Asymmetric Opportunities Fund March 2021 Quarterly Letter
Dear Investment Partner,
For the quarter ended 31 March 2021 the Asymmetric Opportunities Fund (AOF) returned 5.3% (net of fees and assuming the reinvestment of distributions).
By comparison, the fund’s benchmark the S&P/ASX Small Industrials Accumulation Index returned 3.3%.
| Returns to 31 March 2021 | 3 months | 1 year | Since inception (p.a)** | Since inception (Cumulative) ** |
|---|---|---|---|---|
| Asymmetric Opportunities Fund | 5.3% | 114.8% | 19.1% | 48.3% |
| Benchmark* | 3.3% | 49.7% | 14.8% | 36.3% |
| value add (Net) | 1.9% | 65.1% | 4.4% | 12.0% |
*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.
Portfolio Composition
At quarter end the portfolio comprised twenty-one companies inclusive of five special situation positions. Three stocks were exited during the quarter and nine new positions were established.
Equities comprised 98% of the portfolio with the remaining 2% in cash.
The median market capitalisation was $630 million.
Positive attribution was at a rate of 3 to 2, with around half of the gainers contributing meaningfully and only one decliner, enterprise software provider Bravura Solutions which produced a significant negative attribution over the quarter.
The largest contributor to overall portfolio gains was Cardno Ltd which we discuss in further detail below. Marketing agency Enero Group also provided solid returns for the portfolio as did modular building manufacturer Fleetwood Ltd.
Cardno
In last quarter’s letter we mentioned that during February reporting season we had identified an attractive investment opportunity resulting in a new position being established. The company referred to was infrastructure and environmental services business Cardno Ltd.
Cardno is a company that has been around for many decades. One of the great advantages in investing, we believe, is the cumulative knowledge which builds up year after year for a professional investor.
So, although Cardno was not on our radar leading into February reporting season it was within our investment universe and on the day of its results - which included an upgrade to guidance - we set to work delving into its business.
Key to our investment case was our insight on the significant expansion to Cardno’s margins which should occur over the next few reporting periods. A combination of reversion and cost-out has, in our view, the potential to drive a circa 40% uplift in earnings.
We were fortunate to benefit from constructive dialogue with Cardno’s management to help quickly build out our understanding of Cardno’s business and the growth opportunity in front of it. That opportunity centres around the group’s potential to benefit from the large government infrastructure spend underway within its two core markets of Australia and the USA.
We expect the exposure to infrastructure spending to provide a solid tailwind to further revenue and earnings growth over the medium term.
Cardno finished the quarter up ~31% from our purchase price.
Position Sizing
"My largest positions are not the ones I think I'm going to make the most money from. My largest positions are the ones I don't think I'm going to lose money in.” Joel Greenblatt
Having a good investment idea is worth nothing if you fail to act upon it; equally, failing to appropriately size the position to make a meaningful gain is a mistake we try to avoid.
Cardno has a strong balance sheet, was trading on a single digit earnings multiple, achieves decent returns on capital, is improving in quality, has a clear path to a step-up in earnings and a solid growth outlook.
With downside risks limited and attractive upside potential, we increased the fund’s position size as we gained more confidence in our investment thesis. By late March Cardno had become the AOF’s largest position.
Special Situations
The market for merger and acquisition activity remains strong as do corporate actions such as strategic reviews and divestments.
We like to allocate part of the portfolio to “special situations” where the risk adjusted returns are attractive and the near-term return of cash provides optionality.
We opportunistically look to get exposure to these types of situations, mostly in the form of announced takeover offers.
We had six investments that we categorised as Special Situations during the quarter including Vocus Group which provided strong attribution as its acquisition by Macquarie Infrastructure and Real Assets (MIRA) progressed.
On Markets
Winston Churchill reportedly once said "it is always wise to look ahead, but difficult to look further than you can see".
We remain cognisant that areas of financial markets appear to be frothy with speculative elements. However, we readily acknowledge there are plenty of things we simply don’t understand or lack superior insight to - we are fine with that. Maybe Bitcoin is a great buy at US$40,000, maybe it all ends in tears…… it is not the game we play.
Likewise, stock markets on certain measures are at historic highs but countering that, markets look handsomely priced versus bond yields. Again, timing the market is a game we try to avoid.
Our primary goal is to find a handful of really good investment ideas each year. In our experience, if we turn over enough rocks, we have a good chance of uncovering a collection of attractive investment opportunities.
June Quarter performance to date
With the index up roughly 3% thus far into the quarter we are pleased to report that the portfolio has meaningfully outperformed.
While the AOF is only formally priced quarterly, we estimate that the AOF has gained approximately 8%.
On the stock front Cardno has continued to climb higher leading us to reduce the fund’s weighting to this position. Bravura Solution’s share price has also rebounded and despite an unexpected departure of the long serving CEO at Praemium Ltd, its share price has climbed to a fresh 52-week high.
Outlook
The stock market is now entering the “earnings confession season” which typically sees some companies update investors on full year guidance prior to “reporting season” which occurs in August.
This time of year can often provide us with some good investment opportunities leading into August which we remain alert for.
As always, we are keen for both feedback from readers and the opportunity to meet with prospective investors.
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.