Emerging Companies Fund
The Emerging Companies Fund (Wholesale) (the ‘Fund’) returned 13.8% net of fees in the year ended 30 June 2024, outperforming its benchmark which rose 12.4%. The Emerging Companies Fund has outperformed its benchmark over 1, 3, and 5 year periods and since inception.
The Emerging Companies Fund (Retail) climbed 13.3% net of fees for the year ended 30 June 2024, also outperforming the benchmark.
The Funds’ small and microcap holdings delivered double digit returns in the financial year, as investor appetite returned to this segment of the market. The Emerging Companies Fund has a small-cap strategy with investments spread across small and microcap companies in Australia and New Zealand.
Stock selection in the technology sector was the stand-out contributor to performance, with triple digit share price returns from software names - Nuix, Gentrack and Bravura. The technology sector also benefited from takeover activity, with Ansarada and Damstra attracting takeover interest during the period.
The Fund benefited from nil exposure to real estate, as the sector underperformed against a backdrop of higher interest rates and declining asset valuations, particularly in office. Consumer discretionary was also a favourable contributor due to stock selection (Webjet) and holding nil underperformers such as Tabcorp and Star Entertainment, which are excluded due to our Ethical screen.
The Healthcare sector detracted from performance due to stock specific issues. The fund participated in 10 healthcare capital raises during the period, of which, seven were existing, with the placement priced at modest-to-steep discounts. Further weakness was attributed to the healthcare services segment, and we divested the underperforming Healius. We continue to hold a favourable outlook over the healthcare industry as many of our stocks are now well-funded and patients return to prioritising their health.
The Fund benefited from continued acquisition activity, with deals consummated for Symbio, Damstra, Blackmores and Limeade. Additionally, Ansarada, Capitol Health, Bigtincan and Perpetual attracted bidding interest during the year. The Fund participated in 12 equity placements during the year, of which 8 were pre-existing holdings.
Emerging Companies (Wholesale) Fund Performance
As at 30 June 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 1.9% | -4.5% |
| 6 months | 8.3% | 4.6% |
| 1 year p.a. | 13.8% | 12.4% |
| 3 years p.a. | -1.4% | -2.2% |
| 5 years p.a. | 10.5% | 2.9% |
| since inception p.a. | 12.5% | 6.5% |
^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 30 June 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 1.9% | -4.5% |
| 6 MONTHS | 8.1% | 4.6% |
| 1 year p.a. | 13.3% | 12.4% |
| 3 years p.a. | -1.8% | -2.2% |
| 5 years p.a. | 10.0% | 2.9% |
| since inception p.a. | 11.9% | 6.5% |
^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
+262.4%
Nuix Ltd. (NXL)
+141.9%
Gentrack Group Ltd. (GTK)
+132.6%
Ansarada Group Ltd. (AND)
Top 3 detractors from Fund return
-78.9%
Bigtincan Holdings Ltd. (BTH)
-58.4%
Healius Limited (HLS)
-60.0%
Impedimed Limited (IPD)Contributors
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Nuix (NXL) was a key positive contributor to returns in FY24. Under this management team, the business has overseen significant transformation of the business, particularly in evolving the product offering and engaging with their customers, which has yielded positive results. The technology company provided an update that it was likely to exceed its annual contract value (ACV) growth of ~10% in FY24 and upgraded its earnings guidance following a key multi-year deal win in May. Management is expecting to be underlying cashflow positive
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Gentrack (GTK) shares rose during the year as the software billing company announced a significant upgrade to FY24 Revenue and operating earnings guidance driven by customer wins and upgrades. We believe they are well positioned for further growth and a beneficiary of the climate transition, as their sophisticated real-time software is used to process short-term energy pricing signals which enable demand responses from energy users, while keeping the grid stable and catering for the anticipated huge growth of intermittent renewable energy generation.
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Ansarada (AND) appreciated after the software company attracted a takeover bid at a significant premium from a private equity backed industry player. We have held Ansarada since 2018 as an unlisted investment and are pleased the company is in the process of managing a profitable exit for investors in 2024. Due to a delay in the ACCC’s investigation of the transaction, the company expects the implementation of the sale to be postponed to early September 2024 and we await the outcome of the investigation and revised timeline.
Detractors
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Healius (HLS) shares fell throughout the period amid diminishing Covid-19 testing revenues combined with solvency concerns around its balance sheet. These factors resulted in an emergency capital raise required by lenders to pay down debt. The equity raise, which was priced at a 30% discount, was accompanied by full-year guidance that implied a material 1H vs 2H skew at the midpoint. We divested our shareholding during the period and did not participate in the capital raise.
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Bigtincan (BTH) shares fell over the period, tracking its weak underlying cash flow, which culminated in a dilutive capital raise in June to fund its investment in its artificial intelligence (AI) product suite, marketing and working capital. Post the capital raise, the company has more runway to balance growth and free cashflow whilst navigating higher levels of customer churn. The company rejected a non-binding bid in June and remains in a critical turnaround phase.
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Impedimed (IPD) shares fell during the financial year as a change in management led to a re-basing of the market’s expectations for sales ramp-up post National Comprehensive Cancer Network guideline inclusions. We continue to see long-term value, with Impedimed benefitting from regulatory tailwinds, recurring style revenues and strong gross margins.
Ansarada: Shares appreciated after the software company attracted a takeover bid at a significant premium from a private equity backed industry player.
Portfolio changes
Additions to the Fund
- Clarity Pharmaceuticals Ltd. (CU6) – Clarity is an early/mid-stage radiopharmaceutical company employing technology around copper radioisotopes for diagnosis and treatment of a variety of cancers. We were particularly enamoured with CU6’s early data showing instances of complete responses from the therapeutic and see a large opportunity for CU6 moving forward
- Perpetual Limited (PPT) – Perpetual operates three units – asset management, private wealth management and corporate trust. The position was added due to the sum of the parts valuation being higher than the share price. Following a strategic review, Perpetual received a bid from KKR that was above expectations however, the lack of clarity on tax and separation costs has been disappointing. We have a longer-term view that the remaining asset management business may be undervalued
- SiteMinder Limited (SDR) – SiteMinder is a global hotel commerce platform provider, which offers accommodation providers a range of products to manage the distribution of rooms, take bookings from and communicate with guests. We are attracted to the significant growth potential as it raises its take rate in the large global hotels addressable market, driven by the rollout of its key new products namely Channels Plus (C+) and Dynamic Revenue Plus (DR+) which are on track to accelerate growth from FY25.
- Super Retail Group Limited (SUL) – Super Retail Group is a Trans-Tasman retailer, which owns and operates a portfolio of retail brands including Supercheap Auto, Rebel, Macpac and BCF (Boating, Camping and Fishing Store). Although the consumer environment is challenged, we are attracted to the retailer’s portfolio of brands, strong balance sheet, cashflow generation and reasonable valuation
- Tyro Payments Ltd. (TYR) – Tyro Payments was a recent addition to the Fund as we took advantage of the weakness in the share price, partly driven by the deletion from the MSCI Australia index at the end of May. We view Tyro as a fundamentally solid payments business which has strengthened its core margin and gross profit through active repricing whilst expanding its operating margins and FCF through cost management. We see continued solid transaction value growth in non-discretionary verticals in particular ‘Health’, with upside potential from the new verticals they are targeting
- RADIOPHARM THERANOSTICS LTD PLACEMENT (RAD) – is an early/mid-stage radiopharmaceutical diagnostic and therapy company. Its flagship asset is a brain metastases imaging agent entering stage 2B of clinical development. The company is fully funded through to a readout and recently was able to attract US listed Lantheus onto its share registry. Like Clarity, we see a large opportunity for RAD moving forward.
Reductions from the Fund
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Auswide Bank Ltd. (ABA) – 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.
The Fund benefited from nil exposure to real estate, as the sector underperformed against a backdrop of higher interest rates and declining asset valuations, particularly in office.
Sector allocation
Sector overweights
Cash, Communication Services, Health Care, Information Technology, Utilities (renewables)
Sector underweights
Consumer Discretionary, Consumer Staples, Financials, Industrials, Materials, Real Estate
We continue to hold a favourable outlook over the healthcare industry as many of our stocks are now well-funded and patients return to prioritising their health.
Outlook for the Fund
The Emerging Companies Fund has a small-cap strategy with investments spread across small and microcap companies in Australia and New Zealand. As the outlook for interest rates is that we are near peak rates, the appetite for small and microcap companies has started to return to the market.
Our process focuses on fundamental research and we seek opportunities to invest in attractive companies, where the share price materially undervalues the long-term valuation. Our small and microcap exposures are typically in an earlier stage of commercialisation and investing in growth initiatives.
There are several portfolio companies that have attracted bidding interest including Ansarada, Capitol Health, Bigtincan and Perpetual. We expect continued corporate interest in our small-cap and micro names over coming periods. The Fund participated in 12 placements during the year and we expect to deploy additional capital in FY25.
* 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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