Emerging Companies Fund
The Emerging Companies Fund (Wholesale) (the ‘Fund’) returned 15.9% net of fees in the year ended 31 December 2024, outperforming its benchmark which appreciated 12.1%. The Emerging Companies Fund (Retail) grew by 15.4% net of fees in the quarter, also outperforming the benchmark.
The Fund has a small-cap strategy with investments spread across small and microcap companies in Australia and New Zealand. Stock selection in the information technology drove most of the Funds’ outperformance over the last 12 months.
The top 4 annual contributors were all software companies, with the Fund benefiting from strong share price rebounds in Nuix, Bravura Solutions and Gentrack while Ansarada was taken over by private equity earlier in 2024.
Encouragingly have seen investors return to Australian small-caps, however interest in microcaps, particularly those unlikely to join the ASX300 soon, remains weak. We attribute the microcap relative weakness to the proliferation of index and near index investment strategies in the market. While the medium-term outlook for domestic interest rates falling is supportive of equities, the recent 10-year bond yield rise to over 4.5% is more challenging. Additionally, the market is currently priced expensively on an historical basis with small industrial companies trading on nearly 22 times earnings for 2025.
We remain disciplined with our investment process focused on companies with strong fundamentals. We continue to hold elevated levels of cash within the portfolio. We continue to anticipate private equity and corporate interest in the microcap part of our portfolios. We hold overweight in healthcare, information technology and energy transition sectors and opportunistically will build positions on any share price weakness.
Emerging Companies (Wholesale) Fund Performance
As at 31 December 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | -1.7% | -0.4% |
| 6 months | 7% | 7.1% |
| 1 year p.a. | 15.9% | 12.1% |
| 3 years p.a. | -1.6% | -0.8% |
| 5 years p.a. | 8.2% | 3.3% |
| since inception p.a. | 12.6% | 6.9% |
^Benchmark: S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.
Inception date: 30/06/2015.
Emerging Companies (Retail) Fund Performance
As at 31 December 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 2.0% | -0.4% |
| 6 MONTHS | 6.7% | 7.1% |
| 1 year p.a. | 15.4% | 12.1% |
| 3 years p.a. | -2.1% | -0.8% |
| 5 years p.a. | 7.7% | 3.3% |
| since inception p.a. | 12.0% | 6.9% |
^Benchmark: S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.
Inception date: 30/06/2015.
Contributors and detractors
Top 3 contributors to Fund return
+233.5%
Nuix Ltd. (NXL)
+163.2%
Bravura Solutions Limited (BVS)
+85.6%
Gentrack Group Ltd. (GTK)
Top 3 detractors from Fund return
-49.4%
Mach7 Technologies Ltd. (M7T)
-45.4%
McPherson's Limited (MCP)
-25.2%
Domain Holdings Australia Ltd. (DHG)Contributors
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Nuix (NXL) has been a key positive contributor to returns in 2024. Under this management team, there has been transformation of the business, particularly in evolving the product offering and engaging with customers, which has yielded positive results. The company has re-rated significantly over the year, driven by earnings upgrades, a strong FY24 result which highlighted solid underlying cash flow and annualised contract value growth, as well as being added to the S&P/ASX 300 index in September.
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Bravura (BVS) was a strong performer in 2024 and had recently upgraded its FY25 revenue and operating earnings guidance, coming in above consensus expectations. This was mostly driven by further cost outs and favourable currency movements. BVS has a strong balance-sheet and the company is returning surplus capital back to shareholders in the form of a capital return, resumption of dividends and an ongoing on-market buyback, which have been received positively by investors. Investors would like to see further new client win momentum in FY25/26 following the successful implementation of their technology at Aware Super.
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Gentrack (GTK) had performed strongly in 2024. The company released a strong FY24 result which provided the market confidence around prior FY25 consensus Revenue and EBITDA estimates being achievable, with the international pipeline appearing strong coupled with signs of inherent operating leverage in the business. We believe GTK is well positioned for further growth and a beneficiary of the structural growth lever in the climate transition.
Detractors
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Mach7 Technologies (M7T) underperformed this year due to a softer start to FY25 and the potential for cash outflows attributable to its platform technology investment in FY25. The combination likely pushes out operating leverage to FY27 too. We see positive near-term catalysts via the Veteran Affairs opportunity, new contract wins and continue to like the long-term fundamentals. The stock also has strong valuation support when compared to competitors.
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McPhersons (MCP) underperformed this year as it transitions its business model away from supermarkets into a pharmacy focused cosmetics business. New strategy execution continues to take time, and the business model remains at lower levels of profitability until it can be right sized in line with its new operating strategy. The stock’s valuation remains compelling, and we continue to see a significant opportunity for margin expansion and profitability growth for MCP post-transition due to its category leading brands and strong customer relationships.
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Domain (DHG) had continued to underperform its competitor REA over the year, despite the slightly higher listings growth in the September quarter, with the controllable yield growth declining which was impacted by the win back of free or low yielding listings. We maintain our view that there is room for a no. 2 player in the Australian market and retain our position in DHG on the basis of relative valuation attractiveness, whilst its fundamentals, including earnings growth potential and cash flow, remain solid.
Nuix has been a key positive contributor to returns in 2024. There has been transformation of the business, particularly in evolving the product offering and engaging with customers.
Portfolio changes
Additions to the Fund
- Cuscal Limited (CCL) – Cuscal is a payment services company, providing the infrastructure for non-major financial institutions such as Bendigo Bank, building societies and fintech clients such as Zeller. We added Cuscal to the Fund as we like the investment fundamentals and growth profile. Cuscal is likely to grow above industry due to client consolidation and/or from acquiring smaller payment services providers.
- Hansen (HSN) – We added energy billing and communications software company Hansen to the portfolio on attractive fundamentals.
- Tyro Payments (TYO) – We added Australian payments company Tyro on share price weakness.
Reductions from the Fund
- Capital Health (CAJ) – Intense competition in the banking sector for mortgage market share has resulted in net margin income compression. We exited ABA due to funding disadvantages, lack of scale and an inability to compete with larger banks on pricing.
- xRef (XF1) – Xref was divested over the period following the announcement of a takeover bid from SEEK whom they had a partnership with. The implied valuation of 3x EV/ARR FY24 was reasonable, in our view, given its challenged balance sheet position.
- Immutep (IMM) – Immutep was divested over the period due to a combination of weaker than anticipated topline results in TACTI-003 cohort A and Merck’s phase 3 subcutaneous Keytruda trial showing non-inferiority. We believe both factors could prolong Merck’s time horizon to the end of TACTI-004 and prefer to reassess closer to trial outcome.
We added energy billing and communications software company Hansen to the portfolio based on its attractive fundamentals.
Sector allocation
Sector overweights
Cash, Health Care, Information Technology, Utilities (renewables)
Sector underweights
Communication Services, Consumer Discretionary, Consumer Staples, Financials, Industrials, Materials, Real Estate
Encouragingly, we have seen investors return to Australian small-caps, however interest in microcaps, particularly those unlikely to join the ASX300 soon, remains weak
* All data is prepared in accordance with FSC Standard No. 6. 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.
Disclaimer
Interests in the Australian Ethical Managed Funds are issued by Australian Ethical Investment Ltd (ABN 47 003 188 930, AFSL 229949), the Responsible Entity of the Australian Ethical Managed Funds.
The information in this summary is of a general nature and is not intended to provide you with financial advice or take into account your personal objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances and read the Financial Services Guide, relevant product disclosure statement and Target Market Determination available on our website.
You may wish to seek financial advice from an authorised tax or financial adviser before making an investment decision. Past performance is not a reliable indicator of future performance.
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The information contained in this document is believed to be accurate at the time of compilation.