Asymmetric Opportunities Fund March 2023 Quarterly Letter
Dear Investment Partner,
For the quarter ended 31 March 2023 the Asymmetric Opportunities Fund (AOF) returned 5.3% (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 1.3%.
The fund’s outperformance against its benchmark for the quarter was 4%.
| Returns to 31 March 2023 | 1 month | 3 months | 6 Months | 1 Year | 2 Years (p.a) | 3 Years (p.a) | Since Inception 1 Jan 2019 (p.a) | ||
|---|---|---|---|---|---|---|---|---|---|
| Asymmetric Opportunities Fund (Net Return*) | -0.8% | 5.3% | 10.4% | -11.9% | 1.7% | 30.5% | 10.5% | ||
| Benchmark** | -3.0% | 1.3% | 8.0% | -12.8% | -6.6%% | 9.3% | 4.2% | ||
| Value Add (Net) | 2.2% | 4.0% | 2.4% | 0.9% | 8.3% | 21.2% | 6.3% |
*Net of fees & assumes reinvestment of income distributions; **S&P/ASX Small Industrials Accumulation Index (XSIAI); All performance figures are calculated by Asymmetric Asset Managment Pty Ltd. Until June 2022 the Fund was priced on a quarterly basis. This affects the performance time frames that can currently be reported.
Net Asset Value (NAV): $1.1101
Market Update
The March quarter was a good reminder of the futility of trying to time markets.
We suspect that most investors peering into a crystal ball on 1 January 2023 and seeing:
· further interest rate rises;
· stubbornly high inflation;
· the failure a top 20 bank (Silicon Valley Bank) in the USA, marking the second largest bank failure since Lehman Brothers during the GFC;
· the need to rescue global investment bank Credit Suisse;
would have understandably adjusted their investment portfolios to a higher cash weighting.
Yet, despite all this turmoil, markets managed to finish higher. The Nasdaq notched its best quarter since 2020 with a gain of 16.8%. The S&P500 rallied 6.7%, while the European Stoxx 600 gained 7%. At home, the ASX300 Accumulation Index was up 3.3%.
The complexity of markets makes successfully timing them a near impossible task – certainly with any consistency. So, while we maintain a defensive positioning within the AOF, we were pleased to have been fully invested throughout the quarter and benefitted from the tailwind of a rising market.
The Growing Small Cap vs Large Cap PER Discount
As readers will note from the performance data above, larger caps continue to outperform the smaller industrials companies where Asymmetric focuses its attention. That’s principally because resource companies continue to enjoy their “time in the sun”.
Indeed, over the past 12 months large cap indices have delivered an ~1% positive return while the small cap industrial index has retreated ~13%.
Based on 17 years of historic data compiled by Morgan Stanley the average discount of the Small Ords (which includes resource stocks) price-to-earnings ratio (PER) discount versus large caps (defined as Top 100) has been ~12%.
Cross-checking this with a longer dataset (24 years) from Macquarie Research suggests an 11.9% PER discount for small cap industrials versus large cap industrials.
With that historical discount in mind, we think it’s significant that the small industrials’ PER discount has stretched out to 21.5% as a result of their recent underperformance.
This discount suggests to us that smaller companies are attractively priced relative to larger companies based on historical data and that there is a good chance that smaller industrials will outperform larger industrials as a result of reversion to the long-term mean PER discount of around 12%.
Portfolio Update
| Portfolio Snapshot | ||
|---|---|---|
| # of Portfolio Positions (stocks held) | 18 | |
| Equity exposure | 98.6% | |
| Cash exposure | 1.4% | |
| Median Market capitalisation of companies held ($m) | $378.6m |
The graphics above and below provide a snapshot of how the fund was positioned at the end of March.
During the quarter, the fund experienced gains from 12 stock positions held while 7 positions declined.
Notable positive performances came from Codan and Smartgroup, while Enero (discussed below) was the primary drag on returns.
| Portfolio Characteristics Snapshot | AOF | Small Industrials | AOF Attributes |
|---|---|---|---|
| Return on Equity | 12.3% | 12.4% | High Quality |
| Net Debt/EBITDA | 44% | 78% | High Quality |
| Revenue Growth | 2.4% | 8.6% | Reasonable growth (once adjusted for divestments, etc) |
| Earnings per Share Growth | -6.8% | -3.9% | Reasonable growth (once adjusted for divestments, etc) |
| Price to Earnings Ratio | 13.5x | 18.1x | Attractively Priced |
| Dividend Yield | 4.5% | 2.6% | Attractively Priced |
Stock in Focus - Enero
For some time Enero has been a solid performer for the fund, but the opposite was the case during the past quarter.
Much of the negativity seems to have stemmed from the performance of Enero’s “traditional” advertising businesses which unsurprisingly reported softer numbers and outlook when Enero reported its half year numbers in mid-February.
Given the macro headwinds it wasn’t surprising to us that this occurred, but we were surprised that it was apparently unexpected by the market (judging by the ensuing sell off in the stock’s share price).
Readers may quite reasonably want to know why we were holding Enero in the face of the obvious macro headwinds. The answer lies in the 51% owned data-driven OB Media business which identifies and delivers “high intent” customers from search engines to advertisers.
Enero’s share of OB Media revenue grew in the order of 90% in the December 2022 half (vs the December 2021 half) with close to $30m of incremental revenue and almost $10m of incremental earnings (EBITDA).
This business is the jewel in Enero’s crown. In fact, we estimate this business alone justifies the entire market capitalisation of Enero which currently stands at circa $170m. The remaining, more traditional part of the business (just under half of Enero’s revenues expressed on an economic or “see-through” basis) comprises several agencies which, while cyclical, are leaders in their fields and have generated outstanding returns on capital. Suffice to say we’re comfortable owning this company and its place within the portfolio.
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
PORTFOLIO HOLDINGS BY MARKET CAPITALISATION
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 (AFSL No: 536830) accepts no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information.