September, 2023
The fund returned -1.6% in September, 2.4% better than the Small Ordinaries Accumulation Index return of -4.0%. This saw the index fall to its lowest level in 12 months, with the Small Industrials Accumulation Index faring worse with a -5.0% decline.
Key fund contributors over the month were Seven Group (SVW +12.2%), Regis Healthcare (REG +9.2%) and EQT Holdings (EQT +4.8%). Key detractors were Kelsian (KLS -8.1%), AUB Group (AUB -4.0%) and Helloworld (HLO -15.0%).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Emerging-Opportunities-Fund-September-2023.pdfAugust, 2023
The fund returned -1.2% in August, 0.1% better than the Small Ordinaries Accumulation Index return of -1.3%.
August was reporting season when most companies report their financial results for the period to June 30. Broadly speaking, shares prices follow earnings so it is a critical time to assess how a company is performing and how it is likely to perform in future. We met with over 100 companies during this period.
It is clear the economy is softening, which is to be expected after multiple rate risesthat started in May 2022. As you would expect. the more cyclical sectors are experiencing the toughest conditions, namely media (advertising), retail and residential housing. Advertising softened from late 2022 while retail took another c. 3-6 months to be impacted (depending on the category).
Residential housing impacts were staggered with house prices softening first in mid 2022, which flowed through to weak listing volumes (houses for sale), followed by weakening household goods demand and more recently softer construction activity. Interestingly these are starting to improve in the same order with house prices starting to rise moderately c. 6 months ago, which has flowed through to higher listing volumes recently. Should this be sustained, it’s likely household goods purchases and construction activity will also improve.
Cost pressures were a feature in reported results but are easing. It’s easier to find employees and staff turnover is reducing. Shipping rates are typically at or below pre-covid levels after increasing c. 500% previously. Many are reporting manufacturing costs out of China have reduced.
These easing pressures are being reflected in softening inflation data globally and locally which is a positive sign in that it reduces upward pressure on interest rates.
The rearview is interesting insofar as it helps assess implications for future performance. Kelsian reported a result below expectations due to challenges sourcing labour, however we view this as a short-term issue and increased our holding after the stock fell. Sourcing drivers of their buses is becoming easier and should result in an earnings uplift in 2024. The business is relatively defensive, its US acquisition was surprisingly strong and valuation is compelling in our view.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Emerging-Opportunities-Fund-August-2023.pdfJuly, 2023
The fund returned +2.9% in July, -0.6% below the Small Ordinaries Accumulation Index return of +3.5%. Key fund contributors over the month were Lindsay Australia (LAU +18.4%), SG Fleet (SGF +13.9%) and Credit Corp (CCP +19.2%). Key detractors were Kelsian (KLS -4.5%), Austal (ASB -7.2%), and AUB Group (AUB -2.4%).
July continued the strong recovery in the Small Ordinaries Accumulation Index which has risen 12.8% from September 2022 lows, reflecting a recovery of 40% of the fall from peak levels in December 2021.
As we mentioned last month, very few investors expected such strong market returns highlighting that short term returns are hard to predict and long-term investing is best.
We highlight this via a couple of twenty-year charts, the first of which shows the monthly returns of the Small Ordinaries Accumulation Index since July 2003, which appears relatively volatile and lacking direction.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Emerging-Opportunities-Fund-July-2023.pdfJune, 2023
The fund returned +2.9% in June, 2.9% above the Small Ordinaries Accumulation Index return of 0.0%. June concluded the financial year and returns were strong for both the market (Small Ords Accum +8.5%) and the fund (+13.7%).
Very few expected such strong market returns highlighting that short term returns are hard to predict and long-term investing is best. There are good years and bad years but over the long term, returns are very strong. By being invested, unit holders have benefitted from a +13.7% year when many other asset values declined.
The fund has performed well in recent years consistently generating returns above the market (table below) through highly variable conditions that have tested investor styles and biases. Markets have experienced bull/bear markets, rising/falling interest rates, strong/weak economic growth, tech boom/bust and covid. The fund’s risk is also well below market as measured by volatility of returns (table below). Higher returns and lower risk is our ongoing aim.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Emerging-Opportunities-Fund-June-2023.pdfMay, 2023
The fund returned +0.4% in May, which was 3.6% ahead of the Small Ordinaries Accumulation Index return of ‐3.3%, and 2.1% ahead of the Small Industrials Accumulation Index which fell ‐1.7%.
The month was characterised by strong returns from Technology and Lithium stocks, and weak performances from the broader Resources and Retail sectors, with the Small Resources Accumulation index ‐7.1%.
Local Technology stocks appeared to rally following a material profit upgrade from US‐listed Artificial Intelligence beneficiary, NVIDIA. Conversely, softer Chinese economic data saw Resource stocks sold off, while Retail stocks were hit by signs that consumer demand is softening. Key fund contributors in May were Kelsian (KLS +11.5%), Newscorp (NWS +11.3%) and Austal (ASB +19.0%). Key detractors were AUB Group (AUB ‐8.0%), Helloworld (HLO ‐10.6%) and EQT Holdings (EQT ‐3.7%).
Kelsian (KLS) rose on limited new news, and has steadily become one of the fund’s largest holdings. For us, it is a reminder of the importance of investing in quality businesses at the right price. For a long time, we have been attracted to Kelsian’s resilient public bus business model, that sees it generate inflation‐protected cash flows with no fare box risk from long‐ term contracts with government counterparties, and without material capital investment in key infrastructure in some regions. However, we were not alone in appreciating these qualities, with investors pushing the stock beyond our valuation tolerance levels to >$9ps for much of 2021 following a series of contract wins and renewals. But no‐one has a perfect win rate, and shortly thereafter, the company’s extraordinary winning streak came to an end as it missed out on several tender opportunities.
This saw investors lose faith and push the stock down into our hitting zone, resulting in our initial purchase in Jan 2022 at c. $6.50ps. Further ‘disappointments’ from the failed attempt to acquire a large UK bus operator saw the stock fall lower, providing the opportunity to add 25% to the fund’s holding below $6ps in Sept 2022, and a further 25% addition below $5ps in Oct 2022. Through this time that the stock halved in price, nothing had changed with regards to its business model or operating performance; investors had simply fallen out of love. And just as a perfect hitrate is unobtainable, a perfect lossrate issustained by few, and Kelsian has since enjoyed more than its market share worth of new wins through the NSW Government’s recent tender process, resulting in a ~50% share price rise since (to $6.80ps). Our most recent opportunity to add to the position came in Mar 2023, participating in an equity raise (at $5.55ps) as the company acquired a large US bus business with an experienced management team and an impressive organic growth profile.
The key in this case study is the importance of the entry price of an investment; it is a key component of the returns ultimately generated. It will surprise many to learn that the share price of the median company in the Small Ordinaries index is trading 22% below its 52‐week high, while also trading 29% above its 52‐week low – that is, the median company has traded in a >50% share price range over the past year.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Emerging-Opportunities-Fund-May-2023.pdfApril, 2023
The fund returned +3.4% in April, 0.6% above the Small Ordinaries Accumulation Index of +2.8%. April was the 5-year anniversary of the fund being managed by at least one of the current team. Over that time investment returns have been strong (+11.6% p.a. v’s Small Ords Accum +3.9%/Small Industrials Accum +3.0%) and consistent (outperformed both indices every year). In our view, more important is the way in which those returns have been achieved.
The fund consistently ranks as one of the lowest risk in its smallcap peer group (measured by volatility of returns). We value more certain returns over potentially high returns with high risk. Investment returns are prominently disclosed and highly visible for most funds but risk is often overlooked, particularly in the small cap space. It is a key part of our investment process.
Over the last 3 years the fund’s risk measured by volatility of returns (standard deviation) is 16.4% which is circa 20% below the Small Ords Index and its peer group. Capital preservation is reflected in the fund’s performance in down-markets with it outperforming the Small Ords 81% of months when the index return was negative.
File:March, 2023
The fund returned -0.8% in March, broadly in line with the Small Ordinaries Accumulation Index of -0.7%, but was +2.2% ahead of the Small Industrials Accumulation Index which fell -3.0%.
The month was characterised by a strong Resources sector (+5.6%), with Resource companies representing 15 of the top 20 performing stocks for the month, driven by a +7.8% rise in the Gold price as a flight to safety response to the global banking crisis.
It was also interesting to see a resumption of corporate activity in the form of M&A and capital raisings, with bids made for Invocare (private equity bidder), Estia Health (private equity bidder), Healius (trade buyer) and United Malt (trade buyer).
The fund was a beneficiary of the latter transaction, as French competitor Malteries Soufflet lodged a nonbinding and indicative proposal for UMG for $5.00ps in cash. The United Malt Board has indicated that it is supportive of a binding offer of at least this amount, should one eventuate.
Key fund contributors in March were United Malt (UMG +33.1%), Regis Healthcare (REG +23.9%) and Lindsay Australia (LAU +17.5%). Key detractors were Bravura (BVS -41.6%), AUB Group (AUB -7.8%) and Kelsian (KLS -9.6%).
File:February, 2023
The fund’s return was +0.2% in February, 3.9% above the Small Ordinaries Accumulation Index of -3.7%.
The fund’s strong relative performance in February (+3.9%) followed relative underperformance (-3.0%) in January. Returns were positive in both months and it feels like the fund is steadily moving upward while the market is bouncing around it as risk appetite ebbs and flows. The fund has delivered a positive return in 6 of the 8 months this financial year (index 4 of 8) despite fears of inflation and rising interest rates.
We continue to hold a portfolio of stocks which individually are high quality, all are profitable and most we consider structurally growing with less dependence on the economic cycle. The equity we own in this group of companies should grow in value over coming years and provide a reasonable dividend stream along the way. Less certain is market sentiment and how this value is reflected in stock prices in the short term. We hold stocks for an average of 4 years which reflects our belief in the power of compounding wealth through the patient ownership of quality assets that grow in value over time.
With February marking the 3 year anniversary of markets first being impacted by covid, it is interesting to look back at asset returns over this time. Most asset prices are higher, benefitting from significant monetary and fiscal stimulus e.g. large cap equities, commodities, residential property and even bitcoin, used cars, wine & watches. With this stimulus being withdrawn over the last 12 months, many assets have been falling in value. One asset class that is already below its pre-covid high is small industrial equities, in which the Emerging Opportunities Fund specialises. It appears reasonable to draw the conclusion that this asset has already deflated and there are attractive opportunities available. This is reflected in valuations with small industrial valuations at 20 year lows relative to large industrials.
In small cap equities there are 2 main sectors; Small Resources (mining companies) and Small Industrials (non-mining companies). Relative to pre-covid (Feb ’20), the Small Resources Accumulation index is +40%, while the Small Industrials Accumulation is -8%. As the Emerging Opportunities Fund does not invest in mining, this has been a significant headwind to relative performance over the last 3 years. Despite this the fund has outperformed the index which combines both sectors (Small Ordinaries Accumulation) by 6% p.a. (after fees) over 3 years. When markets turn and small industrials come back into favour, we believe the fund is well positioned to deliver strong returns.
At the stock level there are many opportunities that highlight the value on offer. One of the largest holdings in the fund is EQT Holdings, a trustee business founded in 1888. It is a high quality, resilient business with a diverse, growing customer base that we expect to grow for decades to come. EQT’s earnings per share is expected to be 50% higher in FY25 than in FY19 yet the stock price is currently 20% lower than 2019. At some point this value creation will be reflected in a significantly higher stock price and the fund will benefit. Good things come to those who wait…
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Emerging-Opportunities-Fund-February-2023.pdfJanuary, 2023
The fund’s return was +3.2% in January, 3.4% below the Small Ordinaries Accumulation Index of +6.6%. The strong market performance was led by stocks in the Retail and Mining sectors. Retailers benefited from still strong consumer spending (refer to strong updates from the likes of Super Retail and Accent Group), while Miners benefited from strong commodity prices (and are a sector in which the fund does not invest due to a low predictability of earnings). The fund currently has a limited exposure to Retailers given the exhaustion of ‘excess’ savings that resulted from COVID stimulus payments and the pending fixed rate mortgage cliff.
This sector of the economy has experienced conditions that are about as good as it gets, both in terms of sales and margins, which we expect to revert over the medium-term. In particular, the household savings rate has returned to a more normal level of ~7%, having increased to as high as 24% in June 2020 as land-locked households were restricted from spending on services that were in lockdown, instead deflecting this spend into buying more goods than ever. Additionally, a temporary low cost funding facility provided to the banks through COVID saw them offer very low fixed rate mortgages that will largely expire over 2023. This will result in ~10% of Australians move from fixed rates of ~2%pa into higher variable interest rates of ~6%, which will likely further impact consumer spending levels.
Key fund contributors in January were Helloworld (HLO +33.6%), Pinnacle (PNI +19.1%) and Breville (BRG +23.2%). Key detractors were Austal (ASB -20.2%), Regis Healthcare (REG -7.2%) and Lindsay Australia (LAU -7.2%)
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Emerging-Opportunities-Fund-January-2023.pdfDecember, 2022
The fund’s return was -1.7% in December, 2.0% better than the Small Ordinaries Accumulation Index of -3.7%. It was good to see the end of a tough year for equities in 2022. Rising inflation resulted in higher interest rates that impacted valuations, particularly small industrial companies (the fund’s focus).
Equities generate strong long term returns however volatility is part of the tradeoff. There are good years and bad years. Thankfully the good years far outnumber the bad years. Historically markets have rebounded strongly after years like 2022 which was the 3rd worst in the last 20 years (chart below). But forecasting the timing is very uncertain. Global macro factors are a key driver which are notoriously difficult to forecast. Our best estimate is “sometime in 2023”.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Emerging-Opportunities-Fund-December-2022.pdfNovember, 2022
The fund’s return was +0.2% in November, 4.7% below the Small Ordinaries Accumulation Index of +4.9%. It was a strong risk-on month for equities, and particularly for resources, which made up 17 of the top 20 performing stocks in the index in November (and which the fund does not invest in). And of the remaining 3 industrial stocks, just 1 is expected to post a profit in FY23!.
Key fund outperformers for the month were Kelsian (KLS +17.3%), AUB Group (AUB +11.6%) and Nib Holdings (NHF +9.4%). Key detractors were Bravura (BVS -35.2%), IPH (IPH -8.4%) and City Chic (CCX -39.1%).
Kelsian (KLS) shares benefited from a contract renewal, reversing recent performance which has seen the stock -23% over the previous 3 months. AUB Group (AUB) rose on upgraded FY23 earnings guidance, while investors gained more comfort with the recent Tysers acquisition. Bravura (BVS) downgraded its FY23 earnings outlook as the new CEO highlighted that the company’s cost base had blown out (rising 16-20%) due largely to inflationary pressures and labour inflexibility. We note that BVS is a relatively small holding in the fund. City Chic (CCX) also downgraded its FY23 outlook due to excess inventory, intense competition in the USA, a weak European economy, and higher freight costs. We view the stock as having been excessively sold off, with a reduction in inventory likely to see strong cash flows and a net cash position by June 2023. CCX’s fund weighting is relatively small.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Emerging-Opportunities-Fund-November-2022.pdfOctober, 2022
The fund’s return was +4.7% in October, 1.8% below the Small Ordinaries Accumulation Index of +6.5%.
Key outperformers for the month were Omni Bridgeway (OBL +19.6%), Chorus(CNU +15.5%) and News Corp (NWS +14.3%). Key detractors were NIB Holdings (NHF -10.2%), National Tyre & Wheel (NTD -13.2%) and Kelsian (KLS -3.3%).
2022 has been a tough year for equities with the Small Ordinaries Accumulation Index -19% and the Small Industrials (where we invest) slightly worse at -22%. Yet economic growth remains strong and recent AGM updates by listed companies indicates they are broadly performing very strongly. This apparent detachment is due to equities looking ahead and reacting to; 1) higher interest rates (lower valuations), and 2) expectation of weaker economic growth ahead (cyclicals have been hit hardest). Our underlying assumption is that 2023 will be a tough year for global growth with Australia also softening but one of the better performing regions. Consequently, we prefer domestic exposure over international and defensive growth over cyclicals. There are some exceptions to these themes where stocks have fallen so far that the risk/reward is heavily favourable and a strong balance sheet ensures durability of the business. Stock picking remains key. In almost any circumstance, some part of the economy is doing well and small caps offer a large number of businesses & industries from which to choose. It is a large pool from which to fish. Over the long term, stock prices follow corporate earnings so we continue to focus on companies that will have higher earnings over coming years. Markets are currently being driven by macro factors (nb inflation, interest rates) but in time this will subside and company fundamentals will return to focus and be reflected in share prices.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/192651706.pdfSeptember, 2022
The fund’s return was ‐8.9% in September, 2.3% better than the Small Ordinaries Accumulation Index of ‐11.2%. While never pleasing to post a negative monthly return, we note that only 9% of index constituents posted a positive return for the month, with most of these represented by companies the fund tends not to invest in – those in the mining sector and non‐profitable tech / biotech businesses.
Key outperformers for the month were Lindsay Australia (LAU +3.5%), NRW (NWH ‐2.9%) and IPH (IPH ‐0.7%).
Key detractors were SG Fleet(SGF ‐22.4%), IRESS (IRE ‐21.1%) and Omni Bridgeway (OBL ‐17.5%). Lindsay Australia (LAU) shares bucked the broader market trend as investors continued to absorb its strong FY22 profit result, driven by the transformation of its Transportsegment towardsthe less capital intensive and growing Rail business.
The competitive landscape remains rational, following increased ownership by Private Equity firms in recent years. NRW (NWH) was resilient as miners and mining services companies fared relatively better through the month via a combination of solid underlying commodity prices and a lower A$. SG Fleet (SGF) fell heavily on the back of no new news. The company’s profit result in August was broadly as expected, as the integration of the LeasePlan acquisition tracks to plan.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/191370388.pdfAugust, 2022
The fund’s return was +2.2% in August, 1.6% above the Small Ordinaries Accumulation Index of +0.6%. Key positive contributors for the month were AUB Group (AUB +14.7%), NRW (NWH +26.0%) and NIB Holdings(NHF +13.0%). Key detractors were City Chic (CCX -29.1%), Hansen (HSN -14.0%) and Kelsian (KLS -10.5%). A key reason for the fund’s solid performance in August was portfolio construction. We believe portfolio construction is an under-rated part of investment management that gets overlooked by the more exciting skill of stock-picking. In August City Chic was our worst performer and fell 29%. However, its weighting in the portfolio was relatively small. The top 4 positive contributors in August all had a larger positive impact on the portfolio than City Chic had negative impact despite none of the positive stocks rising more than 29%. Our winners were larger weightings than our losers. Central to Prime Value’s investment approach is risk management, particularly downside protection. This means typically having the largest weightings in stocks with the lowest risk and the smallest weightings in those with the highest risk. This is particularly important in the current uncertain economic environment. Importantly we expect all investments in the fund to generate a strong return. We target a minimum of 10% p.a. for a stock to be included in the fund. So our large weightings are not just low risk and low returning – they must contribute solid returns. The key is that we have much higher certainty of these returns.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/190983790.pdfJuly, 2022
With equity markets rebounding in July, the fund returned +8.1%, below the Small Ordinaries Accumulation Index of +11.4%. Risk‐on sentiment saw loss‐makers comprise 8 of the top 10 returning stocks for the month, such as Zip Co which rose +158% in July, but remains ‐83% over the past 12 months. The fund does not typically invest in loss‐making companies, preferring to focus on those with more predictable earnings profiles.
Key positive contributors for the fund in July were Austal (ASB +48.9%), SG Fleet (SGF +21.9%) and Pinnacle (PNI +42.4%). Key detractors were Alliance Aviation (AQZ ‐9.8%), EQT Holdings (EQT ‐2.1%) and nib Holdings (NHF ‐1.9%).
Austal (ASB) shares jumped on news that the US Coast Guard had awarded it with a contract to design and construct 11 vessels at a potential value of US$3.3bn. This helped calm market nerves around the company’s ability to win steel shipbuilding programs, and will underwrite the recent investment in the company’s new facility in Alabama. The good news continued later in the month, with the company also awarded a US$156m contract from the US Navy for two steel vessels.
SG Fleet (SGF) rose on no news, noting the company similarly fell in June (‐11%) on no new news. The company will provide an update on its progress in integrating LeasePlan ANZ in it’s upcoming FY22 result. We expect this acquisition to provide significant value accretion for the company over the medium‐term as material synergies are realised.
Pinnacle (PNI) provided a modestly positive update, highlighting solid performance fees achieved across its stable of funds for FY22. With the stock leveraged to equity markets, it was not a surprise that it performed strongly in July, just as it similarly performed poorly through the June quarter as the Small Ordinaries Index fell 20%.
Alliance Aviation (AQZ) fell on no new news, as the date of the ACCC’s review of findings into it’s proposed acquisition by Qantas was delayed from 28 July to 4 August (and later to 18 August). We note the stock was trading at $3.22ps at the end of July, below both the Qantas bid ($4.75ps) and the price it traded at prior to the bid ($3.51ps).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/189747074-1.pdfMay, 2022
2022 has been tough for stocks, particularly Small Industrials where the Emerging Opportunities Fund invests. The Small Industrials Accumulation index is -19% for the first 5 months of 2022 and the fund is -13%. While we have outperformed the index, it gives us no satisfaction to generate a negative return for investors. We have a large proportion of our wealth invested in the fund so we are aligned and also feel the impact. Over the long term, Small Industrials perform strongly. In the 20 years before 2022, Small Industrials generated returns above Small Resources. After the recent decline, Small Industrial valuations are now at the largest discount to Large Industrials in 20 years (chart below).
Our fee structure also benefits investors in weak markets. Despite outperformance relative to the index in 2022, no performance fee is charged. This is very unusual in the industry. Our benchmark is 8% p.a. therefore we must generate a positive absolute return before a performance fee is accrued. Additionally, we have a unit price high watermark which means we must recoup all losses plus 8% p.a. before a performance fee can be achieved. This ensures we are focused on capital preservation and fees are reduced for investors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/187928081.pdfApril, 2022
The prospect of higher interest rates leading to slower growth weighed on equity markets. The fund returned -0.7% in April, 0.8% better than the Small Ordinaries Accumulation Index of -1.5%. Small resources again outperformed (+0.3%) as commodity prices remained high. The fund does not invest in mining companies due to their relatively high risk. The market sell-off continues to provide us with opportunities to buy high quality companies at attractive prices
The fund’s return was -0.7% in April, which was 0.8% ahead of the Small Ordinaries Accumulation Index’s -1.5% return. The fund also bettered the Small Industrials Index’s -2.1% return by 1.4%, noting that it does not invest in mining companies due to their inherent volatility.
As we mentioned last month, the fund is largely exposed to businesses that are relatively defensive and less influenced by the economic cycle. This is a key reason why the fund tends to outperform the market more strongly when it falls.
Key positive contributors for the month of April were nib Holdings (NHF +11.3%), United Malt (UMG +10.1%) and Kelsian (KLS +12.5%). Key detractors were Omni Bridgeway (OBL -10.5%), City Chic (CCX -12.1%) and News Corporation (NWS -5.8%).
nib Holdings (NHF) rose strongly in a weaker market, as the government further eased COVID restrictions, and international travel bookings ramped up. Health insurance is a resilient industry that has the ability to pass on inflationary pressures through higher insurance premiums, and while the current decline in the number of elective surgeries (and therefore hospital claims) is creating excess profits in the short-term, the opening up of international travel and increasing international student mobility is set to benefit the group’s travel and overseas student insurance businesses in the years ahead.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/187437245.pdfMarch, 2022
The fund’s return was +2.6% in March, 2.7% below than the Small Ordinaries Accumulation Index of +5.3%. Small Resources were again strong (+12.7%), boosted by higher commodity prices that increased following Russia’s invasion of Ukraine. The fund does not invest in mining companies as their earnings are less predictable and share prices more volatile.
Key positive contributors for the month of March were Uniti Group (UWL +43.8%), Omni Bridgeway (OBL +16.9%) and Alliance Aviation (AQZ +17.1%). Key detractors were United Malt (UMG -10.9%), City Chic (CCX -13.0%) and Shine Justice (SHJ -8.4%).
Uniti Group was the highlight in March when it received several takeover offers, the latest at $5.00 / share. This has been a fantastic investment for the fund, with an average entry price of $1.57 reflecting a gain of 220% in just under 18 months. The deal is not yet finalised but looks likely to complete in coming months. We reduced our holding in March to lock-in some of these strong gains. Interestingly the offer came after the stock was sold down heavily in February (-21%) highlighting the importance of patience when investing in quality businesses.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/186224630.pdfJanuary, 2022
The fund’s return was -7.3% in January, 1.7% better than the Small Ordinaries Accumulation Index of -9.0%. Negative returns are always disappointing, but it is a normal part of investing in equities. Equities generates strong returns over the long term however they do experience short term volatility. Of some consolation, the fund has a very strong track record of outperformance in down markets. Over the 45 months (current portfolio manager), the fund has outperformed 84% of months when the market fell (16 of 19 months). Forecasting the short term direction of markets from here is very difficult and our track record is no better than others. February has started strongly and recouped almost half of January’s decline (at the time of writing). A key feature of the fund’s performance track record is outperformance in down markets and performing in-line in up-markets. It preserves capital when times are tough and capturesthe upside in good times. This provides a smoother ride for investors. We are heavily invested in the fund ourselves so are aligned.
Additionally the fund has a structural advantage over many of our peers through the fee structure. Our benchmark is 8% p.a. absolute, not an index like many others. For example, in January we outperformed relative to the index, but we do not charge a performance fee. We only charge a performance fee when investors have received a reasonable return themselves (8% p.a.). We are incentivised to deliver a real return for investors not just beat an index. So there is no drag on returns in periods of negative return
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/184288549.pdfDecember, 2021
The fund’s return was +1.8% in December, 0.4% above the Small Ordinaries Accumulation Index of +1.4%. In 2021 the fund had a solid year returning +20.3%, 3.4% above the index (+16.9%). A strong mining sector provided a headwind to relative performance. Relative to the Small Industrials index, the fund outperformed by 6.6% (20.3% v’s 13.7%). Key positive contributors for the month of December were AUB Group (AUB +12.5%), Omni Bridgeway (OBL +13.2%) and Hotel Property Investment (HPI +8.4%). Key detractors were City Chic (CCX -8.5%), Pinnacle (PNI -5.5%) and Redbubble (RBL -7.4%).
Future market returns are exceptionally challenging to forecast and our record is no better than others. It is likely 2022 will see higher volatility as central banks are moving to a tightening phase. However we are excited by the investments in the portfolio. We are stock pickers and each holding in the fund must be attractive on its own merit. If attractive opportunities are not present, we hold cash.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/182650322.pdfNovember, 2021
The fund’s return was -0.4% in November, in-line with the Small Ordinaries Accumulation Index of -0.3%). A strong mining sector provided a headwind to relative performance again this month as we don’t invest in this space. The Small Resources was +3.6% while the Small Industrials was -1.5%. Over the long term, industrials have performed better than resources however this has not been the case in the last 2 months.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/181804197.pdfOctober, 2021
The fund’s return was -1.4% in October, below the Small Ordinaries Accumulation Index of +0.9% and the benchmark of +0.6%. A strong mining sector weighted on relative performance this month as we don’t invest in this space. The Small Resources was +6.5% while the Small Industrials was -0.6%. We also had several larger holdings which drifted lower on little news (see below).
Key positive contributors for the month were Pinnacle Investment (PNI +9.2%), NRW (NWH +16.6%) and Uniti Group (UWL +5.2%). Key detractors were SG Fleet (UWL -14.8%), Alliance Aviation (AQZ -12.2%) and Mainfreight (MFT -7.2%)
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/180719624.pdfSeptember, 2021
Share markets were weaker in September due to concerns of slower economic growth and less accommodative central bank policy. The fund returned -0.3% in September, 1.8% above the Small Ordinaries Accumulation Index of -2.1% and 1.0% below the benchmark of +0.6% (8% p.a.). It was the fund’s first negative return in 18 months but continued our 2¾ year run of outperforming in down markets. Despite the small fall in September returns remain strong at +5.6% in the first 3 months of the current financial year. Additionally recent volatility is providing some good buying opportunities. We have cash and have been buying some quality businesses at attractive prices.
The fund’s return was -0.3% in September, above the Small Ordinaries Accumulation Index of -2.1% and below the benchmark of +0.6%. Key positive contributors for the month were Helloworld (HLO +41.4%), News Corp (NWS +8.3%) and City Chic (CCX +5.9%). Key detractors were Uniti Group (UWL -10.8%), Omni Bridgeway (OBL -14.9%) and United Malt (UMG -9.1%).3 negative issues have recently grabbed headlines; 1) falling iron ore price, 2) Chinese property market, specifically uncertainty around the developer Evergrande and 3) rising bond yields
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/179800468.pdfJuly, 2021
COVID variants emerged as a global concern but markets have remained largely calm and are looking through the short-term noise. The fund returned +0.6% in July, in line with the Small Ordinaries Accumulation Index of 0.7% and the benchmark of +0.7% (8% p.a.). Small Industrials were -0.9%, while Small Resources were +7.4%. We don’t hold resources so didn’t benefit from their strong performance. Returns over the last 3 years remain strong at 19.8% p.a. (after fees), 10.6% p.a. above the Small Ordinaries Accumulation
The fund’s return was 0.6% in July, in-line with the benchmark of +0.7. Key positive contributors for the month were Mainfreight (MFT +6.6%), NIB Health (NHF +9.7%) and NRW Holdings (NWH +16.4%). Key detractors were Australian Finance Group (AFG -9.1%), Omni Bridgeway (OBL -8.3%) and Maas Group (MGH -17.5%). During July Mainfreight gave a trading update at its Annual General Meeting. For the first 17 weeks of the current financial year, revenues were +41% and profit before tax +97%. While partly boosted by a weak previous period due to covid disruptions, this is a still a very strong result. Annualising the period’s profit implies strong growth over the last two years across all regions and product segments. This highlights broadbased growth including in large markets where the long term opportunity is vast e.g. United States of America and Europe. In recent weeks the Managing Director (MD) also purchased c. $3m of shares on-market adding to his c. $200m holding.
He is clearly aligned with shareholders and optimistic on the longer-term outlook. Having led the company for 20 years, Don Braid has been instrumental in its success. In the recently published Annual Report, Mainfreight provided 5 year revenue targets that imply strong growth in the years ahead. This is matched with significant capital investment plans that typically deliver high returns through the offering of additional services, increasing network intensification (efficiencies) and the removal 3rd party providers. The company’s historical return on capital is strong at 22% (ROCE).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/176305755.pdfJune, 2021
The fund’s return was +3.1% in June, above the benchmark of +0.6. Key positive contributors for the month were City Chic (CCX +17.1%), EQT Holdings (EQT +13.3%) and Pinnacle (PNI +15.9%). Key detractors were Collins Food (CKF -9.0%), Mayne Pharma (MYX -16.9%) and Austal (ASB - 9.3%).
Forgive us for taking a minute to reflect on performance over the past year. The fund returned +42% (after fees), 9% above the Small Ords Accum index. Every month generated a positive return and we had a high strike rate of beating the market; outperforming the index 8 months, underperforming 3 months and in-line 1 month. On a relative basis we are strongest in falling markets so to generate these returns in rapidly rising markets is pleasing. The last time we underperformed in a month the index fell was over 2.5 years ago (Dec ’18). The fund was the #1 fund of its type in the FY20 year (Mercer) and we may be near the top again in FY21.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/174813406.pdfMay, 2021
Global share markets were broadly positive in May, with commodities a stand-out positive driver during the month.
-The fund returned +0.6% in May, 0.3% above the Small Ordinaries Accumulation Index of +0.3% and in-line with the benchmark of +0.6% (8% p.a.).
-Consecutive positive returns now stretch to 14 months with only 2 negative months over the last 2 financial years. While luck has played a part, a key factor is also our investment style of consistent, lower risk investing which can generate very strong long-term returns.
The fund’s return was +0.6% in May, in line with the benchmark of +0.6% (8% p.a.).
Key positive contributors for the month were Uniti Wireless(UWL +7.9%), Collins Foods (CKF +10.8%) and Bapcor (BAP +6.0%). Key detractors were NRW (NWH -17.0%), AUB Group (AUB -5.0%) and Redbubble (RBL - 16.3%)
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/173427905.pdfApril, 2021
The fund’s return was +7.0% in April, 6.4% above the benchmark of +0.6% (8% p.a.).
Key positive contributors for the month were Mainstream (MAI +119.9%), Uniti Wireless (UWL +20.4%) and City Chic (CCX +17.6%). Key detractors were Redbubble (RBL -18.2%), Southern Cross Media (SXL - 9.9%) and Helloworld (HLO -13.0%).
April was the 3 year anniversary of the fund being managed by the current portfolio manager. 3 years is commonly used to assess fund performance so we thought it worthwhile to provide a summary.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/172022989.pdfNovember, 2020
The fund’s return was 9.0% in November, 8.4% above the benchmark of 0.6% (8% p.a.). Key positive contributors for the month were Helloworld Travel (HLO +77.8%), News Corp (NWS +32.8%) and Southern Cross Media (SXL +33.1%). Key detractors were Bapcor (BAP -8.5%), Breville Group (BRG - 7.6%) and Collins Foods (CKF -3.2%).
To put the current market in context it’s worth looking back at the 3 main phases of this year;
Phase 1 (February-March): the Small Ordinaries Accumulation index (index) declined 29.1% as the implications of a global pandemic became evident (Fisher Paykel Healthcare a rare winner). The fund fell by 23.8%, delivering outperformance of 5.3% driven by our focus on quality businesses that are economically resilient.
Phase 2 (April-October): the index rebounded +31.5% and the fund +41.1%, delivering outperformance of +9.6%. It became evident that government and central bank support would limit the economic impacts. There were clear covid winners (incl tech, online retail) and covid losers (incl travel, media). We maintained a long term view, selling winners when valuations became stretched and selectively purchasing covid losers (vaccine beneficiaries) when valuations were extremely attractive eg Auckland Airport, Helloworld Travel.
Phase 3 (from November): multiple successful vaccine trial results in early November switched the focus to a world post covid. Initially, stocks reversed prior trends and previous covid winners fell (incl tech, online retail) and covid losers rose sharply (incl travel, media). In November the index rebounded 10.3% and we captured almost all of this upside which is pleasing as we continue to hold lower risk stocks. Gains were driven by some small positions that generated large gains (eg Helloworld Travel +78%, Southern Cross Media +33%) and strong financial results from core/large holdings (Mainfreight, News Corp).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/162702424.pdfticker: PVA0013AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://primevalue.com.au/resources/product-information/emerging-opportunities-fund/
Fund Updates
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
manager_contact_details: Array
fund_features:
Prime Value Emerging Opportunities Fund seeks to achieve superior total returns by providing medium to long term capital growth without the constraints of a share market benchmark. The Fund will be comprised of securities, primarily companies listed on an Australian stock exchange with a market cap of less than $500m at the time of first purchase by the Fund, with an emphasis on capital preservation. The Fund is designed for investors seeking medium – long term capital growth who are prepared to accept fluctuations in short-term returns.