Asymmetric Opportunities Fund June 2020 Quarterly Letter
Dear Investment Partner,
For the quarter ended 30 June 2020 the Asymmetric Opportunities Fund (AOF) returned 56.9% (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 returned 20.8%.
As readers of our March Quarterly Letter will be aware, our investment process resulted in a high level of conviction in a small group of companies during the covid-19 induced market plunge in March. While the fund endured a significant fall to 31 March 2020 and the timing of our buying was far from perfect, the fund also enjoyed a strong rebound during the June quarter from what we consider were very “over-sold” positions.
Portfolio Composition
At quarter-end the portfolio held ten stocks.
During the quarter sixteen stocks (including closed positions) provided positive attribution, while one stock (a recent addition to the portfolio) declined.
The largest contributor to overall portfolio gains was investment bank Moelis.
In May we decided to exit the underperforming tail end of our portfolio, namely Experience Co, New Century and MPW Solutions.
The holding in Helloworld was also sold. We remain impressed with how management has navigated the crisis so far. However, the short- and medium-term outlook for travel remains highly uncertain and we didn’t feel the risk versus reward equation was attractive at the time of exit. We took advantage of the resurgent share price which recouped much (but not all) of our loss on that holding which had been established pre-covid.
Equities comprised 52% of the portfolio with the balance in cash.
The Cash Position
When we last wrote to unit holders in early June we noted that our cash balance had edged towards 10% thanks in part to exiting the fund’s position in OneVue after Iress emerged with a takeover offer.
As the month of June progressed, we decided to lock in more gains and reduce our individual stock weighting back to levels we deemed more appropriate given where our portfolio holdings were trading in relation to our assessment of fair value.
We also used the market rebound as an opportunity to exit a few positions where our confidence in future returns had diminished.
All told, this resulted in the fund’s cash level ballooning to ~48% by the close of the June quarter.
In prior letters we have tried to be clear with our readers about our intentions regarding cash. To reiterate, our intention – as manager of the Asymmetric Opportunities Fund – is to provide unit holders with exposure to equities.
Our assumption is that investors in the AOF have made their own asset allocation decision regarding equities versus cash and any money they entrust to our management comes with the expectation it will be invested into equities.
For this reason, the fund generally holds minimal cash with any excess cash – cash which is essentially waiting to be deployed into the next investment opportunity – is allocated to the purchase of an index fund (to date we have been using Betashares A200 index fund).
This strategy of allocating to an index fund serves multiple purposes including:
1) It provides unit holders with close to one hundred percent exposure to equities
2) It saves us (as manager of the AOF) from falling into the “trap” of trying to time the market. In our experience timing rarely proves to be a successful long-term endeavor
3) The holding can be readily converted back to cash as specific investment opportunities arise
So why are we holding cash today rather than either being fully invested in stocks or with the balance in the index?
Answer: The odds appear unfavorable.
We believe the market is pricing in a speedy post-covid recovery. We acknowledge this could prove to be the actual outcome (see point 2 above); however we think it is neither the only outcome, nor the most likely outcome.
To paraphrase a recent comment by Oaktree’s Howard Marks:
…prices are much higher than they were. Risk aversion once again appears low and the market (as a whole) appears to be fearless.
In summary, we are moving forward with a high level of caution. These are exceptional times. We think a defensive stance is warranted at present.
June Quarter Review
In our opinion, the market in March was offering up companies that, despite significant uncertainty and a wide range of potential outcomes (and hence a wider range of possible valuations), provided compelling risk-reward investment opportunities.
We believe the asymmetry was in our favour.
By early June, things had changes markedly. The market and our portfolio holdings had experienced a profound recovery and the asymmetry of risk versus reward had flipped.
Our assessment is that during the June quarter the market switched from a “fear” setting to pricing in a strong recovery in economic activity and corporate profits. In contrast, we felt there was still significant uncertainty around the ultimate path of recovery. In short, we no longer believed that we were being adequately compensated for the wide range of potential economic outcomes.
With our conviction level diminished, the portfolio’s stock exposure was reduced accordingly.
Financial Year 2020 Review
The AOF’s return for the twelve months to 30 June 2020 was -0.5%. In comparison, its benchmark fell 7.4%. While it was pleasing to outperform our benchmark by ~7%, it would have been even more satisfying to report a positive absolute return to unit holders.
“Winners” outnumbered our “losers” (based on securities sold) at 19 to 11. However we are disappointed at the ‘mistakes of commission’ that have occurred. The portfolio would have performed significantly better had we avoided two businesses (namely New Century and MSL Solutions) which in hindsight were poor inclusions in the portfolio.
The biggest contributors to the fund’s return for the year included Moelis, QMS Media, GBST and Bingo Industries.
Major detractors to performance were New Century Zinc, Helloworld, MSL Solutions and 3P Learning.
Outlook
While the AOF is only official priced quarterly, we estimate that for the month of July the fund gained around 2% versus a near flat return for our benchmark.
At the date of writing, the weighted average market capitalisation of the fund’s holdings is ~$306 million.
In July we initiated one new position and increased one existing position. The fund’s cash position stood at ~37%.
Highlights for the month included:
Our long-term position in Catapult saw a strong rise after the sports analytics company provided a well-received earnings update to the market.
Our long-term holding in financial services software business Praemium rose after announcing a proposed bolt-on acquisition of smaller listed peer Powerwrap.
A newly initiated position gained ground after announcing an acquisition which will speed up its digital offering
One of the most uncertain reporting seasons in recent times is about to begin. With the fund’s high cash level, we are positioned to capture any attractive investment opportunities that may arise in the coming weeks when we expect volatility to be high and interesting situations to appear.
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
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 Asset Management accepts no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information.