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Emerging Companies Fund update

General
commentary highlights

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Fund commentary

The Emerging Companies portfolio has delivered strong performance as at 30 June 2021, significantly outperforming its benchmark over the medium term.

In keeping with the Ethical Charter, the Fund’s largest sector positions typically align with forward looking parts of the economy in areas where the team has deep domain expertise.  Pleasingly several of these sectors made significant contributions to outperformance; specifically healthcare and information technology.

 

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

The Emerging Companies Fund (Wholesale) outperformed its benchmark over 1, 3, 5-year periods ending 30 June. Over the past year, it returned 51.1% compared to 33.0% for the benchmark S&P ASX Small Industrials, generating outperformance of 18.1%.

 

1 Year
(%)

3 Years
(% pa)

5 Years
(% pa)

Since inception
(% pa)

Fund

51.1

26.0

20.9

20.3

Benchmark

33.0

9.4

10.8

11.1

Source: FE fundinfo. Benchmark is the S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.

 

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

The Emerging Companies Fund (Retail) outperformed its benchmark over 1, 3, and 5-year periods ending 30 June 2021. Over the past year it returned 50.3% compared to 33.0% for the benchmark S&P ASX Small Industrials Index, generating outperformance of 17.3%.

 

 

1 Year
(%)

3 Years
(% pa)

5 Years
(% pa)

Since inception
(% pa)

Fund

50.3

25.3

20.0

19.4

Benchmark

33.0

9.4

10.8

11.1

Source: FE fundinfo. Benchmark is the S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.

Relative to peers in the Mercer Wholesale Equity Australia Small Cap Universe and the Mercer Retail Equity Australia Small Cap Universe, the Fund delivered top quartile performance over 1, 2, 3, 4 and 5-year periods ending 30 June 2021.

The fund performance was also ranked in first place over the following periods:

  • the Emerging Companies Fund (Retail) ranked in first place out of 34 funds in the Mercer Retail-Equity Australia Small Cap Universe over 5 years ending 30 June 2021.
  • the Emerging Companies (Wholesale) Fund ranked in first place out of 40 funds in the Mercer Wholesale-Equity Australia Small Cap Universe over 3 and 5 year periods ending 30 June 2021.

 

Quartile rankings as at 30 June^

 

1 Year

2 Years

3 Years

4 Years

5 Years

Emerging Companies (Wholesale) Fund

1st 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 June 2021. Past performance is not a reliable indicator of future performance.

Contributors

Neurological focused Cogstate was the Fund’s strongest performer appreciating 278% on a recovering contract research business and the approval of new Alzheimer’s drug in America. The company’s digital cognition software is expected to play a role in future Alzheimer’s testing and monitoring. It has entered into a licensing deal for its cognition testing technology with global pharmaceutical company Esai.

Online education assessment company Janison Education was a strong contributor with Covid bringing the technology to the forefront and accelerating the transition of examinations from pen and paper to online digital delivery. Janison announced an exclusive partnership with the OECD to become the sole provider of PISA for Schools in Australia.

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Detractors

The Fund is typically underweight consumer discretionary names, which are often cyclical companies that don’t align with our ethical frameworks. This proved a modest headwind over the year as several businesses in this space held up better than market expectations during the COVID pandemic.

Notable detractors included Cleanspace and Rhipe. Cleanspace was impacted after a sharper than expected deterioration in healthcare demand for their powered air purifying respirators. In the case of Rhipe, the company subsequently entered into a Scheme of Arrangement to be acquired, which pleasingly has led to a strong appreciation in the share price after period end.

Outlook

Despite pockets of valuation excess, we continue to find attractive opportunities, often in less well-researched parts of the market such as mid and smaller capitalisation companies.

We are seeing increased levels of corporate activity consistent with stimulatory policy settings and the positive implications for earnings assuming a successful rollout of effective vaccines against COVID.  Our research efforts remain focused on identifying bottom-up opportunities in areas that align with our ethical frameworks and our established expertise.

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.

Past performance is not a reliable indicator of future performance. Australian Ethical offers a diverse range of investment options depending on your investment objective, timeframe and risk profile. You can see the options and their respective performance here.

*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 the Wholesale-Equity - Australia - Small Cap (Actual Ranking) as at 30 June 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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