SUMMARY
The Fund rose 1.5%1 in October, outperforming the Small Industrials by 0.9% and outperforming the Small Ordinaries Indices by 1.0%1. For the 12 months to October, the Fund was down 4.3%1, underperforming the Small Industrials Index by 0.7%1 and underperforming the Small Ordinaries Index by 1.9%.
COMMENTARY
The Fund rose 1.5%1 in October, outperforming the Small Industrials by 0.9% and outperforming the Small Ordinaries Indices by 1.0%1. For the 12 months to October, the Fund was down 4.3%1, underperforming the Small Industrials Index by 0.7%1 and underperforming the Small Ordinaries Index by 1.9%.
Global markets fell over October due to a rise in the reported cases of Covid in Europe and the USA. The US market dropped 2.8%, while European markets fell over 5%. The US election also created a global distraction during the period, affecting sentiment.
The Australian market bucked the trend however, rising 1.9% with tech stocks up 8.6% and the financial sector rising 6.3%. The mining sector was sold down on fears of a lower global growth outcome should Covid cases, and associated lockdowns push out a recovery.
Early November has seen a strong rally in markets following the US election outcome and encouraging news from Pfizer and Moderna about proposed vaccines. While we all hope vaccine are commericalised quickly we would warn against baking such an outcome into expectations. There remain many key unanswered questions (actual trial data, potential side effects, FDA approval, efficacy against the key vulnerable citizens, manufacturing capacity, distribution etc). News flow (good or bad) will remain a critical determinant of markets over the coming 6-12 months, and we are not prone to speculating on these types of outcomes.
Takeover activity is becoming more prevalent given the ready availability of cheap debt financing and buoyant equity markets. Bids for Coca Cola Amatil (worth A$9bn) and Link Market Services (A$3bn) were announced, and we would expect more over time, especially given how challenged many companies are globally to identify organic growth opportunities.
The smallcap sector remains very busy with a rush of IPOs coming to market. Over the past 2 months we have met with 21 IPOs, and expect may more between now and year end. As always, we retain a sober approach to new listings, however are also encouraged by fresh ideas. As with any trend, it will not surprise our investors to know that many IPOs are looking to capitalise on trends established during Covid (on-line shopping, work from home, etc), hence we are especially wary of shorter term earnings risk once the world eases restrictions.
The merger of two of our larger investments, Uniti Wireless and Opticom moved to closure last week. Uniti is a well run wireless wholesale/retail telco operator, and Opticom is the largest wholesale competitor to the NBN. While we were favourably disposed to both separate companies given the high growth of data usage over fibre, the combination of the businesses should accelerate growth and create strong operating synergies.
Since the low in March, we have delivered gains of 59% against the 50% rise in the Small Industrials sector. We remain confident in the growth opportunities of our long term investments, however are somewhat sceptical about valuations ascribed to certain sectors (esp retail) where current spending patterns reflect consumers working from home and/or spending subsidised payments from government which are likely to roll off gradually next year.