INVESTMENTS | FUND COMMENTARY
Emerging Companies Fund
The Emerging Companies Fund slightly outperformed the ASX Small Industrials Benchmark in Q1 2022, falling 8.8% against the benchmark’s 9.1% decline. This outperformance is attributed to strong stock selection in the financials and utility sectors, while information technology names detracted from investment performance. The Fund continues to have outperformed its benchmark since inception.
26 April 2022
While small industrial ASX companies have been weak in an environment of rising commodity prices, higher interest rates and global economic dislocation because of war and Covid-19, the Emerging Companies Fund slightly outperformed its benchmark, falling 8.8% against the benchmark’s 9.1% decline.
This outperformance is attributable to strong stock selection in the financials and utility sectors, while information technology names detracted from investment performance. The Fund’s overweighting in information technology was a significant detractor with earlier stage, small, growth-orientated companies underperforming in the rising interest rate environment.
Emerging Companies (Wholesale) Fund Performance
As at 31 March 2022*
3 months
Fund: -8.7%
Benchmark: -9.1%
1 year p.a.
Fund: 6.6%
Benchmark: 0.0%
3 years p.a.
Fund: 23.3%
Benchmark: 6.5%
5 years p.a.
Fund: 17.7%
Benchmark: 7.7%
Since inception p.a.
Fund: 17.5%
Benchmark: 8.7%
*Source: FE fundinfo. Benchmark is the 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 March 2022*
3 months
Fund: -8.8%
Benchmark: -9.1%
1 year p.a.
Fund: 6.2%
Benchmark: 0.0%
3 years p.a.
Fund: 22.6%
Benchmark: 6.5%
5 years p.a.
Fund: 17.0%
Benchmark: 7.7%
Since inception p.a.
Fund: 16.7%
Benchmark: 8.7%
*Source: FE fundinfo. Benchmark is the S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.
Inception date: 30/06/2015.
Contributors over the past quarter
We were pleased with the performance of residential mortgage insurer Genworth Mortgage Insurance Australia which appreciated 29%. The share price rerate is primarily attributed to the company re-signing CBA as well as a favourable half yearly result, a healthy fully franked dividend, and a share buy-back.
The second strongest performer was Aussie Broadband which appreciated 12% with the market enjoying its growing marketshare in NBN broadband and its recently completed acquisition of business telecommunications company Over the Wire.
Our investment in foreign exchange currency transfer company OFX appreciated 5.2%, continuing its strong share price rerate seen in 2021. We attribute the gains to a positive trading update given in March 2022.
Our investment in childcare operator Mayfield Group appreciated 18.2% after a solid first half result and a growing appreciation of the near doubling of childcare centres via acquisition achieved in 2021.
We were pleased with the performance of metals recycler Sims Metal Management which appreciated 34.3%, with the company benefiting from strong commodity prices.
Detractors over the past quarter
Our largest detractor was workplace management software company Damstra, which fell 44%. The company’s poor acquisition track record and customer losses culminated in a heavily discounted 2021 capital raise resulting in poor investor sentiment in a currently difficult small-cap investment market.
Our information technology names including: Hipages -45.4%, Nitro Software -38%, CV Check -29%, Bravura Solutions -28%, Symbio -19% and Bigtincan -14.8% were all significant detractors from investment performance. Earlier stage, small-capitalised company valuations particularly in the technology sector have been under pressure because of rising interest rates.
Pathology and radiology provider Healius fell 16.7% as the market progressively reduces PCR Covid-19 testing volumes in forward-looking estimates. Our investment in consumer-focused, medical adherence technology company MedAdvisor fell 35% on little news.
Portfolio changes during the past quarter
Over the quarter we added a holding in fund manager and corporate trustee Perpetual on valuation grounds. We also added investment platform provider Praemium into the portfolio on share price weakness. We added to our holdings in payments company EML and PDF and e-signature business Nitro Software due to share price weakness. We topped up on our holdings in Mayfield Childcare and vitamin company Blackmores.
We divested our holding in pharmacy wholesaler and Priceline pharmacy chain into the Wesfarmers takeover bid. We also divested a small position in Close the Loop.
Fund strategy
The Emerging Companies Fund is an actively managed small-cap strategy investing in small and microcap companies listed on the ASX and NZX that meet our values-based Charter. We are a bottom-up investor using fundamental analysis with no change in fund strategy expected over the next 12 months.
*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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