Asymmetric Opportunities Fund June 2022 Quarterly Letter
Dear Investment Partner,
For the quarter ended 30 June 2022, the Asymmetric Opportunities Fund (AOF) declined 24.9% (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, declined 18.4%.
For the twelve months ending 30 June 2022, despite it being an unpleasant absolute number, we are pleased to report that the AOF outperformed its benchmark by 1.6%.
| Returns to 30 June 2022 | 3 months | 1 year | 2 years (p.a) | 3 years (p.a) | Since inception 1 Jan 2019 (p.a) |
|---|---|---|---|---|---|
| Asymmetric Opportunities Fund (Net Return) | -24.9% | -22.3% | 10.0% | 6.2% | 7.8% |
| Benchmark* | -18.4% | -24.0% | 0.5% | -2.2% | 3.1% |
| Value Add (Net) | -6.5% | 1.6% | 9.5% | 8.4% | 4.8% |
*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 held 12 stocks plus a position in an Exchange Traded Fund (ETF) that provided exposure to the broader stock market.
Equities comprised 95% of the portfolio with the balance (5%) in cash.
The median market capitalisation was $560 million.
Some losses resulting from declining share prices were crystallised to help manage the tax position for unitholders. This ledt to a higher than usual turnover in stocks as existing positions were sold and new positions established.
PORTFOLIO HOLDINGS BY MARKET CAPITALISATION
The June quarter’s performance of the AOF’s portfolio is disappointing relative to its benchmark, particularly in the context of having outperformed in both April and May, only to experience a dramatic sell-off in the share prices of portfolio positions in June.
We’ve been attuned to market dynamics and thought we’d positioned the portfolio to mitigate the anticipated headwinds via our stock selection and allocation to special situations. Despite this, the share prices of our portfolio holdings bore the full brunt of the market’s wrath (and more) in June.
On the stock front several portfolio holdings released announcements most of which we feel were dealt with overly harshly in terms of share price falls including:
· GUD – noted the bottleneck in new car sales. This wasn’t surprising but it did lead to a reduction to previous guidance. We think the weakness is transient.
· Emeco - provided updated guidance pointing to the low end of previous guidance which we thought pleasing given the operating environment. Like GUD, we expect solid earnings from the group over the next few years.
· Codan – announced it was expecting to report a record profit in FY22. Its share price initially rallied but then got caught up in the late June sell off too.
· Smartgroup – announced a contract loss which was uncharacteristic but disappointing. Although the company stated that the revenue loss impact would be less than 5%, the hit to the bottom line is likely to be more.
· During the March quarter we increased the AOF’s exposure to well-established, profitable, enterprise software businesses. The substantial share price declines of this subset of the tech space, we believe, was a case of ‘throwing the baby out with the bath water’. Despite the solid business operations of these companies versus the dynamics of emerging, unprofitable tech which has been popular with some investors over the past few years, we were wrong in assuming that our select tech stocks would avoid getting tarred with the same brush.
· Loan financing company Humm Group abandoned the sale of its Consumer Finance division to Latitude after the founder split from the board with a negative view on the proposed sale . This was a disappointing blemish to our Special Situation (SS) record given a key motivation for having exposure to Special Situations is to limit the downside for the portfolio. We have since exited this position.
| Portfolio Characteristics Snapshot | AOF | Small industrials* | AOF Attributes |
|---|---|---|---|
| Return on Equity | 11.5% | 12.5% | High Quality |
| Net Debt/EBITDA | -.20 | 1.0 | High Quality |
| Revenue Growth | 17.3% | 14.3% | Solid Growth |
| Earnings Per Share (EPS) Growth | 4.0% | 3.7% | Solid Growth |
| Price to Earnings (PE) ratio (x) | 14.6 | 20.2 | Attractively Priced |
| Dividend Yield | 3.3% | 2.6% | 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 and Biotechnology companies
The most important investing question is not, “What are the highest returns I can earn?” It’s “What are the best returns I can sustain for the longest period of time?”
Playing the long game
The quote above is from a great recent article by Morgan Housel which reminds readers not only of how important consistency and calmness is to the training regime of professional athletes but in a similar vein, how important it is for professional investors to also be methodical. We accept that setbacks are part of the journey and that our goal is to achieve above benchmark returns, sustained over a long period of time to maximise the magic of compounding.
So, while we are of course disappointed that the portfolio didn’t perform better during the June quarter we maintain our focus on a longer time horizon.
Put simply, the June quarter was the market doing what the market does best (albeit often bluntly and lumpily) – adjusting to new information. Macro factors (which we assume our readers are well versed in) have clearly altered the market’s outlook for sales and earnings growth rates, margins and the discount rate for valuing cash flows.
We don’t have a crystal ball regarding the depth or width of a recession (if it happens), but we think the economy and companies will experience more headwinds than tailwinds in the months ahead. We also think it’s quite possible that the headwinds haven’t been fully priced into stock markets just yet despite the rally we’ve experienced in July.
Perspective and Performance for July
The Small Industrial Accumulation Index fell 24% over the 12 months to 30 June 2022.
For comparison, in 2015 the bear market knocked the ASX down 21%. While back in 2010-2011 after a huge rally from the nadir of the GFC lows the ASX dropped 23%.
So, the correction we’ve just experienced is far from unusual and part and parcel of investing in the share market. However, according to research by Zurich, it’s also worth considering that the average ASX bear market has lasted 13 months and seen a decline of ~36%.
As a reminder to readers, just as we’re no better than average at picking market declines, we’re also no better than average at picking the rallies. For this reason, we think its sensible to stay fully invested most of the time. Most of our readers are aware of how costly to long term performance that it can be to miss out on even short market upswings. Remaining invested has allowed us to benefit from a very strong rebound which has just occurred in July, as it did in the sharp recovery from the March 2020 covid sell-off.
Indeed, while the fund is yet to be officially priced for the month, based on our estimates, the Small Industrials index was up 11.7% and the AOF gained approximately 15%.
Please note that from July the AOF is moving to monthly pricing.
Fund Launch
We’re pleased to announce that ASIC recently issued Asymmetric Asset Management Pty Ltd with an Australian Financial Services Licence (AFSL) which allows us to accept applications for investment into the Asymmetric Opportunities Fund from wholesale clients.
Since receiving our AFSL we have appointed service providers including a custodian to the AOF and are in the process of finalising our Information Memorandum with the aim of accepting applications in late August and issuing units in the fund on 1 September.
We hope to have an update regarding the launch out in the next two weeks.
Outlook
Where the economy and the market head from here only time will tell but we do believe that the portfolio is defensively positioned for any further turbulence and with attractive valuation metrics to drive positive relative performance.
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
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.