Emerging Companies Fund
Outlook for the fund
Over the last quarter, expectations for interest rate cuts have been pushed out further, with rates expected to remain stronger for longer.
The momentum in the stock market from the December quarter has continued unabated into the March 2024 quarter. This share price appreciation now indicates forward looking market multiples are one standard deviation more expensive than their historical norms. We have seen investor interest return to small companies, however outside the ASX300, investor appetite remains generally poor.
The Australian IPO market is subdued, and we don’t expect this to change until ASX investor interest broadens. Private equity and corporates remain interested in Australian microcap names, particularly software business models, with Ansarada receiving an attractively priced bid over the quarter. We believe post the recent share market rally the earlier stage companies offer the most compelling valuations. However, with interest rates remaining stronger for longer, and market multiples elevated, the investment back drop is more challenging and ultimately vulnerable to external shocks. We are holding higher cash balances currently and remain focused on fundamental valuation.
Commentary for the quarter ended March 2024
The Emerging Companies Fund (Wholesale) (the ‘Fund’) returned 6.3% net of fees in the quarter ended 31 March 2024, underperforming its benchmark which appreciated 9.6%. The Emerging Companies Fund (Retail) grew by 6.2% net of fees in the quarter, also underperforming the benchmark.
The Fund has a small-cap strategy with investments spread across small and microcap companies in Australia and New Zealand. The quarter’s underperformance is attributed to negative stock selection in Healthcare and being under-weight in the strongly performing Consumer Discretionary sector. The Fund’s holding in cash was a drag on relative performance as quarterly returns on cash were significantly less than the benchmark. Our holdings in the Information Technology sector added strongly to relative performance.
Emerging Companies (Wholesale) Fund Performance
As at 31 March 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 6.3 | 9.6 |
| 1 year p.a. | 18.6 | 20.5 |
| 3 years p.a. | 0.7 | 1.7 |
| 5 years p.a. | 12.4 | 4.9 |
| since inception p.a. | 12.7 | 7.3 |
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 31 March 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 6.2 | 9.6 |
| 1 year p.a. | 18.1 | 20.5 |
| 3 years p.a. | 0.2 | 1.7 |
| 5 years p.a. | 11.8 | 4.9 |
| since inception p.a. | 12.0 | 7.3 |
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.
Contributors and detractors
Top 3 contributors to Fund return
+63.7%
Bravura Solutions Limited (BVS)
+42.4%
Ansarada Group Ltd. (AND)
+32.8%
Gentrack Group Ltd. (GTK)
Top 3 detractors to Fund return
-36.6%
Impedimed Limited (IPD)
-33.1%
Aroa Biosurgery Ltd. (ARX)
-9.5%
Mach7 Technologies Ltd. (M7T)Contributors
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Bravura Solutions (BVS) was a strong performer +63.7% for the Fund in the March quarter, as the revamped management team delivered on the company’s turn-around. Improved financial metrics, alongside a better-than-expected balance sheet were positively received by the market when they announced their interim results in February. We see further upside to performance, as FY24 is a transitional year for the business as management re-sets the cost base and exits unprofitable contracts.
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Gentrack (GTK) was a strong performer +32.8% for the Fund in the March quarter, with the market anticipating the energy billing company will be a significant beneficiary of climate transition. There is a need for more sophisticated real-time software 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 +42.4% over the March quarter after the company announced it was being acquired by a private equity player at a significant premium to market. We have held Ansarada since 2018 as an unlisted investment and are pleased the company has been able to successfully manage a profitable exit for investors in 2024.
Detractors
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Impedimed (IPD) shares fell 36.6% during the quarter as a change in management meant a re-basing of the market’s expectations for the sales ramp-up post NCCN guideline inclusions. We continue to see long-term value, with Impedimed benefitting from regulatory tailwinds, recurring style revenues and strong gross margins.
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Aroa Biosurgery (ARX) shares fell 33.1% in the quarter as the company’s sales guidance was adjusted due to ordering delays from a key partner. Timing issues aside, the opportunity has not changed with a global addressable market opportunity, strong gross margins, and a robust balance sheet with a clear pathway towards free cash flow generation.
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Mach7 Technologies (M7T) shares fell 9.5% in the quarter as it accelerated its shift towards ARR recurring-style sales, rather than upfront licence agreements. Whilst a near-term revenue impact, longer-term M7T will see a bolstered recurring revenue base. M7T’s valuation remains undemanding versus peers, and we see multiple opportunities in both the near and medium-term.
Bravura Solutions: the revamped management team delivered on the company’s turn-around.
Portfolio changes
Additions to the Fund
- EP&T Global Ltd. (EPX) – We added energy efficiency technology company EP&T to the portfolio at an attractive valuation believing European demand for its hybrid services to the commercial property sector can expand.
- Nanosonics Limited (NAN) – We invested in infection control medical device company Nanosonics after the company share price was derated on the back of a maturing market for its flagship Trophon device. We are hopeful the market will soon apportion value for the company’s new device to be launched in 2025.
Reductions from the Fund
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Symbio Holdings Limited (SYM) – We divested from software-based telecommunications company Symbio after Aussie Broadband also held in this Fund successfully acquired the company.
We invested in infection control medical device company Nanosonics after the company share price was derated on the back of a maturing market for its flagship device.
Sector allocation
Sector overweights
Utilities, Information Technology, Healthcare
Sector underweights
Materials, Consumer Discretionary, Industrials, Financials
We have seen investor interest return to small companies, however outside the ASX300, investor appetite remains generally poor.
*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.
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