fund increased by 34.87%, outperforming the Index by 17.97% (net of fees)
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-11.pdfNovember, 2021
The DNR Capital Australian Emerging Companies Fund increased 1.68% (net of fees) in November, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 1.99%. Over the last 12 months the Fund increased by 39.89%, outperforming the Index by 21.45% (net of fees)
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-10.pdfOctober, 2021
The DNR Capital Australian Emerging Companies Fund increased 0.70% (net of fees) in October, underperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.22%.
Although the ASX Small Ordinaries Index only posted a modest increase for the month, under the surface there was a wide dispersion in performance across various sectors. Companies set to benefit from the re-opening of the economy led the market higher. Vaccination rates have increased rapidly in Australia, providing greater visibility on the path towards a normalisation of the economy post COVID-19. This benefited the Fund’s holdings in Lovisa Holdings (LOV) and IDP Education (IEL), which were the largest positive contributors during the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-9.pdfSeptember, 2021
The DNR Capital Australian Emerging Companies Fund decreased -2.83% (net of fees) in September, underperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.69%
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-2-1.pdfAugust, 2021
The DNR Capital Australian Emerging Companies Fund increased 4.21% (net of fees) in August, underperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.77%, which increased 4.98%.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-1-2.pdfJuly, 2021
The DNR Capital Australian Emerging Companies Fund increased 4.44% (net of fees) in July, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 3.76%, which increased 0.68%. Over the last 12 months the Fund increased by 59.06%, outperforming the Index by 26.76%
The Fund posted strong gains versus the Index during July, with a range of companies contributing to the performance. Several of the Fund’s holdings in the mining sector were particularly strong contributors, with the shares of Lynas Corporation (LYC), IGO (IGO) and Orocobre (ORE) all rising between 20-30% in the month
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-8.pdfJune, 2021
The DNR Capital Australian Emerging Companies Fund increased 6.57% (net of fees) in June, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 3.49%, which increased 3.08%. Over the last 12 months the Fund increased by 51.95%, outperforming the Index by 18.72% (net of fees).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-7.pdfMay, 2021
The DNR Capital Australian Emerging Companies Fund increased 1.07% (net of fees) in May, outperforming the S&P/ASX Small Ordinaries Accumulation Index which increased 0.27%. Over the last 12 months the Fund increased by 36.33%, outperforming the Index by 9.60% (net of fees).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-6.pdfApril, 2021
The DNR Capital Australian Emerging Companies Fund increased 4.90% (net of fees) in April, broadly in line with the S&P/ASX Small Ordinaries Accumulation Index which increased 4.98%. Over the last 12 months the Fund increased by 49.29%, outperforming the Index by 9.51% (net of fees)
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-5.pdfMarch, 2021
The DNR Capital Australian Emerging Companies Fund decreased 0.63% (net of fees) in March, underperforming the S&P/ASX Small Ordinaries Accumulation Index by 1.42%. Over the last 12 months the Fund increased by 72.34%, outperforming the Index by 20.19% (net of fees).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-4.pdfFebruary, 2021
The DNR Capital Australian Emerging Companies Fund increased 8.26% (net of fees) in February, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 6.71%. Over the last 12 months the Fund increased by 40.00%, outperforming the Index by 22.82% (net of fees).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-3.pdfJanuary, 2021
The DNR Capital Australian Emerging Companies Fund increased 0.13% (net of fees) in January, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.38%. Over the last 12 months the Fund increased by 16.93%, outperforming the Index by 11.55% (net of fees).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-2.pdfDecember, 2020
The DNR Capital Australian Emerging Companies Fund increased 6.15% (net of fees) in December, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 3.39%. Over the last 12 months the Fund increased by 19.04%, outperforming the Index by 9.83% (net of fees).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-1-1.pdfNovember, 2020
The DNR Capital Australian Emerging Companies Fund increased 10.09% (net of fees) in November, underperforming the S&P/ASX Small Ordinaries Accumulation Index by -0.18%. Over the last 12 months the Fund has outperformed its Index by 5.65% (net of fees). November saw a strong market rally, with optimism towards the recovery increasing following the release of positive COVID-19 vaccine data.
The widespread distribution of a vaccine will certainly have positive implications for equities, especially the more cyclical and hardest hit parts of the market. As a result, November saw a significant rotation within the market, with the more expensive growth/ defensive stocks underperforming. The key outperformers included the reopening beneficiaries along with the more value/cyclical stocks that will do better as growth accelerates.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report-1.pdfOctober, 2020
The DNR Capital Australian Emerging Companies Fund decreased 3.20% (net of fees) in September, underperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.38%. Over the last 12 months the Fund has outperformed its Index by 9.90% (net of fees). September saw equity markets give back partial gains following a strong prior month on a better-than-expected earnings season.
Despite the Fund slightly lagging the benchmark during the month, we were pleased with this outcome given the recent strong performance. There was a notable shift during September away from growth and momentum stocks towards the out-of-favour value stocks, particularly those directly impacted by COVID-19. The market continues to gyrate between COVID-19 ‘winners’ and ‘losers’ depending on the latest vaccine headlines.
As we have written previously, there had been an increasing valuation disconnect between many of these stocks and this had started to close during the month. The Fund benefited in this regard with holdings in Corporate Travel Management (CTD), Webjet (WEB) and Lovisa Holdings (LOV) outperforming at the expense of ‘winners’ like Breville Group (BRG) and Zip Co (Z1P). We had been positioning the Fund into COVID-19 ‘losers’ like CTD, IDP Education (IEL), and WEB given the valuation upside on recovered earnings.
In our view industry leaders such as these will emerge from the pandemic in a much stronger position helping them to gain market share. We witnessed this during the month when CTD acquired US-based Travel & Transport for US$200m on an attractive valuation of 4.3x Enterprise Value (EV) / Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) including synergies based on CY19.
This is a significant transaction giving CTD scale in North America. CTD’s capital-light business model and low gearing saw it avoid a dilutive equity raising in the midst of the pandemic, and instead raised $379m with 30% earnings accretion post synergies. We are also positioned in companies that have been temporarily impacted by COVID-19 yet are well placed to benefit when the economy re-opens and are less dependent on a vaccine. This includes Credit Corp Group (CCP), LOV, Tyro Payments (TYR) and Domain Holdings Australia (DHG). For example, TYR has been impacted by the Victorian shutdowns, yet other states are growing +20% and we expect the overall group to return to this level of growth following the imposed lockdowns. There is still considerable uncertainty around the timing and efficacy of the development of a vaccine, which reinforces the importance of maintaining balance within the Fund. This includes a focus on the highest quality COVID-19 recovery stories, long-term structural COVID-19 winners, and companies with strong bottom-up fundamentals.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report.pdfSeptember, 2020
The DNR Capital Australian Emerging Companies Fund decreased 3.20% (net of fees) in September, underperforming the S&P/ASX Small Ordinaries Accumulation Index by 0.38%. Over the last 12 months the Fund has outperformed its Index by 9.90% (net of fees). September saw equity markets give back partial gains following a strong prior month on a better-than-expected earnings season. Despite the Fund slightly lagging the benchmark during the month, we were pleased with this outcome given the recent strong performance. There was a notable shift during September away from growth and momentum stocks towards the out-of-favour value stocks, particularly those directly impacted by COVID-19. The market continues to gyrate between COVID-19 ‘winners’ and ‘losers’ depending on the latest vaccine headlines. As we have written previously, there had been an increasing valuation disconnect between many of these stocks and this had started to close during the month. The Fund benefited in this regard with holdings in Corporate Travel Management (CTD), Webjet (WEB) and Lovisa Holdings (LOV) outperforming at the expense of ‘winners’ like Breville Group (BRG) and Zip Co (Z1P). We had been positioning the Fund into COVID-19 ‘losers’ like CTD, IDP Education (IEL), and WEB given the valuation upside on recovered earnings. In our view industry leaders such as these will emerge from the pandemic in a much stronger position helping them to gain market share. We witnessed this during the month when CTD acquired US-based Travel & Transport for US$200m on an attractive valuation of 4.3x Enterprise Value (EV) / Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) including synergies based on CY19. This is a significant transaction giving CTD scale in North America. CTD’s capital-light business model and low gearing saw it avoid a dilutive equity raising in the midst of the pandemic, and instead raised $379m with 30% earnings accretion post synergies. We are also positioned in companies that have been temporarily impacted by COVID-19 yet are well placed to benefit when the economy re-opens and are less dependent on a vaccine. This includes Credit Corp Group (CCP), LOV, Tyro Payments (TYR) and Domain Holdings Australia (DHG). For example, TYR has been impacted by the Victorian shutdowns, yet other states are growing +20% and we expect the overall group to return to this level of growth following the imposed lockdowns. There is still considerable uncertainty around the timing and efficacy of the development of a vaccine, which reinforces the importance of maintaining balance within the Fund. This includes a focus on the highest quality COVID-19 recovery stories, long-term structural COVID-19 winners, and companies with strong bottom-up fundamentals.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/DNR_Emerging_Companies_Fund_Monthly_Report.pdfticker: PIM4357AU
commentary_block: Array
factsheet_url:
release_schedule: Monthly
fund_features:
The DNR Capital Australian Emerging Companies Fund is designed for investors seeking a medium-to-longer term investment focused on achieving growth, with less focus on generating excess income. The investor is prepared to accept higher volatility in pursuit of higher growth.
- Style neutral with a quality focus
- The Fund’s investment objective is to invest in a portfolio of Australian emerging companies that aims to outperform the Benchmark (net of fees) over a rolling five -year period.
- Maximum exposure to an individual security is 15% of Fund NAV.
Minimum exposure of 60% of the Fund NAV to be invested in the S&P/ASX Small Ordinaries.
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