February was a tough month for the funds. Usually in February we see big movements in our Australian positions as they report their half-year results. This earnings season, however, was overshadowed by the spread of the Coronavirus outside of China. A number of companies used the reporting season update to give early indications of how they would be disrupted by Coronavirus. Some travel companies provided large profit downgrades, while other companies more indirectly affected by the manufacturing supply chain have not yet been able to quantify the impact.
Markets sold off heavily, especially smaller companies, with large price movements on little volume. The selling was broad based and even gold stocks, meant to be a safe-haven during times of turmoil, fell late in the month. We began opportunistic buying on the days where clear panic set in, especially early in the day.
Since month-end we have seen an emergency 50bp cut in interest rates in the US and a 25bp cut in Australia.Although positive for equity valuations (the equity risk premium – the difference between earnings yield on equities and government bond rates – is at levels last seen at the end of the 2018 market sell-off, suggesting equities are relatively cheap), it does raise concern whether economic growth is likely to be weaker than expected and that is why central banks are cutting rates aggressively.
Australasian Fund summaries
All the funds outperformed their index during the month, although this was little consolation, and stocks that declined the least were the relative winners during the month. The Emerging Companies index was down 14% in local currency terms during the month – one of its worst one month returns on record – while the Small Ordinaries index was down 8.7%.
The funds benefited from having cash levels of ~20%+ plus market hedging, which was put on relatively early as we saw the spread of Coronavirus outside China.
Key contributors for the Growth Fund were Macquarie Telecom (MAQ.ASX) and West African Resources (WAF.ASX). The main detractors were EML Payments (EML.ASX) and Atrum Coal (ATU.ASX). EML suffered from profit taking as it had been a large outperformer and despite recording a strong result, where they lifted the low end of the guidance range, some investors were seeking more.
The Emerging Companies Fund’s large detractors were Kip McGrath (KME.ASX) which fell 40% and erased all the gains since November and Citadel (CGL.ASX) which raised capital at a large discount to fund a significant acquisition in the UK. The extra shares issued caused share-price weakness. The contributors were ICS Global (ICS.ASX), a long-standing position, which increased their underlying profit by 100% from the same period a year ago.
Key contributors to the Dividend Fund were Johns Lyng (JLG.ASX) which showed the resiliency of their business model being unaffected by macro-events. The main detractors were ServiceStream (SSM.ASX) and McPhersons (MCP.ASX). McPhersons fell on concerns for their product selling into China.
Growth 2 Fund benefited strongly from a great result from IDP Education (IEL.ASX) which reported one of the best results from reporting season. Although leveraged to international student education, the stock rallied nearly 30% for the month. Money3 (MNY.ASX) also produced a solid result and indicated they are likely to obtain bank funding at a far more competitive cost of capital compared to their current facilities, which will enable strong loan book growth and lower interest costs for FY21. The main detractors were EML Payments (EML.ASX) and McPhersons (MCP.ASX).
International fund summaries
The International Funds fared better than the Australasian funds benefiting from some currency tailwinds and slightly higher cash levels. The Global and UK / Europe Funds were down 4.2% and 6.2% respectively compared to local currency index returns down more than 8%. Climate Friendly Fund was only down 4% compared to its index being down 8%.
Key contributors for the Global Small Companies Fund were NHN KCP (060250:KS) which is a beneficiary from increased online payments and IMI Mobile (IMO.LN) which also has negligible direct exposure to Coronavirus impacts.
For Growth UK & Europe, key contributors were again IMI Mobile (IMO.LN) and Flatex (FTK:Xetra). Flatex is benefiting from increased trading activity as volatility has increased. Detractors for both Global and UKE Funds were DotDigital (DOTD.LN) and Boku (BOKU.LN) both of which fell with the broader market sell-off.
For Climate Friendly, key contributors were NHN KCP (060250:KS) and Alibaba (BABA.US) which is seeing increased demand on its online e-commerce platform, despite delays from logistics providers, as people are discouraged from leaving their houses to shop in certain parts of China. Detractors were Liveperson (LPSN.US) which had a disappointing result signalling increased expenditure for growth next financial year.
Despite the difficult month we are comfortable with our portfolio positions. We have been readjusting the portfolios, deploying more cash into stocks which have fallen heavily and reducing those positions which have been more resilient, which we think is the right approach right now.
Thank you for entrusting your capital with us.