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Global Small Companies Fund

Specialists in a vast and growing investable universe

March 2020 - Monthly REPORT

What may be a once in a decade buying opportunity

SUMMARY

The Fund returned -18.10% in March, underperforming the benchmark return of -15.20%.

The global markets have entered one of the most challenging periods since the Global Financial Crisis in 2008 – 2009.  Complacency has been replaced by fear as investors grapple with the economic uncertainty caused by the COVID-19 pandemic.  Beginning the last week of February, forced selling placed massive downward pressure on prices across asset classes.  Volatility also rose to extreme levels.  March witnessed the second fastest sell-off in US equities, followed by the largest three-day rally, since the Great Depression.  Increased participation by computer-driven strategies exacerbated the often-violent price swings. Our full commentary is below >>

 

PORTFOLIO

Top Holdings (alphabetically)

Cerved Group Italy Financials ForFarmers Netherlands Consumer Staples NICE Information Service Korea, Republic Of Industrials OpenText Canada Information Technology Swedish Match AB Sweden Consumer Staples

Capitalisation Breakdown

Region Breakdown

PERFORMANCE

Performance Table

NET PERFORMANCE FOR PERIODS ENDING 31 Mar 20201
1 Month1 Year2 Years P.A.3 Years P.A.SINCE INCEPTION
Fund -18.1%-8.6%-7.0%2.0%4.0%
Benchmark -15.2%-7.8%-1.2%4.0%4.4%
1 Month1 Year2 Years P.A.3 Years P.A.SINCE INCEPTION
Fund
-18.1%
-8.6%
-7.0%
2.0%
4.0%
Benchmark
-15.2%
-7.8%
-1.2%
4.0%
4.4%

Performance Chart

NET PERFORMANCE SINCE INCEPTION2

COMMENTARY

The global markets have entered one of the most challenging periods since the Global Financial Crisis in 2008 – 2009.  Complacency has been replaced by fear as investors grapple with the economic uncertainty caused by the COVID-19 pandemic.  Beginning the last week of February, forced selling placed massive downward pressure on prices across asset classes.  Volatility also rose to extreme levels.  March witnessed the second fastest sell-off in US equities, followed by the largest three-day rally, since the Great Depression.  Increased participation by computer-driven strategies exacerbated the often-violent price swings.

Potential outcomes are still wide.  The severity of the economic fallout will be directly linked to the duration of the global shutdown. The longer the global economy is at a standstill, the more severe the liquidity and credit concerns will become for corporates, financial institutions, and small businesses.  Governments around the world are responding to the unprecedented exogenous shock with massive monetary and fiscal stimulus.  This has reassured investors and put a floor under prices for the moment.   While we do not know whether we have seen the lows, we remind ourselves that markets discount the future, and will rally well before a durable economic recovery occurs.

In retrospect, the divergences between segments of the markets that we discussed in prior letters warned of potential trouble ahead.  Financial historians may someday conclude that March 2020 represented the capitulation phase of a bear market that began two years earlier.  Because global small cap equities had been under stress before the current downturn, they were not expensive heading into this crisis.  While there is substantial near-term uncertainty, equally great opportunities wait for patient investors.  Companies with solid balance sheets, good customer value propositions and competent management will use the current crisis to improve their relative market positions.  In that context, we are positioning the portfolio to capitalize on what may be a once in a decade buying opportunity.

The team is focused on two goals in managing the Fund through this crisis. The first is to preserve capital given the unique nature of this crisis.  The second is to use the sell-off to create a portfolio that will drive returns in the medium term by buying excellent businesses at discounted prices.   While most investors would love to time a market bottom, we know from experience this is a very challenging task.  Instead we are investing capital at a moderate pace, utilizing our institutional knowledge to take advantage of the opportunity set.

March was a very active trading month. The Fund increased its net exposure from 95% to 97% over the course of the month.  We added to several existing positions that we felt were adversely affected by the recent dislocation where the company fundamentals are still strong and where there was still very good medium to long term value.  We also added several new positions where we found exciting new opportunities.  Two of the larger positions are as follows:

Japan Lifeline has 80% market share in defibrillation catheters used during heart ablation procedures, used to treat heart arrythmia.  Originally a distributor of medical devices, the company pioneered its new technology allowing for lower risk ablation procedures which should grow above 10% compounded due to the aging population in Japan.  Returns on capital are in the 20%+ range and the stock trades at a under 15x PE with no debt on the balance sheet.

Avast PLC, based in the UK, is a global leader in personal computer virus protection with over 435 million users globally.  They have a “freemium” model where customers are provided the product for free but have the option to pay a premium for virus protection and VPN products.  The stock was hit hard because of the concerns surrounding a very small division called Jumpshot, which management has since closed.  What we bought is a recurring revenue business, with a massive and embedded user base, trading at low double-digit PE.

The Fund also reduced or eliminated exposure in several investments last month.  The COVID-19 pandemic caused us to reconsider the investment case of companies exposed to the travel industry because of our inability to analyze downside risk.  We reduced our position in eastern European discount airline Wizz Air and sold out of our holding in a Chinese hotel chain called GreenTree Hospitality.  We also owned a basket of energy related investments which were negatively affected when Saudi Arabia instigated an oil price war with Russia. As a result, we sold out of those positions.

Individual stock selection and currency were the main driver of the Fund’s underperformance in March. Approximately 212 bps separated the top contributor and largest detractor. The large dispersion in the fund exemplified the volatility in the market last month.  As of 31st March, the top 10 holdings accounted for approximately 39% of the Fund’s assets, with the largest position approximately 4.9% of the portfolio. The Fund has outpaced the benchmark 5 out of the past 6 months.

The recent market dislocation has afforded us the opportunity to uncover unique and exciting investments that we believe will drive the portfolio in the medium and long term.  Our pencils are sharpened, our price targets are ready, and we continue to take advantage of opportunities as they present themselves.

 

PROFILE

Platform Availability

  • AMP North
  • Asgard eWrap
  • AET Wholesale Access Fund
  • BT Panorama
  • BT Wrap
  • Colonial First Wrap
  • Centric IDPS
  • Centric Super
  • Hub24
  • IOOF Pursuit
  • IOOF Portfolio Service
  • IOOF Core
  • Macquarie Wrap
  • Mason Stevens
  • MLC Navigator
  • MLC Wrap
  • Netwealth
  • Omniport(lifespan)
  • Powerwrap
  • Praemium
  • uXchange

STATISTICAL DATA

PORTFOLIO SUMMARY
VOLATILITY3
12.8%
NUMBER OF STOCKS
46
BETA4
0.78
MAXIMUM DRAW DOWN
-20.7%

FEATURES

  • APIR CODE PCL0022AU
  • REDEMPTION PRICEA$ 1.1909
  • FEES * Management Fee: 1.1%
    Performance Fee: 20.5%
  • Minimum initial investment A$10,000
  • FUM AT MONTH END A$ 91.92m
  • STRATEGY INCEPTION DATE 1 April 2015
  • BenchmarkMSCI All Country World SMID Cap Index unhedged in AUD

Fund Managers

Jon Moog

CIO and Portfolio Manager

Description

The Fund invests principally in small and midcap listed (or soon to be listed) global equities. Its investment objective is to obtain returns greater than the MSCI All Country World Index SMID Cap unhedged in Australian dollars (‘Index’) over rolling 3 year periods after fees. The Fund’s investment manager, Lizard Investors LLC, uses a value oriented investment approach that seeks to identify and invest in quality businesses that create significant value but are mispriced, overlooked, or out-of-favour. The investment manager believes that unique opportunities exist due to limited available research, corporate actions, or unfavourable investor perception.

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1. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. No allowance has been made for buy/sell spreads. Please refer to the PDS for information regarding risks. Past performance is not a reliable indicator of future performance, the value of investments can go up and down.
2. Inception 1st April 2015.
3. Annualised standard deviation since inception.
4. Relative to MSCI All Country World SMID Cap index unhedged in AUD.
* For further information regarding fees please see the PDS available on our website.