Asymmetric Opportunities Fund June 2021 Quarterly Letter
Dear Investment Partner,
For the quarter ended 30 June 2021 the Asymmetric Opportunities Fund (AOF) returned a net 13.6%.
By comparison, the fund’s benchmark the S&P/ASX Small Industrials Accumulation Index returned 7.3%.
For the twelve months the fund achieved a return of 56.3% versus a benchmark return of 33%.
Portfolio Commentary
At quarter end the portfolio was made up of twenty-four companies.
Equities comprised 93% of the portfolio with 13.6% of these equities categorised as Special Situation positions. The remaining 7% was cash earmarked for deployment in early July.
The median market capitalisation of the portfolio was $479 million.
Major contributors to overall portfolio gains included Cardno which in early June announced a strategic review “following receipt of a number of unsolicited approaches”. We provided an overview of Cardno in our March Quarter letter.
Praemium also headed higher, most likely in anticipation of the divestment of Praemium’s UK business unit which ultimately was announced to the market in mid-July. We first purchased Praemium for the fund in May 2019 just a few months after the fund’s inception. The covid-induced sell-off in early 2020 gave us a wonderful opportunity to increase our holding in a business we were confident was worth substantially more than its market price. The stock is up ~200% from our average entry price.
Enterprise software provider Bravura also provided meaningful positive attribution having been the main laggard for the fund in the previous quarter. While Bravura’s revenues can be lumpy, we are positive on the long-term growth opportunity in front of Bravura and its software offering which becomes deeply embedded into its clients’ systems.
There were no major detractors during the quarter.
Outlook
The September quarter provides investors with the opportunity to assess the full year results of the majority of ASX listed companies during August’s “reporting season”. We are comfortable with how the portfolio is positioned and have only made minor adjustments such as increasing our weighting in a few higher conviction ideas where their share price has drifted lower for no apparent reason. At the same time, we shortened the portfolio’s “tail” which was getting a little too long.
While we are certainly pleased with the performance of the fund since its inception, our focus is firmly on the future and achieving continued outperformance of our benchmark.
To achieve our goal of continued outperformance we will remain committed to an investment process which seeks out asymmetric payoffs: payoffs where our assessment of the downside is far less than our assessment of the upside return potential. This potential is always viewed in terms of probabilities because in investing nothing is certain.
| Returns to 30 June 2021 | 3 months | 1 year | Since inception (p.a) | Since inception (Cumulative) |
|---|---|---|---|---|
| Asymmetric Opportunities Fund (Net Return) | 13.6% | 56.3% | 23.2% | 68.4% |
| Benchmark ** | 7.3% | 33.0% | 16.4% | 46.2% |
| Value Add (Net) | 6.3% | 23.3% | 6.8% | 22.1% |
*S&P/ASX Small Industrials Accumulation Index (XSIAI)
**Inception 1 January 2019
All performance figures are calculated net of fees & assume reinvestment of income distributions.
Turning over Rocks
In our December 2019 Quarterly Letter we laid out for readers the “types” of businesses we are attracted to.
As some readers will be aware, the small team of two here at Asymmetric enjoys a vigorous investment dialogue. We thought the following (slightly modified) excerpt from an email exchange between the two of us might be of interest because it summarises how we look at the investment landscape:
I like your thinking on the types of business Asymmetric owns. The first type of business you’re referring to - one you buy and hold in the expectation it will double in value in five years - is a high quality business, investment nirvana. It’s one which has competitive advantages and/or is very well managed such that it earns unexpectedly outsized returns and/or finds and executes on strategic options that are difficult for investors to anticipate. These companies seldom look cheap, though often hindsight shows they were. That gives rise to one of my favourite Buffettism’s: far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.
From experience, I think it’s difficult to outperform consistently if that’s the only type of company on the menu.
That’s why we also invest in good companies that are mispriced. “Good” can refer to their management and also their industry and positioning within it.
The companies to avoid (i.e. never own, regardless of price) are flawed companies - flawed because of their business model, their industry, mediocre/dishonest management.
Essentially, these are the 3 types of business from our perspective.
“Volatility – Emotion = Opportunity” Chris Davis
We read the above “equation” in the 2020 Annual letter from Davis Funds. (Their latest letter can be found here and as always, it’s an insightful read.)
We love the equation above for its simplicity (simple in its explanation but not easy to execute) and feel it aptly sums up how many of our investment ideas arise.
One of the huge advantages of investing in the stock market is the fascinating level of volatility in share prices that occur from year to year. Much of this volatility, whatever its cause, does not reasonably correlate with the value of the long-term free cash flows that a business will generate.
Our job is to try and identify any lasting shifts in long term profitability while simultaneously screening out the emotion which can affect an investor’s ability to act decisively and hence miss that attractive investment opportunity.
Breaking the above equation down, volatility is a factor we have no control over but is a reality which we can use to profit from.
Our investment mindset or emotion is something we strive to control. We won’t always control it perfectly but a keen focus on long term value and second-order thinking goes a long way towards keeping our emotions in check and avoiding the clanging of the market crowd.
We believe our team’s ability at Asymmetric to successfully screen out the emotion and focus on fundamentals during times of volatility - whether that volatility is market wide or stock-specific - is a key attribute enabling us to identify attractive risk-adjusted investment opportunities.
Of course, not all companies that make it into the AOF portfolio are borne of volatility. Whether the company is out-of-favour, a hot stock, or completely overlooked by the market, in each instance our analysis focusses on gaining insights into the core of a business.
We’ll keep “turning over rocks” with gusto and look forward to reporting back to you on our discoveries from August’s reporting season.
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.