Asymmetric Opportunities Fund December 2022 Quarterly Letter
Dear Investment Partner,
For the quarter ended 31 December 2022 the value of units in the Asymmetric Opportunities Fund (AOF) increased by 4.9% (net of fees and expenses).
By comparison, the fund’s benchmark the S&P/ASX Small Industrials Accumulation Index increased by 6.6%. Thus, in what was a difficult quarter for most active managers, AOF underperformed its benchmark by 1.7% despite outperforming it by the same degree in the last month of the quarter.
At month end, the Net Asset Value (NAV) unit price was $1.0543
| Returns to 31 December 2022 | 1 Month | 3 Months | 1 Year | 2 Years (p.a) | 3 Years (p.a) | Since Inception 1 Jan 2019 (p.a) |
|---|---|---|---|---|---|---|
| Asymmetric Opportunities Fund (Net Return) | -1.7% | 4.9% | -20.3% | 1.7% | 6.5% | 9.8% |
| Benchmark* | -3.4% | 6.6% | -21.8% | -5.7% | -2.0% | 4.1% |
| Value Add (Net) | 1.7% | -1.7% | 1.5% | 7.4% | 8.5% | 5.7% |
* Net of fees & assumes reinvestment of income distributions; ** S&P/ASX Small Industrials Accumulation Index (XSIAI)
Portfolio Update
For the quarter the portfolio experienced a mixed performance. Eight stocks produced gains. Six stocks fell. The fund’s holding in Link Administration also showed a share price decline in conjunction with an in specie distribution of stock in digital conveyancing group PEXA, which we now hold.
The largest positive contributor to the portfolio was electrical components supplier IPD Group which we have highlighted in prior monthly updates. The largest negative contributor was radio station operator HT&E which trended lower on no specific news but has bounced back very strongly in January following the announcement of the sale of a non-core holding in a significant software business that we had been waiting for.
| Portfolio Characteristics Snapshot | AOF | Small Industrials* | AOF Attributes |
|---|---|---|---|
| Return on Equity | 11.5% | 11.9% | High Quality |
| Net Debt/EBITDA | 30% | 91% | High Quality |
| Revenue Growth | 2.1% | 8.6% | Solid Growth |
| Earnings Per Share (EPS) Growth | 8.9% | -5.8% | Solid Growth |
| Price to Earnings (PE) ratio | 11.3x | 18.1% | Attractively Priced |
| Dividend Yield | 5.2% | 2.7% | Attractively Priced |
Source: Thomson Reuters, Asymmetric Asset Management; Median of 1 year forward analyst consensus forecasts; * Small Industrials comparison is ASX Small Industrials Index excluding Real Estate & Biotechnology companies
AOF Chalks up 4 Years
The end of December 2022 marked the completion of four years of operation for the fund. We’re pleased to be able to report that over all annual time frames (1, 2, 3 & 4 years) the fund has outperformed its benchmark.
Putting that into a visual perspective, as the chart below shows, the value of $100,000 invested in the AOF has grown to $145,145 after all fees. In comparison, $100,000 invested in the (hypothetical) index would have returned $117,294.
Our preference would be to accept slightly more volatility in exchange for a higher return than a consistent, less volatile but lower return. It’s for this reason that we put more discussion into our quarterly letter to unitholders than the monthly updates (though we still consider 3 months to be far too short a period to be meaningful).
So, while we don’t obsess over the cadence of the fund’s returns, we are pleased with the strike rate of the fund’s alpha (outperformance) generation to date as shown in the graph below.
Finally, we’d also point out that the fund has a track record of paying distributions to unitholders. Since inception four years ago, a total of 40.6 cents per unit has been distributed.
| Period Ending | Distributions Paid | |
|---|---|---|
| 30 June 2019 | $0.021 | |
| 30 June 2021 | $0.150 | |
| 30 June 2022 | $0.096 | |
| 26 August 2022 | $0.139 |
The danger of trying to time the market
As we pen this letter there have been eight trading days for 2023. Defying the end-of-year predictions of many market forecasters, the All Ordinaries Index has put on 4.4% (with our benchmark up 4.1%). Missing out on a couple of weeks’ gains may seem inconsequential, but as the studies referenced below illustrate, it can have a dramatic impact on long-term performance.
As the two charts below highlight (first in dollar terms and secondly in percentage terms) reducing market exposure at the wrong time can be costly.
(Source: Putnam Investments)
Some readers will quite reasonably ask “but what about also avoiding the very worst days in the market?”
Well, it’s certainly true that if you could time things to perfection your returns would be enhanced by avoiding the worst days. But what are your chances of doing that? The reality is that this outcome (certainly with any level of consistency) is nearly impossible to achieve.
Pointedly, the best and worst days in the market are often entangled within the same time periods – sometimes even occurring on consecutive days. To complicate matters further, some of the best days in the market occur during bear markets and conversely some of the worst days occurring during bull markets.
“Not only have the best and worst days typically clustered together, they often occurred during bear markets or recessions, when markets were at their most volatile. For example, three of the 30 best days and five of the 30 worst days [in the 20 years from 1992 to 2022] occurred during the eight trading days between March 9 and March 18, 2020 [the onset of covid]”.
(Source: Wells Fargo)
It’s perhaps instructive here to make a confession. When I (Tim) launched the AOF at the beginning of January 2019 I tried to time the market. Late 2018 had been a torrid time with the market having slumped around 15% between September and December 2018. This led me to initially deploy funds slowly and to hold above average levels of cash before Pierre shared his portfolio management experience which now forms the basis of our approach – avoid timing the market as we don’t have an above average talent for this; remain fully invested (as the empirical evidence suggests we should); and position the portfolio to reflect any macro views we hold with conviction.
As the earlier table of the fund’s quarterly performance highlights, the initial two quarters after inception is the only time the portfolio has underperformed in consecutive quarters and it was this period which took the longest to recover the underperformance from. Lesson learned!
Outlook
As we enter a new calendar year, there is a case for markets to move higher after the correction which occurred in 2022. The other side of the coin is that it was a very big bubble requiring correction, and we are acutely attuned to the economic risks which could lead to further declines.
Stock markets are forward looking but we don’t know how accurately any such economic headwinds are priced in.
So, while non-committal on the market’s direction, having no particular skill in that domain, where we believe we can add value is at the company level, uncovering and identifying mispricing.
We believe the Asymmetric Opportunities Fund’s portfolio enters the new year well positioned with a combination of:
Higher quality businesses, trading at reasonable prices and with more defensive revenue and earnings growth (AUB insurance brokers, Codan)
Companies with assets on their balance sheet which are not (in our view) accurately priced in (HT&E, Link Administration, Enero)
Smaller, good quality businesses, often with a strong market position (Monash IVF, Smartgroup)
Businesses where we have high confidence that the earnings trajectory is improving (Fleetwood, GUD)
We take our role as stewards of our investment partners’ capital very seriously and express our sincere appreciation to you for investing alongside us.
Kind regards,
Tim McArthur and Pierre Prentice
Co-Portfolio Managers
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 Asset Management accepts no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information.