6/30/2022 12:00:00 AM

Fund Reviews: Australasian Growth

Written by Michael Goltsman, Portfolio Manager 

Australasian Growth Fund

The Australasian Growth Fund returned -8.1% for the month, bringing it to a 12-month return of -32.7%, and 12.2% annualised since inception. 

June saw a broad decline across the market, with the Small Ordinaries benchmark declining by 12.8%. The Australasian Growth Fund performed better than the broader index, supported by the fund’s defensive growth tilt.

Longer duration technology stocks were the key detractors from the portfolio’s performance this month, including:

Symbio – The company held an investor day and provided a trading update which showed it is operating at the bottom end of its FY22 EBITDA guidance range as Singapore ramps up slightly slower than expected. We continue to like the company’s investment attributes, with the shares trading at a high-teens PE ratio and earnings set for multiple years of strong growth from structural tailwinds in the core CPaaS market as well as expansion into new Asian markets.

Life 360 – The shares declined by -23.4% on no news this month. Life 360’s share price continues to be swayed in the short term by changes in valuations across the global technology sector.

We were pleased with our defensive growth holdings this month as they were able to outperform the broader market. In particular we had positive contributions from:

Pacific Smiles – The shares rose 16.2% during the month as the company revealed that trading in May rebounded following a weak April. We expect patient attendance and practitioner absenteeism to stabilise in the coming months which will allow investor attention to re-shift back to the stock’s high-quality growth story. 

IPD Group – Electrical distributor IPD Group announced that it will materially exceed its FY22 earnings guidance which supported the shares in June. IPG is benefiting from the structural electrification trend and market share gains which we expect will continue for a number of years.

Written by Mike Ross, Portfolio Manager

Australasian Dividend Growth Fund

The Australasian Dividend Growth Fund returned -8.4% in June. The fund has returned -12.7% over the last 12 months and 15.6% p.a. since inception. 

June was a tough month as equity markets continued to decline. The fund outperformed the Small Ordinaries Accumulation Index, which fell 12.8%. We were helped out by our higher cash levels, market hedging, and lack of exposure to resources (which underperformed industrials). Still, the sell-off was broad and brutal. 

In company news, Macquarie Telecom advised it will deliver a result at the higher end of its previously announced EBITDA range of $85-$88m, delivering eight consecutive years of growth. The company also announced a delay to its IC3 Super West data centre project at its Macquarie Park campus. The stock finished the month down 3%.

MA Financial (ASX: MAF) fell 27% despite providing a strong trading update at its investor day. Key metrics are holding up and while performance fees generated by equities funds will be down this year, we believe this will be partially offset by tailwinds in other areas of the business such as hospitality and credit. Diversification has been a key theme for MA Financial over recent years; it has diversified distribution channels and asset classes which should mean the business is more defensive in a volatile environment. Should the business demonstrate these characteristics at coming results, we believe the market will wake up and realise the 5-6x EBIT multiple currently implied for a growing asset management business is too light. 

Smartgroup fell 27% after announcing it had lost a key contract with the Department of Education and Training in Victoria. The company also updated that revenue and EBITDA would be flat on the previous corresponding period. 

Johns Lyng (ASX: JLG) upgraded its earnings guidance by 5% to $83m EBITDA. In FY22, JLG incurred mobilisation costs in relation to the recent storm events on the east coast of Australia which should support job volumes and margins in FY23. The stock ended the month 4% lower.

In terms of portfolio activity, we have been adding to existing holdings (we believe have been) unjustifiably caught up in the market sell-off. These have been funded by outperformers or ideas with lower conviction levels or expected returns. We have also been adding a few new positions to the fund. 

The half-yearly distribution of 5 cents per unit was processed on 30 June and should now show in your investor portal.

Written by Mark Devcich, Portfolio Manager

Australasian Emerging Companies Fund

The Australasian Emerging Companies Fund returned -5.2% for the month, bringing it to a 12-month return of -15.5%, and 18.4% annualised since inception. 

It was another savage month for the ASX micro-cap market with the Emerging Companies index down 18.3% for the month. The fund entered the month with higher cash levels of more than 20%, and a short futures position. Pleasingly, the more significant positions held up relatively well versus the market. However, frustratingly, several positions had substantial drawdowns on low liquidity, potentially resulting from the tax-loss selling season in Australia, which encourages investors to realise losses in stocks to claim tax deductions before the end of the financial year in June.

Newsflow-wise, there were earnings guidance updates from Kip McGrath (ASX: KME), Excelsior Capital, IPD Group, GTN and Viva Leisure (ASX: VVA). 

Most of the updates have been particularly pleasing, even if the share-price reactions are muted. However, the real test will be what the companies will be able to achieve in FY23, which will be a much more difficult business environment in the face of weaker demand and higher costs. 

A number of our stocks, KME, VVA and Aussie Broadband, also saw director-buying during the month, which is one of the best indicators of future performance. 

Excelsior Capital is one of the significant value opportunity anomalies that often exist in the ASX micro-cap universe. It runs a consistently profitable electrical business that recently guided to earn ~$12m EBIT for a ~11% margin in FY22. Furthermore, the company has a net tangible asset of 65c from its investment portfolio and 96c from its electrical business. An excellent comparable valuation is IPD Group, which we also own, which trades at a valuation of 8x FY22 EBIT. This would imply a valuation of $12m x 8 = $96m or $3.30 and then adding the value of the investment portfolio of 65c = $3.95 vs a current share-price of $1.75. Eventually, the electrical business will be sold, but until then the business continues to accrue value earning a 22% return on equity.

We exited a number of smaller positions where we have concerns around their balance sheet: Atomos and Imricor.

One new position was added that is gushing cash flows right now, which we will disclose once our position has been built. We took advantage of the share price fall to initiate a position that we are building. This business has an active and supportive shareholder base to ensure the cash flow is immediately returned to shareholders.

There is also a subset of the portfolio that we are holding as we believe there is a high chance of corporate activity for these stocks. There are still a number of small positions that we are in the process of exiting, unfortunately, liquidity has deteriorated in many of these companies. 

Thank you for entrusting your capital with us.

Written by Mark Devcich, Portfolio Manager

Australasian Growth 2 Fund

The Australasian Growth 2 Fund returned -12.0% for the month, bringing it to a 12-month return of -38.0%, and 9.4% annualised since inception.

June was a difficult month again as we saw a broad-based sell-off across the market, and cyclical areas of the market which had previously held up well, like resources and financials also fell. These sectors started to retreat as concerns around the economy weighed. Inflation expectations, and therefore interest rates, are also moving down in concert, creating the opposite conditions to what we have seen at the start of the year. This is also what happened in 2008 as the market fell, and typically in this environment, defensive and structural growth stocks outperform relative to the more cyclical stocks.

Although there was little news flow for the portfolio companies, many retreated with the market. Few changes to the portfolio were made, apart from largely adjusting weightings of positions. We continue to add to positions we feel have a resilient earnings outlook or may benefit from a more challenging economic environment. We are also reducing those where we think there is a more difficult earnings outlook that the market may not appreciate. Heading into the August reporting season, it will be a dynamic environment to give earnings guidance for the next year, given the combination of a slow-down in demand alongside rising costs. However, some companies’ share prices have retreated to such an extent that any slight positive news flow results in large rallies. It is essential not to get too caught up in the price action of individual securities dictating sentiment around the fundamentals.

We have exited our position in Uniti Wireless, a very successful investment, which was trading at a slight 1.5% discount to the offer price of $5 to deploy into other ideas. Tyro, on the other hand, was an extremely poor investment. We exited the small remaining balance of our holding during the month as the CEO left. Tyro has been largely on track with their transaction volume, which they report weekly. However, the margins that Tyro will be able to earn are in structural decline from increasing competition and needing to move up to service larger size merchants. The increasing cost investment that is required will result in an earnings profile far below our initial expectations.

Thank you for entrusting your capital with us.

Information is current as at 30 June 2022. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.