Emerging Companies Fund
The Emerging Companies Fund (Wholesale) (the ‘Fund’) returned 1.3% net of fees in the quarter ended 30 September 2023, outperforming its benchmark which fell 1.9%. The Emerging Companies Fund (Retail) grew by 1.3% net of fees in the quarter, also outperforming the benchmark.
The Fund has a small-cap strategy with investments spread across small and microcap companies in Australia and New Zealand. Stock selection in information technology and the communication services sector added value, while being underweight the poorly performing real estate sector also added value.
The Fund benefited from continued acquisition interest with cloud communications company Symbio receiving a non-binding indicative bid from ASX listed telco Superloop. One of our investee companies Aussie Broadband subsequently entered the fray with a superior bid for Symbio late in September.
Emerging Companies (Wholesale) Fund Performance
As at 30 September 2023~
| fund | benchmark$ | |
|---|---|---|
| 3 months | 1.3% | -1.9% |
| 6 months | 7.6% | 0.4% |
| 1 year p.a. | 8.5% | 8.4% |
| 3 years p.a. | 2.9% | 0.5% |
| 5 years p.a. | 10.6% | 0.7% |
| since inception p.a. | 12.2% | 5.4% |
$ Benchmark: S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.
Inception date: 30/06/2015. Source: FE fundinfo.
Emerging Companies (Retail) Fund Performance
As at 30 September 2023~
| fund | benchmark$ | |
|---|---|---|
| 3 months | 1.3% | -1.9% |
| 6 months | 7.5% | 0.4% |
| 1 year p.a. | 8.2% | 8.4% |
| 3 years p.a. | 2.5% | 0.5% |
| 5 years p.a. | 10.1% | 0.7% |
| since inception p.a. | 11.5% | 5.4% |
$ Benchmark: S&P ASX Small Industrials Index. Past performance is not a reliable indicator of future performance.
Inception date: 30/06/2015. Source: FE fundinfo.
Contributors and detractors
Top 3 contributors to Fund return
+203%
Nuix (NXL AU)
+160%
Gentrack (GTK AU)
+96%
Helia (HLI AU)
Top 3 detractors from Fund return
-62%
Bigtincan (BTH AU)
-51%
Praemium (PPS AU)
-57%
Healius (HLS AU)Contributors
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Nuix (NXL) shares rose 67% in the September quarter after delivering a strong financial update. Led by a refreshed management team, Nuix demonstrated strong growth in recurring revenue, which is measured by annual contracted value (ACV). Nuix showed discipline on costs and positive underlying free cashflow, which was favourably received by the market. The momentum seems likely to continue, with management targeting further recurring revenue growth and operating leverage in FY24. Nuix also resolved a litigation appeal from a former employee in August, bringing a close to the Ed Sheehy legal proceedings.
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Aussie Broadband (ABB) performed strongly during the September quarter following a positive earnings result highlighted by continued revenue growth and strong free cash generation. The integration of Over-The-Wire appears to have gone well and positions ABB as a full-service telco offering data and voice products to a wide range of customer types. Late in the quarter ABB lodged a conditional, non-binding offer for Symbio (SYM), which if ultimately successful would build further scale in ABB’s business.
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Bravura (BVS) was a strong performer during the September quarter as the stock reacted favourably to progress on the re-set of the business under the stewardship of new CEO, Andrew Russell. Further developments will be seen in FY24, which is a phasing year for the business as the cost restructuring programme benefits start coming through. The business, which provides mission critical software used in financial services firms, is expected to pivot to cashflow break-even in the second half of FY24 and this was positively received by investors.
Detractors
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Bigtincan (BTH) shares declined 28% in the September quarter as a raft of challenging news flow was released. From an operational perspective, recurring revenue growth slowed and churn increased in their customer base. The shares are trading at an historical low multiple of 1.1x enterprise value/ sales. The sales enablement company needs to demonstrate a clear path to be sustainably cashflow break-even to see improvements in its share price, in our view. Shareholders are increasingly frustrated by the delays in the potential change of control process and the share price has now ascribed nil value to an outcome.
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Our shareholding in Healius (HLS) detracted from performance in the September quarter due to a weaker FY23 result and outlook. Unfortunately, FY24 likely remains a transition year as Healius’ turnaround continues. The overall quantum of debt and lack of full-year dividend also weighed on investor sentiment during the quarter. We continue to see a pathway forward for Healius as base-pathology earnings revert to pre-COVID-19 levels as GP volumes return.
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Our shareholding in Capitol Health (CAJ) detracted from performance in the September quarter as lower general practitioner (GP) imaging volumes and higher operating costs weighed on the FY23 result. However, we believe CAJ is well placed to grow as GP volumes return and indexation benefits assist in offsetting the cost-base increases, leading to growth in FY24.
Aussie Broadband (ABB) performed strongly during the September quarter following a positive earnings result highlighted by continued revenue growth and strong free cash generation.
Portfolio changes
Additions to the Fund
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Antisense (ANP) – We added phase 2 clinical drug developer in muscular dystrophy Antisense into the portfolio, having followed the company historically.
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Aroa Biosurgery (ARX) – We added Aroa Biosurgery into the portfolio on the expectation its sheep based regenerative soft tissue repair will continue to make strong sales inroads into the US.
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Prophecy (PRO) – We added cyber and call centre software name Prophecy to the portfolio, expecting continued top line revenue growth and free cashflow generation in 2024.
Sell-downs from the Fund
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Blackmores (BKL) – The funds holding in vitamin company Blackmores was formally acquired by Japanese company Kirin over the quarter.
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Gathid (GTH) – We divested Gathid after a disappointing investment.
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Limeade (LME) – The funds holding in enterprise software company Limeade was formally acquired by private equity owned WebMD over the quarter.
Our shareholding in Healius (HLS) detracted from performance in the September quarter due to a weaker FY23 result and outlook.
We expect continued corporate interest in our small-cap and micro names over coming periods.
Sector allocation
Sector overweights
Cash, Communication Services, Health Care, Information Technology, Utilities (renewables)
Sector underweights
Consumer Discretionary, Consumer Staples, Financials, Industrials, Materials, Real Estate
Outlook for the Fund
Small cap and microcap companies continue to underperform larger ASX companies with rising interest rates disproportionately challenging companies is their earlier stage of commercial development. We believe once global interest rates have peaked investor interest will quickly return to smaller companies.
Over the quarter two of our portfolio companies were formally acquired with Japanese beer and beverage company Kirin Holdings buying iconic Australian vitamin company Blackmores, while private equity owned WebMD settled on the acquisition of software company Limeade. We are actively monitoring the takeover bidding for cloud communications company Symbio. We expect continued corporate interest in our small-cap and micro names over coming periods.
~ 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.
Investing ethically and sustainably means that the investment universe will generally be more limited than non-ethical, non-sustainable portfolios in similar asset classes. This means that the Fund may not have exposure to specific assets which over or underperform over the investment cycle, and so the returns and volatility of the Fund may be higher or lower than non-ethical, non-sustainable portfolios over all investment time frames.
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