Asymmetric Opportunities Fund December 2021 Quarterly Letter
Dear Investment Partner,
For the quarter ended 31 December 2021, the Asymmetric Opportunities Fund (AOF) returned 4.1% (net of fees and expenses and assuming the reinvestment of distributions).
By comparison, the fund’s benchmark (the S&P/ASX Small Industrials Accumulation Index) fell 1.2%.
The end of December saw the AOF notch up its maiden three-year track record with the after-fee returns shown in the table below.
| Returns to 31 December 2021 | 3 months | 1 year | 3 years (p.a) | Since inception (p.a) | Since inception 1 Jan 2019 (Cumulative) |
|---|---|---|---|---|---|
| Asymmetric Opportunities Fund (Net Return) | 4.1% | 30.1% | 22.3% | 22.3% | 82.9% |
| Benchmark * | -1.2% | 13.7% | 14.4% | 14.4% | 49.9% |
| Value Add (Net) | 5.3% | 16.5% | 7.9% | 7.9% | 33.0% |
*S&P/ASX Small Industrials Accumulation Index (XSIAI)
All performance figures are calculated net of fees & assume reinvestment of income distributions.
Portfolio Update
At quarter end the portfolio owned shares in 18 companies.
Equities comprised 99.9% of the portfolio.
The median market capitalisation was $582 million.
Special Situations accounted for ~15% of the portfolio.
NUMBER OF PORTFOLIO HOLDINGS BY MARKET CAPITALISATION
During the quarter our holding in IVF provider Virtus Health received a buyout approach from private equity firm BGH Capital pitched at $7.10 per share. Since quarter end a second potential suitor, CapVest, has come forward with a higher offer of $7.60 per share. See below for more background to this portfolio position.
Outsourced services provider Link Administration also received multiple takeovers with a $5.53 per share bid for the whole company from Dye & Durham looking like the ultimate winner of the contest.
Finally, financing provider Humm Group announced it had received proposals to acquire all or part of the group. After year end this resulted in an all-stock offer for the Consumer division from peer Latitude Group.
A new position was initiated in automotive parts supplier GUD on the back of a significant and strategically sound acquisition and on pricing grounds.
Two positions, Korvest and McMillan Shakespeare, were sold as more attractive investment opportunities were identified.
Exciting News
After three years as sole portfolio manager I’m excited to announce that Pierre Prentice has decided to take a formal role with Asymmetric and has become a shareholder in the business.
For those who don’t know Pierre, he has had a long and distinguished career within the Australian Equities market.
Firstly, as a top-rated industrials analyst specializing in retail, food, beverage and gaming at Bankers Trust Australia.
Secondly, as co-founder and Head of Research at institutional fund manager JCP Capital Partners where he was instrumental in growing the firm to funds under management of ~$10 billion and achieving top quintile performance over 1,3,5,& 7 year time frames until his retirement in 2010.
Pierre started in financial markets just 5 months before the crash of 1987 (which he considers the best initiation he could have got). Prior to that, he practised as a chartered accountant with Arthur Andersen and KPMG as Manager and Partner respectively, specialising in audit & small business advisory.
For almost a decade now Pierre and I have worked closely together analysing investment opportunities and co-investing.
Pierre has provided invaluable advice and been actively involved with Asymmetric since inception and it is wonderful to welcome him as an analyst and co-portfolio manager.
More things can happen than will happen
Given the recent sell-off particularly amongst the FAANGS, Nasdaq and similarly amongst technology stock on the ASX over the past couple of months there are plenty of news headlines and columns being devoted to the outlook for markets as participants (investors and speculators) grapple with the Federal Reserve’s pivot to a cycle of interest rate rises.
We have our views on macro and likewise on what we suspect are segments of “irrational exuberance”. However, these views are an overlay to how we manage the AOF portfolio rather than a key driver of stock selection.
As Mark Twain so aptly put it:
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
We could write a long list of reasons why we side with the view that there are pockets of irrational exuberance in asset prices but with a hat tip to Twain - we don’t know for sure that they are.
Elroy Dimson (Emeritus Professor of Finance at the London Business School) perhaps put this notion of the risk of overconfidence in your viewpoint best when he said: “risk means more things can happen than will happen”.
Instead of trying to solve complex problems we look for simpler challenges where we think the odds are firmly in our favour. When assessing companies for inclusion in the AOF portfolio, we think in terms of the probability of our expected outcome occurring. As Warren Buffett put it: “I don’t try to jump seven-foot hurdles; I look for one-foot hurdles I can step over.”
Adding value
Whether it’s in a science lab, on a sports field or investing, professionals know that learning from one’s mistakes, as well as successes, allows one to refine a process which can ultimately lead to a consistently improved outcome.
Asymmetric Asset Management remains focused on implementing an Investment Process that can repeatedly produce good investment returns over the medium term.
Having a clear process is important as it can help minimise the distractions of stock market “noise” in times such as the recent January sell-off.
As a high conviction and reasonably concentrated portfolio of our best ideas, AOF’s is far from a “Noah’s Ark” – we don’t own two of everything. Nor do we own companies where we expect the investment returns to mimic the index; rather, we own investments which we have a high level of confidence will deliver outperformance with an acceptable level of risk.
Our view of risk is the permanent loss of capital. We have thick skins and a high level of tolerance when it comes to share price and market movements. In short, we think of volatility more in terms of opportunity than risk.
Given the constant shifting of share prices we are regularly reassessing the upside expectations of the AOF’s portfolio positions versus other investment opportunities.
An example of how this works in practice was our switch in late October from Monash IVF to Virtus Health on relative valuation grounds.
We have owned IVF service provider Monash IVF on and off since the inception of the fund. Coming into the August 2021 reporting season we saw an opportunity to significantly increase the weighting to Monash IVF thanks to a combination of a sluggish share price and positive industry data pointing to solid metrics for domestic IVF cycles.
The share price of Monash ultimately moved higher; however, Virtus’s share price lagged largely because of an ill-considered attempt to acquire a competitor without pre-clearance from the ACCC which subsequently disallowed it. Moreover, it had raised equity capital in anticipation and as a result looked fully priced on a PE basis but was in our opinion cheap on an Enterprise Value/EBIT basis.
Given Virtus was set to benefit from similar industry dynamics and enjoyed similarly attractive business economics such as strong cash flow generation and large market share, we switched the fund’s exposure from Monash to Virtus.
While our timing was undeniably lucky, we do believe that the value capture demonstrates how our investment process adds value.
Performance in January
January 2022 saw a sell-off in markets globally and our benchmark, the Small Industrials Accumulation Index retraced ~10%.
While the AOF portfolio is only formally priced quarterly (this will move to monthly pricing in due course), we estimate that the AOF portfolio outperformed its benchmark by ~5%.
On the stock front we were very active during the month as we repositioned the portfolio into certain companies which we believed had been oversold and that we believe will prove to be very rewarding investment opportunities over the next few years, if not before.
Kind regards,
Tim McArthur
Portfolio Manager
Disclaimer: The information contained in this document is general information only and does not constitute investment or other advice. The contents of this document do not constitute an offer or solicitation to subscribe for units in the Asymmetric Opportunities Fund. Asymmetric Funds Pty Ltd accepts no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information.