Emerging Companies Fund
Fund commentary
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The Fund has a small-cap strategy with investments spread across small and microcap companies in Australia and New Zealand. The quarter’s outperformance is due to favourable stock selection in the Healthcare and Financials sectors, while a significant underweight in the poorly performing Real Estate sector added to relative performance.
Emerging Companies (Wholesale) Fund Performance
As at 30 September 2022*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 1.8% | -1.0% |
| 1 year p.a. | -28.4% | -27.5% |
| 3 years p.a. | 7.0% | -3.7% |
| 5 years p.a. | 11.8% | 2.6% |
| since inception p.a. | 12.7% | 4.9% |
Source: FE fundinfo.
^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 September 2022*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 1.7% | -1.0% |
| 1 year p.a. | -28.7% | -27.5% |
| 3 years p.a. | 6.4% | -3.7% |
| 5 years p.a. | 11.1% | 2.6% |
| since inception p.a. | 12.0% | 4.9% |
Source: FE fundinfo.
^Benchmark: S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.
Inception date: 30/06/2015
Top 3 contributors to fund return
Cogstate (CGS)
+41.6%
Genworth Mortgages Insurance Australia (GMA)
+23.4%
Praemium (PPS)
+55.4%
Top 3 detractors to fund return
Aussie Broadband (ABB)
-31.1%
Limeade (LME)
-44.4%
Xref (XF1)
-27.1%
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We were excited by the announcement that Cogstate’s (CGS) Japanese partner and shareholder Eisai has successfully completed its pivotal phase 3 clinical study on its new treatment for Alzheimer’s disease. The study demonstrated statistical significance in slowing the decline in cognition losses and we are hopeful Eisai will have US FDA approval in early 2023. The implications for Cogstate are potentially more clinical research contracts in Alzheimer’s and the opportunity for its internet-based cognition test to emerge as the global industry standard for Alzheimer’s home monitoring.
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Genworth Mortgage Insurance Australia (GMA) a major provider of lenders mortgage insurance, reported a strong set of results. The excess capital position of the company is attractive despite declining house prices and the company continues to return capital to shareholders via attractive dividends and buybacks.
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Investment platform technology company Praemium (PPS) bounced 55.4% during the quarter, recovering from an oversold position. After recently divesting its loss-making UK division, the company reported a decent 2022 result while commencing a share buy-back.
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We have been disappointed with the performance of broadband reseller Aussie Broadband (ABB) which fell 31.1% over the quarter after disappointing the market with its 2023 commentary.
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Employee wellbeing software company Limeade (LME) fell 44.4% on little market news, while employee referencing company Xref (XF1) fell 27% on a souring outlook for hiring intentions.
Genworth Mortgage Insurance Australia (GMA) a major provider of lenders mortgage insurance, reported a strong set of results.
Portfolio changes
Additions to the Fund
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Australian Clinical Labs (ACL): We added to our holding in Australia’s third largest pathology company (by market share) Australian Clinical Labs on share price weakness. The market has been derating pathology companies as Covid testing volumes rapidly decline in Australia. We believe there is good long-term value in the company now.
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Domain (DHG): The market has aggressively derated residential internet property portal Domain as the outlook for property prices sours. We believe Domain has a strong business model. We added to our position on share price weakness.
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LGI Limited (LGI): We invested in landfill gas electricity generator and emissions management company LGI at its IPO over the quarter.
Reductions from the Fund
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HRL Limited (HRL): We divested our holding in lab testing company HRL into the attractive takeover offer from lab testing giant ALS Group.
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Perpetual (PPT): We divested our small holding in fund manager Perpetual, preferring the standalone company.
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Pacific Smiles (PSQ): We exited a small position in shopping-mall-focused dentistry business Pacific Smiles.
Sector allocation
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Sector overweights: Healthcare, Information Technology, Utilities (Renewables)
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Sector underweights: Materials, Consumer Discretionary, Real Estate
Outlook for the Fund
Over the last quarter, the global inflation numbers have been higher than expected, resulting in central banks around the world aggressively raising shorter-term interest rates; consequentially increasing the chances of economic recession. These conditions have been challenging for equity markets. Small and microcap companies have been disproportionately affected by rising global interest rates as they are typically in an earlier stage of commercialisation and investing in growth initiatives.
However, with much of the negativity already priced into equity markets, any future easing of inflationary numbers will be warmly received. We continue to be a bottom-up investor, actively looking for attractive investment opportunities that meet our Ethical Charter.
We continue to believe the primary reason for investing in small and microcap companies is the superior growth attributes and have consequently been adding to some of our underperforming names.
We continue to believe the primary reason for investing in small and microcap companies is the superior growth attributes and have consequently been adding to some of our underperforming names.
*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.
This commentary may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, Australian Ethical accepts no responsibility for the accuracy or completeness of, nor does it endorse any such third party material. To the maximum extent permitted by law, we intend by this notice to exclude liability for this third party material.