Flinders Emerging Companies B is designed to provide medium to long term capital growth potential and seeks to outperform the S&P/ASX Small Ordinaries Accumulation Index by 5% per annum before fees over rolling three year period. The fund will invest in a diversified portfolio of stocks comprising listed companies that are outside the S&P/ASX 100 Index (90%-100% of the fund) with the remainder of the fund in cash(0%-10%).
The S&P/ASX Small Ordinaries Accumulation Index finished 1.9% lower in the September quarter with industrials and resources performing in line with each other (although resources were well in front over the last month).
Global markets turned sour in September, dragging the quarter into the red. Rapidly rising bond yields and concerns about China’s growth rate were the key reasons for the bearish sentiment. Large caps outperformed smalls later in the quarter and the Australian equity market fared better than most other international markets.
In the US, the S&P 500 declined 3.7% and the Nasdaq 4.1% but within the Nasdaq large tech continued to outperform the broader index. The Dow (-2.6%) was a little better but helped by the strong performance in energy stocks. European markets were mixed, with Germany and France weak, but the UK FTSE managed a 1.0% rise. Asian markets were also weak with China and Hong Kong down 2.9% and 5.9% respectively. Japan was down 4% and Korea 3.9%. NZ has been a notable struggler with the market down for the quarter, half and full year (sadly on its own with that stat…).
Commodities were all over the place with gold down 3.7% (not helped by a strong USD), but WTI oil was up 28.9%, thermal coal up 25.0%, iron ore up 5.3% and aluminium up 10.1%. Clearly, markets aren’t convinced it’s sustainable as the resources sectors were down for both the month and quarter – perhaps lithium was the focus, it has many grades and pricing formats, but all were exceptionally weak over the quarter.
The pivotal move over the quarter and especially the last month has been the sharp rise in bond yields – and with the exception of a brief period before the GFC, the US 10 year reached a 20 year high. While not helped by rising energy prices and US debt ceiling politics, markets were pricing a higher for longer inflation outlook. The same dynamics are the case in most advanced economies – China being the obvious exception. The converse is that economic news is generally strong and corporate profitability is hanging in there. Seems that Goldilocks is potentially being ignored.
For smaller companies, the general consensus is that the higher rates, rising costs and an iffy consumer means there is no reason to consider them, but we believe the market is wrong to take a blanket approach to the sector. Money has come out of small-caps and with less liquidity it has meant that there have been many companies with good growth prospects that have been over-sold and provide excellent upside. If confidence in the earning outlook improves and investor confidence lifts, it is this asset class that will move.
It is easy to sit in a TD yielding 4% but with a 3% yield and good earnings growth that will manifest itself in capital growth, we believe investors should keep an eye closely on the small-cap sector.
What is Flinders Emerging Companies B Flinders Emerging Companies B is an Managed Funds investment product that is benchmarked against ASX Index Small Ordinaries Index and sits inside the Domestic Equity - Small Cap Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The Flinders Emerging Companies B has Assets Under Management of 67.73 M with a management fee of 1.1%, a performance fee of 20.50% and a buy/sell spread fee of %.
How has the investment product performed recently?
The recent investment performance of the investment product shows that the Flinders Emerging Companies B has returned 7.1% in the last month. The previous three years have returned -1.3% annualised and 18.74% each year since inception, which is when the Flinders Emerging Companies B first started.
How is risk measured in this investment product?
There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since Flinders Emerging Companies B first started, the Sharpe ratio is 0.43 with an annualised volatility of 18.74%. The maximum drawdown of the investment product in the last 12 months is -9.64% and -31.96% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.
What is the relative performance of the investment product?
Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The Flinders Emerging Companies B has a 12-month excess return when compared to the Domestic Equity - Small Cap Index of -3.47% and -0.95% since inception.
Does the investment product produce Alpha over its Peers?
Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. Flinders Emerging Companies B has produced Alpha over the Domestic Equity - Small Cap Index of -0.32% in the last 12 months and -0.18% since inception.
What are similar investment products?
For a full list of investment products in the Domestic Equity - Small Cap Index category, you can click here for the Peer Investment Report.
What level of diversification will Flinders Emerging Companies B provide?
Flinders Emerging Companies B has a correlation coefficient of 0.97 and a beta of 1.06 when compared to the Domestic Equity - Small Cap Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.
How do I compare the investment product with its peers?
For a full quantitative report on Flinders Emerging Companies B and its peer investments, you can click here for the Peer Investment Report.
How do I compare the Flinders Emerging Companies B with the ASX Index Small Ordinaries Index?
For a full quantitative report on Flinders Emerging Companies B compared to the ASX Index Small Ordinaries Index, you can click here.
Can I sort and compare the Flinders Emerging Companies B to do my own analysis?
To sort and compare the Flinders Emerging Companies B financial metrics, please refer to the table above.
Has the Flinders Emerging Companies B been independently verified by SMSF Mate?
This investment product is in the process of being independently verified by SMSF Mate. Once we have verified the investment product, you will be able to find more information here.
How can I invest in Flinders Emerging Companies B?
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Comments from SMSF Mates
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Performance Commentary - June 30, 2023 The S&P/ASX Small Ordinaries Accumulation Index finished 0.54% lower in the June quarter with industrials outperforming resources by almost 10%.
US tech stocks once again took the lead with the 12.8% rise in the Nasdaq driven by a small number of large companies. In contrast, the Dow Jones posted a more modest 3.4% rise as cyclicals struggled. This was despite most US economic releases being stronger than expected leading to the assumption of more aggressive interest rate rises by the Fed. US June quarter profit releases will be fascinating.
Other global markets were generally positive with the Japanese Nikkei jumping a massive 18.4% in the quarter. Taiwan and Korea were also strong but in contrast, China and Hong Kong were down 2.2% and 7.3% respectively. European markets were little changed. In contrast to equity markets, commodity markets were a sea of misery. Gold was the best of them with a fall of 2.9%. Oil (WTI) fell 6.9%, Copper 8.1% and other base metals down over 10%. Thermal coal fell 27.8%, iron ore 10.6% and it’s time to fatten the animals, corn is now 24.8% cheaper…
It is clear that this year’s economic performance from China has been disappointing. Consumer spending post Covid lockdowns has been more modest than expected and savings rates are exceptionally high. Stimulus from the Government has been insipid and exports sluggish. And now there is talk of deflation. All grim. We expect stimulus measures and an improvement in economic conditions over the remainder of this year but are aware that social cohesion is as much a focus as economic growth. Any fall in employment and wages will focus authorities on kick starting growth.
The Australian economy remains a balancing act. While the RBA paused, they still pointed to further rises being likely. There is clear evidence from companies we speak to that consumer demand in some areas is beginning to slow, whereas others remain surprisingly buoyant. A number of discretionary retailers (many that are ex-ASX 100 stocks) have downgraded profit expectations on both lower demand and higher costs.
Media companies have seen lower ad spending from certain sectors and the challenges in the home building industry are well known. That’s the bad stuff.
The flip side is that the certain industries are doing well. Travel & tourism, healthcare and aged care are still recovering from the Covid period, infrastructure is still strong and with the energy transition taking place, will continue to be. Certain financial services are also in good health as is mining capital expenditure, transport, automotive and agriculture.
Sentiment will be whipped around by short term economic releases, but we continue to be focussed on companies that have good growth prospects, well managed and have low debt and low capital needs. That’s reflected in the 38 investments in our portfolio.
Performance Commentary - May 31, 2023 The Fund returned -4.4% in May, -1.1% below the benchmark return of -3.3%.
Key Contributors:
Billing software company Gentrack Group (+29.5%) announced their 1H23 result, which exceeded expectations, while both FY23 and FY24 revenue guidance was upgraded. A relatively new holding to the Fund, Gentrack has undergone a significant turnaround and investment phase, which is now seeing the company win new utilities customers globally, many of whom operate on archaic systems in critical need of upgrade. The addressable market for the company globally is substantial, and currently serviced mostly by SAP and Oracle who have legacy solutions ill-fit for the modern needs of utilities customers. A partnership with Salesforce is helping win new business.
Bus and tourism operator Kelsian Group (+11.5%) rallied without specific new news but rather a reminder to investors (via a conference presentation) that they have a number of favourable attributes, particularly in this environment; namely that costs are well hedged through their contracts, that a rebound in tourism is benefitting their Marine and Tourism businesses, and that a strong tender pipeline of bus contract opportunities exists. The recent major acquisition of All Aboard America! was also due to settle imminently, with early indications suggesting that the acquisition should at least deliver to expectations.
Private health insurer NIB Holdings (+9.5%) also presented at a conference revealing net policyholder growth and net margins remained robust. The company also acquired its fourth National Disability Insurance Scheme (NDIS) plan manager, Port Macquarie based All Disability Plan Management. NIB made its first acquisition in the NDIS space only in November 2022, and has been focused on growing this capability under its Thrive brand. Several other acquisitions are under consideration, which if successful, would see Thrive become a top three plan manager in the NDIS. Similarly, fund incubator Pinnacle Investment Management (+8.8%) presented at a couple of conferences and provided updated FUM and flow data to 31 March 2023. Despite a cautious stance across their institutional, financial adviser and individual investor base, net inflows were seen. Markets were positive over the March quarter as well, helping increase FUM levels.
Key Detractors:
The key disappointment for the Fund over May was engineering and manufacturing group Austin Engineering (-25.6%). The company materially downgraded its FY23 earnings guidance, primarily due to their largest customer delaying orders of truck trays. While the contract is signed, actual purchase orders have been delayed; a separate announcement later in the month suggested that 85% of the purchase orders had been received, however the lead times mean that these orders will benefit revenue in the 2024 financial year. Hence, not lost earnings but deferred. Invoice financing firm Earlypay (-24.1%) gave up the gains from the previous month on no news. Earlypay is emblematic of many microcap stocks currently, where perceived risk and illiquidity has resulted in a lack of investor appetite. For stocks tracking near 12-month lows, tax-loss selling has exacerbated poor performance further.
The three remaining key detractors are similar in that they are resources companies (which as mentioned had a tough month). This is despite some positive stock developments. Emerging mineral sands producer Strandline Resources (- 15.3%) has been in the process of ramping up production at its Coburn Project in WA, with its sixth shipment of Heavy Mineral Concentrate (HMC) being completed. ~$60m of revenue has been generated from these shipments to date, with a steady rate of one shipment per month being expected going forward. Remarkably, product is being sold at 40% more than what their feasibility study was based on, given prevailing market prices, a terrific outcome for revenues.
Performance Commentary - April 30, 2023 The Small Ords Accumulation Index edged its way to a 2.78% gain in April, outperforming large caps by over 1.0%. Industrials performed better than resources, not surprising given the weakness in a number of commodity prices over the month. Sector returns were mixed with REITs making a comeback, technology continuing to improve but consumer discretionary and energy once again lagging the market. Global equity markets had a solid month despite mixed economic news and greater volatility in bond and commodity markets. In the US the Nasdaq took a breather and finished square while the Dow Jones added 2.5% and the S&P500 up 1.5%.
European markets continued to move higher with the UK FTSE up 3.1%. Germany and France added 1.9% and 2.3% respectively, and outside the Nasdaq have been the two best performing major markets over the past year – who picked that? Asian markets also had a solid month with Japan up 2.9%, China 1.5%, Korea 1.0% but Hong Kong slipping 2.5%. Commodities were mixed but the prominent feature was the 17.3% fall in the iron ore price which was driven by easing steel prices and demand both in the US and China.
Gold was steady, as was oil after dipping toward the end of the month. Soft commodities were also particularly weak, with wheat and cotton now losing over 40% each in the past year. In an interesting development in global energy markets, US gas prices hit a 30 year low late in the month and European gas prices are now lower than the wholesale spot price in Australia. Again, who would have picked that? Despite investment markets still changing direction suddenly on economic releases, there has been more underlying consistency.
Bond yields came back on the US bank issues and interest rate rises are clearly biting in most OECD countries but not enough to cause unemployment to rise significantly. While every economy has its nuances, Australia would seem little different. Credit is tighter, the consumer is watchful with spending but still has an income. The budget with its ‘cost of living’ allowances will be slightly stimulatory again.
Performance Commentary - March 31, 2023 The S&P/ASX Small Ordinaries Accumulation Index finished 1.88% higher in the March quarter with resources slightly outperforming industrials. Large caps fared slightly better than smalls with the ASX100 rising 3.50% for the quarter.
With the lead from large US tech stocks (the Nasdaq was up a robust 16.8% for the quarter) local technology stocks did well together with the gold sector which recovered very strongly. Consumer facing stocks (with the exception of travel related companies) continued to struggle, as did financials and REITs.
Australia was a laggard amongst global markets over the quarter. European markets were particularly strong with France and Germany up 13.1% and 12.3% respectively. The UK still can’t get out of its own way – only up 2.4%. Asian markets were also very strong, Japan up 7.5%, China up 5.9%, Korea and Taiwan up 10-12% each. Commodities were all over the place. Notable rises were gold (up 8.8%) on US Dollar weakness and flight to safety, and iron ore (up 8.1%) but the energy complex, including gas, oil and especially coal was very weak. Soft commodities were also under pressure – both these sector moves will be very important in bringing down inflation in the coming months.
Economic releases were generally stronger than expected during the quarter – as were a number of inflation indicators. This led to bond yields rising on the expectation of continued Central Bank moves. That trend came to an abrupt halt with the collapse of Silicon Valley Bank (SVB) and runs on a number of smaller regional US banks, then UBS having to subsume Credit Suisse, all in March. In that month alone, US 10-year yields moved to a high of 4.036% on inflation fears to a low of 3.330% on banking sector fears before finishing the quarter at 3.573%. So, has fear subsided? Well, it would seem so for the time being. Prompt action by banking regulators and central banks seems to have settled that industry and inflation is clearly coming down. Not surprising that markets finished the quarter on a more optimistic tone.
Performance Commentary - February 28, 2023 The Fund returned -3.18% in February, 0.52% above the benchmark which fell 3.70%.
Key Contributors: Insurance broker, AUB Holdings (+17.4%) continues to perform well. The company released a strong half yearly profit report driven by improving insurance rates in Australia and a solid contribution from its newly acquired Tysers insurance business in the UK. We expect further improvement in the current half from both the domestic business and Tysers as the insurance rate cycle continues to be supportive.
After a poor month in January following a profit update that included a costly contract write-down, utilities services group, Service Stream (+12.9%) released an interim result that provided evidence that the underlying businesses are performing well. This was highlighted by the growth in its telecommunications division that is seeing increased spending by NBN and mobile operators now beginning to roll out their 5G services beyond inner urban areas. While the utilities business dragged on first half margins, fewer weather interruptions this half will see profitability improve.
Bus, ferry and tourism operator, Kelsian (+12.5%) released a solid interim profit result with an exceptional performance from its marine and tourism businesses. It also announced it had been awarded two more Sydney bus concessions that will make it the largest operator in the Sydney metro area for the next seven years. While the stock has been a strong performer for the Fund over the quarter, it’s improving outlook and further contract opportunities gives us confidence of more upside this year. Building services provider, Johns Lyng Group (+7.3%) also released a solid interim.
The stronger than expected result was driven by a large lift in profitability from its catastrophe division with increased work from floods in NSW and Victoria and a contribution from the US following Hurricane Ian. The US based Reconstruction Experts business also performed well with its business pipeline up 20% in the half.
Performance Commentary - January 31, 2023 The Fund returned 5.54% in January, 1.02% below the benchmark which rose 6.56%. Key Contributors: Multi affiliate funds management group, Pinnacle Investment Management Group (+19.1%) bounced strongly in January after a lacklustre couple of months. While higher equity markets helped funds under management, the company has a much broader suite of asset classes and revenue diversity than it did a number of years ago.
Despite this, the Pinnacle share price does seem to trade as a global growth stock proxy due to its holding in Hyperion Asset Management which is a growth focussed equity manager, but only 12% of group FUM. Mining equipment manufacturer, Austin Engineering (+22.8%) performed well in January in line with a number of other mining contractors that continue to see strong demand for product and better pricing. The company is focused on better utilising its presence in the Americas and Indonesia, keeping costs under control and integrating the recent Mainetec excavation bucket acquisition.
Late in the month the company announced an increased manufacturing deal to supply RIO which doubles its order pipeline from a year ago out to late 2024. Debt collector and unsecured lender, Credit Corp Group (+15.1%) also had a strong month. The company has a growing collection business in the US where the credit cycle is much more advanced than Australia, debt books are readily available from credit card lenders and at attractive yields.
This is offsetting the domestic business where credit quality remains sound and credit card balances are exceptionally low. Interestingly, demand for loans from the low credit score part of the market has picked up in Australia which would suggest that inflationary pressures are belatedly starting to bite that sector. As mentioned, most resource companies performed well in January. Copper producer, Sandfire Resources (+14.9%) continued to outperform. The company is progressing well towards early production from its Motheo project in Botswana. First production is still expected before the end of June, a good outcome in an industry environment of cost blowouts and delays. Lithium developer, Liontown Resources (+18.9%) recovered after a rocky December despite announcing significant cost over-runs expected at its large Kathleen Valley project in WA. While the capacity of the project has risen from 2.5 million tonnes per annum to 3 million tonnes under the new specifications, the cost has ballooned from $593m to $895m which results in a funding shortfall of close to $200m that has to be covered over the next year – modest in the project context but the company will have to reassure the market that the revised costs are realistic and conservative.
Performance Commentary - December 31, 2022 The Fund returned 3.76% in the December quarter, 3.77% below the benchmark return of 7.54%.
Key Contributors:
Given the month to month (let alone week to week) volatility in markets and the AGM season, it wasn’t surprising that there were some aggressive stock moves – in both directions. Copper mining company, Sandfire Resources (+47.4%) benefitted from the 9.7% rise in copper prices over the quarter but of more importance was a modest capital raise that addresses the funding of its Motheo project development in Botswana and working capital to explore and expand its reserves at its Spanish MATSA project. These are both long life assets that will provide significant growth for the company over future years and replace the DeGrussa project that is effectively finished. The production infrastructure could be sold to another regional gold/copper operator. Another positive for the company has been the recent decline in European energy prices that has helped lower operating costs at both mine and production facilities at MATSA.
Continuing recovery in the travel sector has seen online travel services company, Webjet (+29.8%) re-rate over recent months. The company released a very strong half year profit report in November that showed bookings already approaching pre-pandemic levels in Australia and European earnings also close to pre-pandemic levels. Pleasingly, the company hasn’t wasted a crisis, with operational improvements and efficiencies being demonstrated in the better margins delivered. The company also produced outstanding cash generation which was used to pay down term debt and return to normal covenant testing well ahead of schedule. Also re-rating over the quarter, was retirement village developer and operator, Lifestyle Communities (+25.7%). Despite the weakness in the overall property market due to rising rates, at the November AGM, the company confirmed that unit sales remained strong, construction was still on track despite the wet weather and pricing also remained solid. Graphite producer, Syrah Resources (+25.6%) had a good quarter despite losing some ground in December. The company announced an extension of its supply agreement of active anode material (AAM, high spec graphite for lithium batteries) to Tesla on completion of their US based Vidalia AAM facility. This will see Tesla account for 37% of the company’s total output along with supply arrangements with both Ford and LG Chemical. Syrah also announced that it had been selected by the US Department of Energy for a grant of up to US$220m to fund the expansion of Vidalia.
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