Written by Victoria Harris, Senior Investment Analyst and Co-Portfolio Manager
During the month I flew to Canada to meet ~20 companies. I was pleasantly surprised with the calibre of the companies, and their management teams.
The country’s main market index, the Toronto Stock Exchange (TSX) has returned just over 5% in the last 12 months compared to the S&P 500 which has returned over 16%. Therefore, unlike its dominating neighbour, company valuations in Canada appear to be less overvalued, making them more attractive. The Canadian market is similar to one closer to home – the Australian market. Both the TSX and ASX are heavily weighted towards Resources and Energy companies, both markets use similar reporting standards which makes analysis easier, and they both provide investors with great access to top level management.
We met with companies across a broad range of sectors of Consumer, Technology and Industrials, but all with a common theme of being Founder-led and/or having large staff ownership. Another theme was ‘Inflection’ businesses. These are technology companies which are in the process of transitioning their business models from some form of legacy platform to a subscription-based (or SaaS) business model. SaaS businesses typically command higher multiples due to their scalability, operating leverage and high recurring revenue. Hence, if you can invest in a company pre ‘inflection’ point, you’ve got a high probability of experiencing strong earnings growth plus multiple expansion.
The beauty of the Global Fund is the geographical flexibility – if one market looks overvalued, we have the flexibility to allocate resources to look for investment ideas in more attractive markets. This in turn is more likely to generate superior investment returns for our clients. As with everything, this, of course, cannot always be guaranteed.
If you can invest in a company pre ‘inflection’ point, you’ve got a high probability of experiencing strong earnings growth plus multiple expansion.
A good take off
The Global Fund returned 1.2% for September as global markets continue to go from strength-to-strength. Within the direct holdings, the positive fund performance was driven by Curtis Banks (AIM:CBP), Tecnoinvestimenti (BIT:TECN) and - a new addition to the Fund during the month – Chegg Education (NYSE:CHGG).
Chegg Education is a US education-technology company that provides an all-digital interconnected learning platform for students. This is an ‘inflection’ business (as mentioned previously), whereby the business model is transitioning from its legacy model of students purely renting textbooks to a fully-digital, subscription-based model offering study, tutoring and writing solutions. It has strong brand recognition, financial flexibility and a very large addressable market.
The two main detractors from Fund performance for the month were Quixant (AIM:QXT) and Xenith IP Group (ASX:XIP). We exited our position in both holdings during the month. We are also currently working on several new ideas from the research trip that could be potential investments for the Fund.
Written by Daniel Sims, Investment Analyst
Working at a mile a minute
The UK and European team had an extremely busy month as Chris, Mike and myself travelled to London for two weeks of back-to-back meetings. We met with over 40 management teams, sell-side analysts, and economists. The trip proved to be one of our most fruitful, with at least three new ideas coming out of the meetings. Chris and I will now subject these companies to our rigorous due diligence process and flesh out the investment case in further detail, before deciding whether to commit a meaningful portion of the fund’s capital.
The trip proved to be one of our most fruitful, with at least three new ideas coming out of the meetings.
Good news travels fast
Some of the broader macro themes we noticed:
- United Kingdom: Economy continues to fair quite well
The UK economy, as far as London is concerned, continues to fair quite well. However, some early warning signs of a slowdown in consumer confidence and spending are starting to appear, with several listed food franchises downgrading earnings in recent months. The portfolio continues to hold very little exposure to the British consumer, however, given the savage share price movement in some companies, we are beginning to devote some time to evaluating specific opportunities.
- Europe: The best it’s been in years
Several management teams with significant operations across Europe indicated the economy is the best it’s been in years. We met a swathe of companies operating in a range of industries who were cautiously optimistic. Unfortunately many of the companies we consider “investment grade” have shares prices that already reflect this improved outlook and many are now trading at eye-watering valuations. However, as we are a concentrated investment firm, we don’t need to find many ideas to produce strong performance and we’re confident that we’ll continue to find pockets of under-appreciated quality and growth.
Travel light: Reduce cash levels
The Growth UK & Europe Fund closed the month up 2.0% driven by STM Group and SafeCharge, which both released interim results. While the cash weighting continues to be higher than we would like, we have made several new investments that should build into material positions and reduce the cash balance. We remain optimistic in the outlook for our major holdings and have a number of exciting prospects to evaluate post our trip. We look forward to providing updates on these investments in due course.
Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser.