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Emerging Companies Fund – Q3 update

General
commentary highlights

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Climate was one of the biggest stories of the quarter with the release of the IPCC report and extreme weather events continuing to occur around the world.

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Greater urgency around the transition to a more sustainable future in support of net-zero goals will increase opportunities and risks for investors.

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Returns from share markets across the world were quite flat over the September quarter, with many of the gains achieved earlier in the quarter reversed in the final month of September.

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Fund commentary

The Australian Ethical Emerging Companies Fund performed strongly over the September 2021 quarter, with the retail and wholesale funds outperforming their benchmarks, the S&P/ASX Small Industrials Index, by 5.9% and 6.0% respectively.

The outperformance can be attributed to stock selection, largely from holdings in the Communication Services, Healthcare and Information Technology sectors.

Our Ethical Charter drives the portfolio towards the Information Technology, Healthcare, Communication Services and Utilities sectors and away from the Consumer Discretionary, Consumer Staples, Materials, Industrials and Real Estate sectors. The portfolio also holds decent weights in the Financials sector (albeit underweight) which tend to include higher dividend yielding stocks.

Overall, the portfolio has 15.5% invested in small-caps which are typically identified as stocks between ASX100-ASX300, while 67% is invested in microcap names which are defined as companies outside the ASX300. New Zealand companies account for 12.2% of the Fund, and cash 5.2%.

The portfolio introduced the following three holdings over the quarter:

  • a holding in MedAdvisor which provides pharmaceutical adherence software and services in Australia, USA and the UK markets
  • accumulated holdings in governance, risk and compliance (GRC) software company Nuix
  • invested in Rubicon Water at IPO (Initial Public Offering), a company that sells gravity-based hardware and software for major agricultural irrigation schemes.

Investing in sustainable water management

The sustainable use of water resources is essential for healthy ecosystems and the wellbeing of our planet, people and animals.

One of the newest holdings in the portfolio is a water technology business called Rubicon Water Limited (ASX:RWL), which designs, manufactures, installs and maintains irrigations systems, including software and hardware, for agricultural purposes.

Rubicon listed on the Australian share market in August 2021 but the company itself has been around since 1995. It produces gravity-fed irrigation systems, as well as automation software to enable irrigation using less time, effort and water. The company has some very large installations in India, USA, China and Chili, giving it exposure to growth opportunities in large markets. Currently, half of its revenues are generated offshore.

There are few opportunities to invest in water-related companies on the Australian share market. This investment represents an attractive opportunity to participate in the growth of a company helping manage one of the world’s most precious resources.

Emerging Companies (Wholesale) Fund Performance as at 30 september 2021*

 

3 Months
(%)

1 Year
(%)

3 Years
(% pa)

5 Years
(% pa)

Since inception
(% pa)

Fund

9.8

40.1

28.7

20.8

21.1

Benchmark

3.8

29.1

9.5

9.8

11.3

Source: FE fundinfo. Benchmark is the S&P/ASX Small Industrials Index and inception date is 30 June 2015. Past performance is not a reliable indicator of future performance.

 

Emerging Companies Fund (Retail) Performance as at 30 SEPTEMBER 2021*

 

3 Months
(%)

1 Year
(%)

3 Years
(% pa)

5 Years
(% pa)

Since inception
(% pa)

Fund

9.7

39.5

28.0

20.0

20.3

Benchmark

3.8

29.1

9.5

9.8

11.3

Source: FE fundinfo. Benchmark is the S&P/ASX Small Industrials Index and inception date is 30 June 2015. Past performance is not a reliable indicator of future performance.


Relative to peers in the Mercer Wholesale Equity Australia Small Cap Universe (40 funds), the Emerging Companies (Wholesale) Fund:

  • delivered top quartile performance over 2, 3, 4 and 5-year periods ending 30 September.
  • ranked in first place over 2, 3 and 5-year periods ending 30 September.

The performance of the Emerging Companies Fund (Retail) relative to peers in the Mercer Retail Equity Australia Small Cap Universe (33 funds) was also outstanding, as the fund:

  • delivered top quartile performance over every applicable time period ending 30 September.
  • ranked in first place over 3 and 5 year periods ending 30 September.

 

QUARTILE RANKINGS AS AT 30 SEPTEMBER 2021^

 

1 Year

2 Years

3 Years

4 Years

5 Years

Emerging Companies (Wholesale) Fund

2nd
quartile

1st quartile

1st quartile

1st
quartile

1st
quartile

Emerging Companies Fund (Retail)

1st
quartile

1st quartile

1st quartile

1st
quartile

1st
quartile

Source: MercerInsights as at 30 September 2021. Past performance is not a reliable indicator of future performance.

Contributors

The top three contributors to performance were Cogstate Ltd (sector), Xref Ltd (sector) and Aussie Broadband Ltd. (sector).

The strongest contributor was contract research organisation Cogstate which appreciated 62% on growing appreciation of the FDA approval of Biogen’s disease modifying Alzheimer’s drug ‘Adulelm’ as well as a strengthening order book in the Cogstate's core neurological contract research business. The strong share price appreciation is attributed to Cogstate owning one of the leading global digital cognition tests which is expected to benefit from ongoing testing associated with the prescription of Biogen’s drug Adulelm, plus other Alzheimer’s drugs close to approval.

Another strong contributor was employment referencing software-as-as-service technology company Xref, which appreciated 75% over the quarter. It finished its 2021 year very strongly and is expected to benefit from the ‘great job resignation’ post COVID-19. In a similar vein, police-check and qualification verification technology company CV Check appreciated 29% over the quarter.

The third strongest contributor to investment performance was NBN telecommunications reseller Aussie Broadband, which appreciated 66% after beating its prospectus forecasts and taking greater NBN market share than expected.

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Detractors

The laggards included strata and facilities management technology company Urbanise, which fell 13% after strong share price moves earlier in 2021. The performance of wealth management and fund administration software provider Bravura fell 12%, which retracted earlier gains on what appears to be further delays in the recovery of its business driven by a sluggish UK software buying market. Education technology provider 3PL, the owner of Mathletics and Reading Eggs, slipped 8% on little or no new information.

Fund strategy

The Emerging Companies Fund is an actively managed small-cap strategy investing in small and microcap companies listed on the ASX and NZX that meet our values-based Charter. We are a bottom-up investor using fundamental analysis with no change in fund strategy expected over the next 12 months.

SEE FUND INFO



*Total returns are calculated using the sell (exit) price, net of management fees and gross of tax as if distributions of income have been reinvested at the actual distribution reinvestment price. The actual returns received by an investor will depend on the timing, buy and exit prices of individual transactions. Return of capital and the performance of your investment in the fund are not guaranteed. Past performance is not a reliable indicator of future performance. Figures showing a period of less than one year have not been adjusted to show an annual total return. Figures for periods of greater than one year are on a per annum compound basis. The current benchmark may not have been the benchmark over all periods shown in the above chart and tables. The calculation of the benchmark performance links the performance of previous benchmarks and the current benchmark over the relevant time periods.

^According to the Mercer Investment Performance Survey of Wholesale-Balanced Growth Universe and the Retail-Balanced Growth Universe as at 30 September 2021. Information sourced from MercerInsights has been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party.

This commentary may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, Australian Ethical accepts no responsibility for the accuracy or completeness of, nor does it endorse any such third party material. To the maximum extent permitted by law, we intend by this notice to exclude liability for this third party material.

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