Asymmetric Opportunities Fund October 2022 Update
Dear Investment Partner,
For the month of October 2022, the Asymmetric Opportunities Fund (AOF) returned 4.3% (after fees).
By comparison, the fund’s benchmark the S&P/ASX Small Industrials Accumulation Index returned 7.4%, thereby outperforming the AOF by 3.1%
| Returns to 31 October 2022 | 1 month | 3 months | CYTD 2022 | CY2021 | CY2020 | CY2019 | Since Inception 1 Jan 2019 (p.a) |
|---|---|---|---|---|---|---|---|
| Asymmetric Opportunities Fund (Net Return*) | 4.3% | -4.0% | -20.7% | 29.8% | 16.7% | 20.3% | 10.1% |
| Benchmark** | 7.4% | -4.9% | -21.2% | 13.7% | 5.9% | 24.5% | 4.4% |
| Value Add (Net) | -3.1% | 0.9% | 0.5% | 16.1% | 10.8% | -4.2% | 5.7% |
*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) Unit Price: $1.0489
PORTFOLIO HOLDINGS BY MARKET CAPITALISATION
| Portfolio Snapshot | ||
|---|---|---|
| # of Portfolio Positions (stocks held) | 14 | |
| Equity exposure | 86.8% | |
| Cash exposure | 13.2% | |
| Median Market capitalisation of companies held ($m) | $419.9 |
Portfolio Update
With most ASX-listed companies having a June year end, October heralds in ‘AGM season’. Annual General Meetings (AGMs) are an opportunity for management to update the market on trading conditions and/or provide guidance.
One portfolio company which did just that was electronics developer Codan which provide a trading update at its AGM that was well below previous company guidance, market expectations and our own forecasts.
The update brought to light lower sales of its highly popular gold detectors into Africa largely on account of a military coup in Sudan which has had the understandable flow on effects of reducing demand for Codan’s detectors and hindering sales into the region.
The update led to a downward revision in expectations and the share price subsequently fell ~32% for the month. This was the largest drag on fund performance and responsible for ~1.9% of the 3.1% of underperformance.
While we have followed Codan for many years, we’ve chosen to “watch from the sidelines” over the past few years as we considered the stock to be priced for perfection. While catching this recent downgrade was disappointing, we are positive about the long-term merits of this investment.
Firstly, this is not the first time the market has dealt harshly with a drop in metal detector sales. In mid-2013, after a stellar period of gold detector sales into Africa, Codan experienced a sharp fall in detector sales – once again largely due to civil unrest in Sudan. The company ultimately emerged from this period to achieve new all-time high detector earnings within five years.
To paraphrase Mark Twain: history may not repeat itself, but we expect in this instance, it does rhyme.
Secondly, after many years of the detector business overshadowing the communications (“Comms”) division, during 2021 Comms was expanded through what appear to be two sensible acquisitions which provide important diversification and new channels for growth. Our default position is to be questioning of acquisitions and Codan’s acquisition many years ago of Daniels was (in our opinion) an example of an acquisition that failed to meet its initial objectives and wasn’t an immediate success. Pleasingly the AGM update included positive news on how these two recent acquisitions are tracking.
Thirdly, we like to use times of investor anxiety to acquire good businesses at attractive prices relative to what we conservatively think they are worth. With impressive returns on capital, a solid balance sheet, a long history of cash generation, high margins, world leading intellectual property (IP), growth opportunities and a business which is not overly tied to the economic cycle (a particularly attractive attribute given the uncertain macroeconomic outlook) we’re very pleased to have the opportunity to own Codan and add to the holding at these levels.
Outlook
It’s been a tough 2022 for smaller companies with both our benchmark small industrials index and the fund down around 21%.
In contrast, the S&P/ASX 200 Accumulation Index is roughly flat calendar year-to-date. That’s significant relative underperformance by smaller companies and a situation that history would suggest will correct itself at some point.
We suspect this period in markets will continue to offer up attractive investment opportunities (like Codan) and rather than being dissuaded by sharp price falls, we look to profit from them.
Warren Buffett’s early mentor, Benjamin Graham, said it best:
“In the short run the market is a voting machine, but in the long run it is a weighing machine.”
Given we don’t possess a crystal ball we believe continued exposure to conservatively and carefully selected stocks is the only way to sensibly participate in the eventual upside.
Kind regards,
Tim McArthur and 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 (AFSL No: 536830) accepts no liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information.