Emerging Companies Fund
Portfolio performance commentary and outlook for the three months to 31 March 2025
The Emerging Companies Fund (Wholesale) (the ‘Fund’) declined 4.1% net of fees in the quarter ended 31 March 2025, compared to its benchmark which fell 6%. The Emerging Companies Fund (Retail) fell 3.9% net of fees.
It was the worst quarterly performance for the Australian equity market in nearly three years, with markets dropping to 7-month lows, as global uncertainty and a tepid domestic earnings season rattled investor confidence. Trump tariffs dominated the headlines and accentuated share market swings, creating opportunities for our active stock picking style of investing.
The Fund benefited from positive stock selection in the financials sector, a takeover offer and holding excess cash in a declining equity market.
Our leading contributor to portfolio performance was internet property portal Domain Group, which benefited from large US internet real-estate company CoStar building a 17% stake on market before launching a full takeover offer. The Fund also benefited with a robust 1st half 2025 trading update from medical device company Nanosonics and more importantly the US Food & Drug Association approval of medical disinfection device, Coris.
The disappointment of the quarter was drug developer Opthea’s clinical trial failure in wet AMD eye disease. The clinical failure has resulted in a cessation of all drug development.
Outlook for the Fund
Financial market sentiment has been dominated by US politics, with Trump’s tariff policy in particular occupying center stage. The outlook for interest rates is more supportive for equities in 2025, than in years prior, with inflationary expectations now more subdued.
The Trump backdown on tariffs is very positive for keeping inflation under control. We believe the turbulent market is generating opportunities in microcap and small cap companies which can be exploited.
We also believe the proliferation of index orientated investing globally will continue to add to the investment opportunities for active managers. The microcap cap and small caps on the ASX continue to be an active merger and acquisition hunting ground for corporates and private equity as demonstrated by CoStar’s offer for Domain as well as private equity acquiring Bigtincan.
Emerging Companies (Wholesale) Fund Performance
As at 31 March 2025*
| fund | benchmark^ | |
|---|---|---|
| 3 months | -4.1% | -6.0% |
| 6 months | -5.7% | -6.4% |
| 1 year p.a. | 4.6% | -3.8% |
| 3 years p.a. | 0.0% | 0.4% |
| 5 years p.a. | 14.2% | 8.6% |
| since inception p.a. | 11.8% | 6.1% |
^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 2025*
| fund | benchmark^ | |
|---|---|---|
| 3 months | -3.9% | -6.0% |
| 6 MONTHS | -5.8% | -6.4% |
| 1 year p.a. | 4.4% | -3.8% |
| 3 years p.a. | -0.3% | 0.4% |
| 5 years p.a. | 13.7% | 8.6% |
| since inception p.a. | 11.2% | 6.1% |
^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
+69.5%
Domain Holdings Australia Ltd. (DHG)
+51.2%
Nanosonics Limited (NAN)
+33.0%
Cogstate Ltd (CGS)
Top 3 detractors from Fund return
-44.8%
Aroa Biosurgery Ltd (ARX)
-51.4%
Nuix Ltd (NXL)
-100.0%
Opthea Limited (OPT)Contributors
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Domain (DHG) was a positive contributor in the March quarter as they received a non-binding bid of $4.43 per share (up from $4.20 initially) from CoStar which was at a premium of 42% to the pre-bid price. The Fund took the opportunity to sell down part of the fund’s holdings. We view the transaction as having a solid likelihood of going through, having been recommended by the board and having the support of Domain’s largest shareholder.
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Nanosonics (NAN) was a key positive contributor during the quarter as it benefitted from both a guidance upgrade and US Federal Drug and Administration approval for its new high level endoscope disinfection product, Coris. This approval paves the way for commercial launch in 1Q26 with a phased roll-out expected for the product. Coris provides a long-term driver for growth for Nanosonics and an expanded total addressable market.
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Cogstate (CGS) was a key positive contributor during the quarter as it benefitted from a guidance upgrade and capital management strategies. Cogstate has now right-sized its cost-base and has a very strong balance sheet. We remain optimistic the company can grow its earnings going forward, while remaining an M&A target itself.
Detractors
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Aroa Biosurgery (ARX) underperformed over the quarter as it provided revised guidance factoring in a weaker performance by its US partner. Unfortunately, this segment continues to face volatility, but we remain optimistic over its strong positioning within the US market. ARX’s valuation continues to look compelling against its peers and sector M&A multiples, so we remain optimistic on ARX.
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Nuix (NXL) shares retreated during the quarter as they softened growth expectations in annualised contract value (ACV) for FY25 to 11-16% (from 15%) which implies a 2H25 weighting due to the slippage of some larger enterprise deals. We note that there are some larger sized deals in the pipeline, of which the timing of their closure will be a key factor to where the ACV growth lands for FY25. We have taken the opportunity to gradually re-add to our holdings on valuation grounds as the company continues to scale its new product offering, after reducing the fund’s exposure prior to the 1H25 update.
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Opthea (OPT) shares were placed in suspension due to the release of OPT’s phase three clinical trial data that showed OPT’s Wet Age-related Macular Degeneration drugs failed to meet the primary end points in both clinical trials. We are very disappointed in this outcome for both our investors and patients. Wet AMD remains one of the leading causes of blindness and we were very hopeful on the treatment outcomes.
Clinical trial technology provider Cogstate was a key positive contributor thanks to the right-sizing of its cost-base and strengthening of its balance sheet.
Portfolio changes
Additions to the Fund
- Alterity Theraputics Ltd (ATH) – We took the opportunity to participate in Alterity’s recent capital raise following the release of its strong phase 2 trial data. The results were even more impressive considering the size of the patient population and severity of symptoms associated with the disease. We see a long-term opportunity to support better health outcomes for patients
- Amotiv Limited (AOV) – Amotiv is an automotive business comprised of a portfolio of high-quality brands with strong market positions in key categories. A high component of earnings is relatively resilient coupled with strong growth opportunities (both organic and acquisitive). The company generates strong cash flows and has a robust balance sheet, resulting in a favourable dividend yield and current on-market buy-back. While valuation is attractive, near-term earnings reflect current market weakness in key segments of NZ, Cruisemaster and subdued volumes in key customer new car models. Over time, earnings are expected to reflect operating leverage from improved cyclical conditions and returns from growth investments.
Reductions from the Fund
- Bigtincan Holdings Ltd. (BTH) – The fund’s Bigtincan position was exited prior to the scheme meeting for the sale to Vector Capital at a small discount to the bid price. The sales enablement software company received a revised bid from Vector in November 2024 of $0.22 per share (from $0.20), a large 83% premium to the pre-bid price, which was subsequently recommended by the board.
- Fletcher Building Limited (FBU-NZ) – Fletcher Building position was exited, taking advantage of a rally in the share price over the quarter to a level that better reflected the near-term earnings risks. The 1H25 result broadly met expectations, however reflected the ongoing weak operating conditions in Australia and NZ. While we remain optimistic over longer-term cyclical recovery, near term uncertainty remains over the upcoming strategic review, and rising risks around market expectations assumed for the pace of the earnings rebound.
We participated in Alterity Therapeutics’ recent capital raise following the release of its strong phase 2 trial data. We see long-term opportunity supporting better health outcomes for patients with neurodegenerative disease.
Sector allocation
Sector overweights
Cash, Health Care, Information Technology, Utilities (renewables)
Sector underweights
Communication Services, Consumer Discretionary, Consumer Staples, Financials, Industrials, Materials, Real Estate
The microcap cap and small caps on the ASX continue to be an active merger and acquisition hunting ground for corporates and private equity.
* 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.
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.
The information contained in this document is believed to be accurate at the time of compilation.