Emerging Companies Fund
The Emerging Companies Fund (Wholesale) (the ‘Fund’) fell 25.4% net of fees in the year ended 31 December 2022, underperforming its benchmark which declined 21.8%. The Emerging Companies Fund (Retail) fell 25.8% net of fees for the year, also underperforming the benchmark.
The Fund is a small-cap strategy with investments spread across small and microcap companies in Australia and New Zealand.
The annual underperformance is largely explained by poor performing investments in the Information Technology sector, in which the Fund has been overweight relative to the benchmark.
Emerging Companies (Wholesale) Fund Performance
As at 31 December 2022*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 2.1% | 6.6% |
| 1 year p.a. | -25.4% | -21.8% |
| 3 years p.a. | 5.2% | 2.0% |
| 5 years p.a. | 10.7% | 1.9% |
| since inception p.a. | 12.5% | 5.7% |
^Benchmark: S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.
Inception date: 30/06/2015. Source: FE fundinfo.
Emerging Companies (Retail) Fund Performance
As at 31 December 2022*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 2.0% | 6.6% |
| 1 year p.a. | -25.8% | -21.8% |
| 3 years p.a. | 4.7% | 2.0% |
| 5 years p.a. | 10.1% | 1.9% |
| since inception p.a. | 11.8% | 5.7% |
^Benchmark: S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.
Inception date: 30/06/2015. Source: FE fundinfo.
Contributors and detractors
Top 3 contributors to Fund return
Top 3 detractors to Fund return
Contributors
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The Fund benefited from some corporate activity in the last year with laboratory testing company HRL Group (HRL) being acquired by ASX listed ALS for a 95.1% premium in June 2022 and Australian Pharmaceutical Industries being acquired by Wesfarmers in March 2022.
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Helia Group (HLI), a major provider of lenders mortgage insurance, produced strong results during 2022. Despite rising interest rates, the company continues to experience low levels of claims. The strong capital position of the company has allowed it to return capital to shareholders via attractive dividends and buybacks.
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Nitro Software (NTO) contributed to portfolio performance as we acquired more shares during the year at lower prices before the share price recovered late in 2022 on the back of private equity bidding interest.
Detractors
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EML Payments (EML), a fintech company offering a broad range of global payment solutions, fell -87.5%. Its problems intensified with their UK regulator now restricting new business while compliance issues are investigated. The Fund divested from EML in late 2022.
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For Eroad (ERD), which fell -82.0%, the combination of not raising enough equity to support its 2021 acquisition of telematics company Cortex, revenue shortfalls and elevated spending on business integration and software development has left its balance sheet stretched and share price very weak.
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Symbio (SYM), which provides software-based telecommunication services, declined -76.5% over the 12 months. It unexpectedly announced a significant fall in its installed base of digital phone numbers. This has been explained as global technology customers returning phone numbers that were acquired on anticipated growth in demand.
Helia Group (HLI), a major provider of lenders mortgage insurance, produced strong results during 2022.
Portfolio changes
Additions to the Fund
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Praemium (PPS) – We re-introduced technology-based investment platform Praemium into the portfolio, viewing the sale of its loss-making UK business as a catalyst for a share price re-rate.
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Nitro Software (NTO) – We added to our Nitro Software holding on share price weakness in 2022. We were rewarded with two private equity companies now bidding for the company.
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Domain Group (DHG) – We have added to our holding in real-estate internet portal Domain Group on share price weakness. We believe the market can over-penalise the Domain share price in the weakening residential property cycle.
Reductions from the Fund
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HRL Group (HRL) – We sold into the takeover offer from laboratory testing giant ALS for a 95% premium to the prevailing share price in June 2022.
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API Group (API) – We sold into the takeover offer from conglomerate Wesfarmers for a 34.5% premium to the prevailing share price, with the deal completed in March 2022.
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EML Payments (EML) – EML was removed from the Fund following the emergence of a second regulator, the UK’s Financial Conduct Authority, raising concerns with EML’s processes and governance practices in one of its divisions. The timeline for EML satisfying all regulatory concerns has now been extended for an uncertain length of time.
We re-introduced technology-based investment platform Praemium into the portfolio.
Our primary rationale for investing in small and microcap companies remains relevant, with emerging companies offering stronger growth attributes driven by being more innovative, nimble, and entrepreneurial.
Sector allocation
Sector overweights
Healthcare, Information Technology, Utilities (Renewables)
Sector underweights
Consumer Discretionary, Industrials, Materials, Real Estate
Outlook for the Fund
Over the last 12 months, global inflation numbers have been higher than expected, resulting in central banks around the world aggressively raising shorter-term interest rates.
These conditions have been especially challenging for small and microcap companies. We are seeing some early signs that monetary policy is working with company revenue growth slowing, some job layoffs occurring and consumers tightening their belts.
We continue to be a bottom-up investor, actively looking for attractive investment opportunities that meet our Ethical Charter.
Our primary rationale for investing in small and microcap companies remains relevant, with emerging companies offering stronger growth attributes driven by being more innovative, nimble, and entrepreneurial.
*Total returns are calculated using the sell (exit) price, net of management fees and gross of tax as if distributions of income have been reinvested at the actual distribution reinvestment price. The actual returns received by an investor will depend on the timing, buy and exit prices of individual transactions. Return of capital and the performance of your investment in the fund are not guaranteed. Past performance is not a reliable indicator of future performance. Figures showing a period of less than one year have not been adjusted to show an annual total return. Figures for periods of greater than one year are on a per annum compound basis. The current benchmark may not have been the benchmark over all periods shown in the above chart and tables. The calculation of the benchmark performance links the performance of previous benchmarks and the current benchmark over the relevant time periods.
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