Smallco Investment Fund
Investment Objective:
Smallco Investment Manager (Smallco) operates a smaller company managed equity fund, the Smallco Investment Fund (SIF). Smallco aims to provide good performance in SIF through actively looking for high quality, smaller companies whose share price is significantly less than what Smallco considers to be the true underlying value of the shares.
Investment Universe:
Smallco invests mostly in smaller Australian listed companies, but may invest up to 20% of the fund in larger Australian listed companies and some cash. The manager classifies a smaller Australian listed company as a company outside the S&P/ASX 100 Index at the time the fund makes its initial investment.
How to Invest:
Smallco has historically limited the number of investors in the Fund when necessary to protect capacity and limit liquidity issues. It will continue to manage capacity and limit inflows using its power under the Fund’s constitution to reject applications at its discretion.
You should consider the Product Disclosure Statement (PDS) for SIF before deciding to invest. You can either download the PDS or request a hard copy by mail.
| Return as at: 30 April 2012 | |
|---|---|
| 1 month | 4.4% |
| 3 months | 16.7% |
| 6 months | 14.4% |
| 1 year* | 7.6% |
| 3 year* | 22.1% |
| 5 years* | -5.0% |
| 7 years* | 6.0% |
| 10 years* | 9.5% |
| Since inc.* (31/10/2000) | 10.2% |
*Returns annualised. Returns calculated after all fees and expenses and based on exit price and reinvestment of distributions. Past performance is not a reliable guide as to future performance. Returns are not guaranteed.
Latest Update:
31 March 2012
Smallco Investment Fund returned 16.4% in the three months ended 31 March 2012.
As evidenced by the strong performance of SIF during the quarter smaller industrial companies performed strongly. This was driven predominantly by a rerating in the industrials price earnings ratio back to long term averages as macroeconomic risks, such as concerns over European sovereign debt, eased. Assisting with this rerating was the fact that no reduction in future earnings guidance occurred within smaller industrial stocks and many had feared that this might happen. What was not evident however was a step up in the earnings forecasts and as such there remains some risk that consensus estimates for 2013 remain too high.
We are conscious of this and remain focused upon selecting stocks that we believe offer us a higher degree of near term earnings outlook confidence.
Our largest holding heading into the March quarter and a stock that we discussed in the December update, Macquarie Atlas Roads (MQA), refinanced its debt position in APRR. Despite the fact that we saw little risk to this refinancing going ahead, a relieved market pushed MQA’s share price up such that it was our largest contributor to performance for the quarter. We have recently reduced our holding in MQA.
Another strong contributor to performance during the quarter, and a stock that we have not spoken about previously, is Magellan Financial Group (MFG). MFG is a fund manager whose main offering, the Magellan Global Fund, has outperformed its peers and the MSCI index across all periods since inception (July 2007). MFG has managed to grow funds under management from $500m to $3.4bn in a little over two and a half years during which time its peers have struggled to maintain positive net inflows.
We have been meeting with management and following the stock since mid 2007 and made our first investment in MFG in late 2009 once we had increased confidence in management and the business model had gained momentum. Our initial investment was made at $0.80 when MFG’s cash and cash equivalents were $0.55 and we have subsequently added to this position over time with our average buy in price being $0.90. The current share price is in excess of $1.70.
A fund management business such as MFG offers attractive returns on funds employed, high cash flow generation and, where costs are managed effectively, strong earnings leverage. In the time that we have been watching and investing in MFG the management team have done an outstanding job of managing the business including employing an experienced distribution team which, coupled with solid performance since inception, has seen investor inflows exceed even our most bullish forecasts.
The stock is not cheap and trades on a financial year 2012 price earnings multiple in excess of 30x. This high valuation reflects the company’s growth profile and the rare opportunity that currently exists to invest in an early stage fund manager, the majority of which are private companies. It is a higher risk investment given its elevated PE multiple, the fickle nature of investor inflows and the dependence MFG has on these inflows to maintain earnings growth.
Over the last 2 years earnings have grown circa 50% per annum but our expectation is for this growth to slow substantially into 2013 as MFG establishes beachheads offshore in the hunt for international institutional investment. It is our view that sourcing these offshore investments will not be an easy process but our longer term investment thesis stands up on domestic fundamentals alone. Any inflows from offshore or conversely any reduction in costs should management reverse out of the offshore institutional markets is an additional bonus.
On behalf of the Smallco team, I would like to take this opportunity to thank you for your support of the Fund. We will continue to work diligently over the coming period to achieve a satisfactory return.
Please note that we are available to further discuss any relevant issues or to provide ongoing SIF updates. Please feel free to contact Craig Miller on 02 8256 1004 should you have any queries.