OC Micro-Cap Fund aims to provide investors with strong long-term capital growth by investing in micro-capitalisation (micro-cap) companies with sustainable business models and attractive investment qualities. Micro-cap companies, for the purposes of the Fund, are defined as companies with a market capitalisation of less than $350m at the time of the initial acquisition.
The OC Micro-Cap Fund had a strong September quarter, up +3.7%, underpinned by an excellent August reporting season for many of our key portfolio holdings. This was well ahead of the S&P/ASX Emerging Companies Accumulation Index which was down -5.3% for the quarter. Whilst the trajectory of consensus earnings revisions was generally negative across the Australian micro-cap and small-cap market in the August reporting season, we were pleased with the results of the Fund’s holdings overall and remain optimistic about their prospects for the year ahead, notwithstanding the current global macro-economic challenges.
After a protracted period when speculative resource stocks and unprofitable early-stage biotechnology and technology start-ups performed strongly, driving the S&P/ ASX Emerging Companies Accumulation Index to elevated levels, we are starting to see this unwind. In the June 2022 Micro-Cap Quarterly Investment Review, in the middle of this speculative bubble in unprofitable early-stage businesses, we told investors we would stay true to label and persist with our investment strategy of owning quality, profitable and well managed micro-cap companies, notwithstanding this was heavily out of vogue at the time. As a reminder, our focus on capital preservation and risk management leads us to exclude most unprofitable biotechnology and resources stocks from the portfolio, other than for short-term ‘event driven’ trades. This has proven to be a prudent strategy with the OC Micro-Cap Fund having returned +6.5% over the past 12 months, which is well ahead of the S&P/ASX Emerging Companies Accumulation Index which is down -3.0% over the same period. Whilst this most recent 12 month performance number is nothing spectacular, we would remind our investors that micro-cap valuations remain depressed, and overall liquidity remains low. The investment team remains optimistic that we have a portfolio of quality names and that the Fund will bounce back strongly once confidence and liquidity returns to the emerging companies space.
Pacific Current Group (PAC; +39.4%) rallied during the quarter on the back of a non-binding indicative takeover proposal from Sydney based fund manager, Regal Partners (RPL), which immediately drew out the promise of a competing proposal for PAC from GQG Partners (GQG).
The scheme of arrangement proposal from the ASX-listed fund manager, RPL (existing 12.1% PAC shareholder), was made in conjunction with Melbourne based private funds management outfit, River Capital (existing 19.8% PAC shareholder), and comprised a combination of cash and scrip consideration pitched at a significant 50% premium to the 30-day volume weighted average share price of PAC. The interest from multiple suitors in this long term Fund holding was welcome news to the investment team as we have believed for some time that the market was incorrectly discounting the PAC share price as it built a valuable stable of (predominantly) minority interests in international asset managers across multiple asset classes. Indeed, before the RPL proposal was made public, the PAC board had already formed an Independent Board Committee for the purpose of identifying and executing on options to realise the underlying value of the business for shareholders reflecting inbound interest the board had received in the business. In developments late in the quarter, RPL and River Capital withdrew their indicative proposal citing lack of engagement from the PAC board and its lack of confidence in the process being conducted.
Furthermore, 10 weeks after its initial statement of interest in bidding for PAC, GQG has yet to publicly declare the nature of its proposal for the company although we believe it remains engaged in the process. Despite these developments, OC will continue to hold its PAC position as we are confident the process being conducted by PAC will result in a preferred bidder emerging for the company at a significant premium to current share price levels and likely closer to PAC’s stated internal view of value which is around $12.00 per share.
Embark Education (EVO, +23.3%) was a strong performer for the Fund during the quarter following its delisting from the New Zealand stock exchange, the catalyst for which was the divestment in FY22 of its New Zealand operations to an entity associated with Anchorage Capital Partners. EVO is now a ‘pure play’ Australian provider of early childhood education and care with 24 centres, strong occupancy levels and a robust balance sheet. The EVO management team is headed by industry stalwart Chris Scott who has an enviable listed track record including as the founder and Managing Director of G8 Education (GEM) where he grew GEM’s portfolio from 38 centres to over 500 pre-school education centres in Australia. EVO is experiencing some sector tailwinds including better government funding outcomes, with recent changes to the Child Care Subsidy expected to boost demand for childcare and drive occupancy, as well as strong expected net migration in the coming years which ought to boost demand for EVO’s services. EVO has a net cash balance sheet of $25m and a further $25m of debt capacity and is actively pursuing acquisitions which will materially increase the scale of the business. For instance, if EVO acquired centres on a multiple of around 4.2x EBITDA, this could add $12m EBITDA to the business which would boost the current earnings base (CY23F) by approximately 75%. Given Chris Scott’s prior track record, the execution of these acquisitions would leave the company well placed to undertake an acquisition lead roll-up strategy in the coming years which could see a material re-rate of the EVO share price.
What is OC Micro-Cap OC Micro-Cap 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 OC Micro-Cap has Assets Under Management of 226.05 M with a management fee of 1.2%, a performance fee of 20.50% and a buy/sell spread fee of 0.6%.
How has the investment product performed recently? The recent investment performance of the investment product shows that the OC Micro-Cap has returned 8.45% in the last month. The previous three years have returned -4.37% annualised and 20.24% each year since inception, which is when the OC Micro-Cap 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 OC Micro-Cap first started, the Sharpe ratio is 0.5 with an annualised volatility of 20.24%. The maximum drawdown of the investment product in the last 12 months is -8.03% and -60.82% 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 OC Micro-Cap has a 12-month excess return when compared to the Domestic Equity - Small Cap Index of -2.52% and 2.32% 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. OC Micro-Cap has produced Alpha over the Domestic Equity - Small Cap Index of -0.22% in the last 12 months and 0.13% 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 OC Micro-Cap provide? OC Micro-Cap has a correlation coefficient of 0.88 and a beta of 1.03 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 OC Micro-Cap and its peer investments, you can click here for the Peer Investment Report.
How do I compare the OC Micro-Cap with the ASX Index Small Ordinaries Index? For a full quantitative report on OC Micro-Cap compared to the ASX Index Small Ordinaries Index, you can click here.
Can I sort and compare the OC Micro-Cap to do my own analysis? To sort and compare the OC Micro-Cap financial metrics, please refer to the table above.
Has the OC Micro-Cap 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.
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Comments from SMSF Mates SMSF Mate does not receive commissions or kickbacks from the OC Micro-Cap. All data and commentary for this fund is provided free of charge for our readers general information.
Performance Commentary - August 31, 2023 The OC Micro-Cap Fund enjoyed a solid August reporting period returning +1.2% for the month. This was comfortably ahead of the S&P/ASX Emerging Companies Accumulation Index which returned -4.2% during August.
The standout performers during the August reporting season included: NBN reseller Aussie Broadband (ABB, +29.8%) which was up for the month after reporting a result which included strong free cash flow and FY24 guidance that was in line with expectations. Furthermore, during August the NBN Co announced a new wholesale price regime which could improve ABB margins. Chrysos Corporation Limited (C79, +27.1%) rallied throughout August into the delivery of its FY23 result, where the company confirmed it was on track for FY24 earnings and growth expectations in line with market forecasts. Conversely life sciences device and consumables business Trajan Group (TRJ, -18.4%) sold off after reporting a soft FY23 result and outlining FY24 guidance which was below market expectations.
Performance Commentary - July 31, 2023 The Fund enjoyed a strong start to the new financial year, returning +4.3% for the month. This was just ahead of the S&P/ASX Emerging Companies Accumulation Index which returned +4.0%. The Fund has delivered a small positive return (+0.1%) in a very challenging micro-cap environment over the past 12 months which is ahead of the Index (-2.3%). Pleasingly, sentiment is beginning to improve in the small and micro-cap space with valuation multiples at attractive levels and liquidity starting to show early signs of recovering.
Key contributors to the performance included: Pacific Current Group (PAC; +37.9%) which rallied on the back of a nonbinding indicative takeover proposal from fellow fund manager, Regal Partners, with a competing proposal from GQG Partners flagged as highly likely; retailers Baby Bunting (BBN; +21.1%) and Universal Store (UNI;+ 20.1%) moving higher as the market gained confidence that retail conditions were bottoming as interest rates peak; and Praemium Limited (PPS; -17.0%) which underperformed during the month following a soft 4Q23 flows update, driven by higher gross outflows as clients moved money off platform into term deposits.
The domestic economic outlook appears to be more challenging with conflicting signs as to the strength of the economy. Nevertheless, a near 50-year low unemployment rate of 3.5% and a solid (albeit falling) household savings buffer still leaves consumers in a reasonable position even allowing for near-term inflationary pressures and the lagged impact of the more recent interest rate hikes.
The August reporting season has kicked-off, although the Fund is yet to have any companies report. We remain upbeat on the prospects of our core portfolio holdings and will share further thoughts with our investors in early September once we have analysed the numbers and met with the management teams.
Performance Commentary - June 30, 2023 Global equity markets enjoyed a solid quarter, led by a buoyant US market, with the US economy continuing to remain resilient and inflation continuing to moderate in the world’s biggest economy. Investor enthusiasm around artificial intelligence (AI) also provided a sugar hit to the big cap technology sector, with a stunning result from chip maker NVIDIA igniting the ‘animal spirits’ of investors and fuelling a mini boom in AI exposed big-tech stocks, including Microsoft Corporation and Alphabet (Google’s parent company).
Key US indices were up strongly in the June quarter led by the tech heavy Nasdaq (+12.8%), the S&P 500 (+8.3%) and the Dow Jones Index (+3.4%). Other developed world bourses to perform well included the Japanese Nikkei (+18.4%) and the German DAX (+3.3%), whilst Australia’s ASX 200 eked out a positive return of 0.4%. The Chinese equity market was under pressure on the back of underwhelming economic news with the Chinese Shanghai Composite down 2.2% and the Hong Kong Hang Seng was not immune, falling 7.3% for the quarter.
The domestic micro-cap space was mixed during the June quarter with a raft of negative stock specific news-flow from consumer facing companies and weakness in the Materials sector being balanced by more positive news out of the Information Technology and Industrials sectors. The S&P/ASX Emerging Companies Accumulation Index was down 2.5% for the quarter, with small retailers in the index particularly weak. The OC Micro-Cap Fund fared better finishing the June quarter up 1.6%.
Despite all the doom and gloom in the media, the micro-cap space bucked inflationary pressures and rising interest rates to finish the financial year comfortably in positive territory with the S&P/ASX Emerging Companies Accumulation Index up 7.4%.
Following a solid June quarter, the OC Micro-Cap Fund finished the financial year up 7.7%, just ahead of the broader micro-cap index.
Performance Commentary - May 31, 2023 May lived up to its reputation as a difficult month for equity markets as sticky core inflation and rising interest rates began to take a growing toll on leading economic indicators across global markets. Stock markets were also jittery ahead of the US Congress’ latest legislative action to raise the government’s borrowing limits, with the gravity of a potential default further reinforcing a ‘risk-off’ bias across the back end of the month. Key global bourses including the US Dow Jones (-3.5%), the UK FTSE (-5.4%), the Hong Kong Hang Seng (-8.3%) and the Chinese Shanghai Composite (-3.6%) sold off heavily. The US tech heavy Nasdaq bucked the trend and rallied 5.8%, fuelled by a stunning result from chip maker NVIDIA which lifted sentiment to other big-tech stocks exposed to the artificial intelligence (AI) thematic including Microsoft Corporation and Alphabet (Google’s parent company).
The domestic micro-cap equity index too was under pressure throughout May. A raft of profit warnings across the retail space, including from City Chic Collective, Adairs, Best and Less Group Holdings, Dusk Group and Universal Store Holdings spooked investors and liquidity remained below average for much of the month. The S&P/ASX Emerging Companies Accumulation Index finished sharply lower for the month (-6.3%). The OC Micro-Cap Fund managed to comfortably outperform the index but still fell –4.6%.
OC Funds Management is pleased to announce the nomination of the OC Dynamic Equity Fund for the prestigious 35th Annual Money Management Fund Manager of the Year Awards in the Australian Small Cap Equity category. This recognition reflects the Fund’s strong performance and dedication to delivering outstanding results to its investors. The Money Management Fund Manager of the Year Awards is a highly regarded industry event that acknowledges excellence in the investment management industry. It is Australia’s longest-standing independent and ‘wholeof-market’ fund awards program. The Small Cap Equity category specifically focuses on funds that demonstrate exceptional expertise in navigating the dynamic and challenging small-cap equity market segment. The Fund’s nomination (alongside two other Funds) follows on from the OC Premium Small Companies Fund’s recent nomination in the Morningstar Fund Manager of the Year awards in the Domestic Equities – Small Caps category. It underscores the team’s consistent track record of success in managing small-cap and micro-cap investments over a long time horizon. It also marks the fourth time since 2018, when OC Funds Management actually won the award, that OC Fund’s has been nominated as a finalist in the Australian Small or Small/Mid Cap Equity Fund of the Year category at the Annual Money Management Fund Manager of the Year Awards.
Performance Commentary - April 30, 2023 Global equity markets rallied in April as fears of a global banking crisis moderated and investors became more comfortable that peak interest rates were approaching in key markets such as the US. Global bourses that rallied in April included the US Dow Jones +2.5% and the S&P 500 +1.5%, the UK FTSE 100 +3.1%, the German DAX +1.9%, the Japanese Nikkei +2.9%, and our own ASX 200 +1.8%. The US first quarter reporting season is underway, with roughly 45% of S&P 500 companies reporting by the end of April. Results to date have moderately surprised on the upside with earnings numbers generally underpinned by margin resilience. This has engendered some confidence that the economic slowdown that is likely coming in the US will not deteriorate into a steep and protracted recession in the world’s biggest economy.
The domestic micro-cap market too had a buoyant April with the S&P/ASX Emerging Companies Accumulation Index up +1.5% for the month. The OC Micro-Cap Fund performed ahead of the Index in April returning +3.3% for the month. Corporate activity was again in focus in the small and micro-cap end of the market with Blackmores (BKL) entering a Scheme Implementation Deed with Kirin Corporation and SILK Laser Australia (SLA) receiving a non-binding, indicative and conditional offer from Wesfarmers’ (WES) subsidiary Australian Pharmaceutical Industries. This is hopefully a sign that some confidence is returning to the space following a difficult period since the beginning of calendar year 2022.
Performance Commentary - March 31, 2023 The March quarter was a volatile period across global markets with the ongoing battle between inflationary forces and central banks continuing to take centre stage. March itself was a particularly turbulent month for equities, with steep falls early in the month brought about by regional bank failures in the US that undermined confidence in the global banking system before US and European regulators and central banks steadied the ship with a series of guarantees and liquidity backstops which restored confidence across financial markets. This led to a sharp recovery late in the month as investor concerns about a full-blown solvency crisis from mark-to-market losses on banks’ portfolios receded.
The OC Micro-Cap Fund finished the quarter down 1.5% which was behind the S&P/ASX Emerging Companies Accumulation Index which finished the quarter up 2.4%. Several of the larger stocks in the Emerging Companies Index performed spectacularly well during the quarter before they exited the Index at the March 20 rebalance.
The stocks which drove the indexes quarterly gain included Weebit Nano Ltd (WBT +132.6%) which is an early-stage developer of a next-generation memory semiconductor IP, biotech Neuren Pharmaceuticals (NEU, +66.5%), and gold producer Resolute Mining (RSG, +70.0%). These stocks added a combined 3.9% to the Index during quarter and all had market capitalisations well above our threshold of $500m for initial inclusion in the Fund.
Performance Commentary - February 28, 2023 After a strong start to the calendar year, global equity markets retraced in February driven largely by fears that inflation will prove to be stickier and more persistent than had previously been contemplated by many investors. Increasingly hawkish central banks drove up real bond yields and most key global indices ended the month lower including the US DOW (-4.2%) and S&P 500 (-2.6%), the Hong Kong Hang Seng (-9.4%) and the MSCI All Country World Index (-1.9%).
The February reporting period was a mixed bag across the market, with divergent performance across the board from companies, often in the same sector, and few unequivocal macro-call outs. As expected, few management teams and boards were prepared to give numerical forward guidance, and most were guarded in their commentary on the economic outlook. The S&P/ ASX Emerging Companies Accumulation Index finished February down -4.2%. The OC Micro-Cap Fund performed slightly better (-2.6%) with most of our core holdings producing solid results indicating that our investment theses remain intact.
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