Mike Tyson’s Punch-Out

• Global equity markets strengthened further in December as falling inflation across developed economies raised hopes that interest rates will soon start to fall.
• Smaller companies performed especially well during the month as their highly attractive valuation levels began to be recognised by the market following an extended period of underperformance.
• The Fund returned 5.2% in December, while the benchmark returned 4.7%.

As we move into the start of 2024 we will look to deliver a ‘year in review’ Fund update. Please let us know any questions you would like us to cover, either specific to the sector, Portfolio, or any portfolio holdings below.

Top Holdings (alphabetically)

Concentrix Corp

United States

Industrials

Concentrix Corporation provides technology infused solutions. The Company offers digital customer experience (CX) solutions. Concentrix serves customers in the United States.

ePlus Inc

United States

Information Technology

ePlus, Inc. engages in the provision of information technology (IT) solutions that enable organizations to optimize their IT environment and supply chain processes in the United States. It operates through the Technology and Financing segments. The Technology segment offers hardware, perpetual and subscription software, maintenance, software assurance, and internally provided and outsourced services, and advanced professional and managed services, including ePlus managed, professional, security, staff augmentation, server and desktop support, and project management services. The Financing segment specializes in arrangements, such as direct financing, sales-type, and operating leases, loans and consumption-based financing arrangements, and underwriting and management of IT equipment and assets. Its financing operations consist of sales, pricing, credit, contracts, accounting, risk management, and asset management. This segment primarily finances IT equipment, communication-related equipment, and medical equipment, and industrial machinery and equipment, office furniture and general office equipment, transportation equipment, and other general business equipment directly, as well as through vendors. The company was founded by Bruce M. Bowen in 1990 and is headquartered in Herndon, VA.

IONOS Group SE

Germany

Information Technology

IONOS Group SE offers web hosting and cloud solutions. It is an international digitization partner and sees itself as a trusted cloud enabler serving the needs of SMBs and freelance professionals, as well as larger enterprise customers and private users. IT also offer a broad portfolio of products and services including web presence & productivity as well as cloud solutions. The company was founded on November 8, 2016 and is headquartered in Montabaur, Germany.

On the Beach Group PLC

United Kingdom

Consumer Discretionary

On The Beach Group Plc operate as online travel agent. It provides interface between people and third party suppliers of travel products, such as flights and hotels. The firm also acts as an agent in processing customer booking with the airline not being the airline's agent. It operates through the following segments: OTB, International, CCH, and CPH. The company was founded on August 17, 2015 and is headquartered in Stockport, the United Kingdom.

TechnoPro Holdings Inc

Japan

Industrials

TechnoPro Holdings, Inc. offers services and solutions in mechanical and electronic design, IT and software development, and wide range of technological fields through outsourcing. The Company also has presence in biological, chemical and construction management businesses.

Market Commentary

In 1987 Nintendo launched the iconic video game Mike Tyson’s Punch-Out. The game featured an undersized boxer, ‘Little Mac,’ who had to take on a series of bigger and stronger opponents, before facing Mike Tyson for the Championship Belt. Little Mac initially got pummelled by the larger, stronger boxers. However, after hours of perseverance, he would find his rhythm and begin to overpower these larger opponents.

Since the beginning of 2022 investing in the small-cap market has felt reminiscent of the early challenges in Mike Tyson’s Punch-Out. Small-cap equities have been battered and bruised, whereas larger caps globally have fared much better.

Since November, Little Mac has started punching back as small caps started to outperform the large-cap universe. The pressing question investors face is this: ‘Was the recent performance of small caps a mere flash in the pan or the beginning of sustained outperformance?’

Although small caps have historically outperformed over the long term, they tend to underperform in times of market stress. Over the past two years supply chain issues, rising interest rates, an energy crisis, and wars in Ukraine and the Middle East have all dented market sentiment.

The longer-term outperformance of smaller cap equities can be attributed to faster underlying earnings growth. Much of the small-cap outperformance followed recessions or challenging market conditions and the building blocks for good small cap performance over the next three to five years now appear to be in place.

Global financial markets closed 2023 on a high note. The central themes of 2023 have been the fight against inflation and the effect of higher interest rates on corporate earnings growth. US economic growth has exceeded forecasts and early indicators suggest that the Federal Reserve is bringing inflation back to target, improving the likelihood of a soft landing.

US economic data was strong in December as unemployment remained low, inflation continued to moderate and retail sales and industrial production data closed the year higher. While the large-cap S&P500 index increased 0.9% in December (in AUD terms,) the smaller company Russell 2000 soared 8.3%, reversing the trend seen over much of 2023.

European economies remained weak with Eurozone data indicating continued contraction, while the UK is signalling very weak expansion. China’s re-opening from COVID-19 lost momentum earlier in 2023 as the highly leveraged real estate market impacted both investment and consumer spending, threatening a major recession. Meanwhile, in Japan, the manufacturing and services sectors remained strong with the help of the weak yen. Importantly, the Japanese Stock Exchange’s ongoing effort to improve corporate governance seems to be yielding positive results.

Portfolio Highlights

The Fund outperformed the benchmark during December, returning 5.2%, while the benchmark returned 4.7%. The Fund’s smaller cap holdings performed particularly well, as strong stock performance, especially in consumer discretionary, communications services, Europe, and Asia boosted returns. The Fund’s underweight position in North America was the main detractor from relative returns.

On The Beach is a UK-based travel agent which focusses on short and medium haul flight and hotel package holidays to Continental Europe. The share price appreciated more than 55% in December upon strong full year earnings, with profits returning to pre-COVID levels. While the company’s fundamentals have been improving for some time, this only became better reflected in its market valuation in December.

EPlus, the US-based IT distributor which integrates and manages customer networks also performed strongly during December. While there were no significant company-specific developments, it reflected broader gains across the US small-cap IT sector as investors began positioning for the opportunities that a lower interest rate environment will bring.

The Fund increased its position in Ionos Group, a German-based internet service that delivers web hosting, domain, and cloud computing products. It was one of the Fund’s strongest contributors to relative returns after it released higher forward revenue guidance, which it expects to help expand margins earlier than expected.

A new position was established in AfreecaTV, the market leading gaming and video streaming service in Korea. The business has a best-in-class cost structure and the largest user base in the industry. Amazon-owned Twitch entered the local market a decade ago creating a highly competitive environment. Twitch announced its withdrawal in December and the Fund established its position in the AfreecaTV the following day. This represents a critical change in the industry structure and should allow AfreecaTV to return to high-margin growth. The shares were purchased at approximately 12 times earnings, which is extremely attractive for an industry leader in a growth market.