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INVESTMENTS  |  FUND COMMENTARY 

Emerging Companies Fund 

Over the 12 months, the Emerging Companies Fund outperformed its benchmark: +14.3% vs +13.7% (Wholesale +14.9% vs +13.7%). The outperformance is attributed to strong contributions in telecommunications and healthcare companies.

The Fund has strongly outperformed its benchmark over the medium and long term.


December 2021



The Fund underperformed its benchmark over the quarter: -2% vs -1.2% (wholesale -1.9% vs -1.2%). The underperformance is attributed to stock selection in the information technology sector, with names like employee access software company Damstra, sales enablement software company Bigtincan and strata and facilities management software company Urbanise detracting from investment performance.

Soft and hard commodity owners are beneficiaries in an inflationary environment as commodity prices tend to keep pace with inflation. Conversely, high growth companies - particularly those in the earlier stage of commercialisation - are getting penalised by investors through the discounting of their earnings by a higher rate and because significant earnings are still several years away. As such we also attribute our underperformance to sell-off in technology due to global inflationary concerns.


Emerging Companies (Wholesale) Fund Performance
As at 31 December 2021* FUND (WHOLESALE) BENCHMARK
3 MONTHS -1.9% -1.2%
1 YEAR P.A. 14.9% 13.7%
3 YEARS P.A. 31.5% 14.4%
5 YEARS P.A. 20.2% 10.2%
SINCE INCEPTION P.A. 19.9% 10.7%

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



Emerging Companies (RETAIL) Fund Performance
As at 31 December 2021* FUND (RETAIL) BENCHMARK
3 MONTHS -2.0% -1.2%
1 YEAR P.A. 14.3% 13.7%
3 YEARS P.A. 30.7% 14.4%
5 YEARS P.A. 19.4% 10.2%
SINCE INCEPTION P.A. 19.1% 10.7%

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


Contributors over the past quarter

The strongest quarterly contributor was OFX Group, which provides cost effective technology based foreign exchange services to companies and individuals, appreciated 46% over the quarter. The company gave a positive trading update for 2022, while also announcing an attractively priced acquisition of a Canadian FX peer.

Education software company and owner of Mathletics and Reading Eggs learning programs, 3PL Group contributed strongly to the portfolio (+45%). We attribute the share price strength to a better appreciation of the company’s strategy and 2022 guidance, as well as the ongoing Covid-19 crisis which promotes home learning. 

We were very pleased with the performance of job referencing technology company Xref which appreciated 27% over the quarter after announcing very strong 77% revenue growth in the September 2021 quarter. The company is expected to benefit from the great job resignation following Covid-19 as employees go in search of greener pastures.

 

Contributors over the past 12 months

The strongest 12-month contributor (+120%) was contract research company Cogstate which specialises in neurological research and appreciated on news the Federal Drug Administration had approved the first disease altering Alzheimer’s therapy. Cogstate benefited from more clinical research interest into Alzheimer’s and longer term it has some of the leading digital tools used for non-invasively monitoring cognition.

Our investment in Aussie Broadband appreciated 139% on impressive growth in NBN subscriber numbers.  The company has also acquired a business-focused telecommunications provider recently.

OFX Group which provides cost effective technology based foreign exchange services to companies and individuals appreciated 88% over the year. The company announced a positive trading update for 2022, while also announcing an attractively priced acquisition of a Canadian FX peer.


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Detractors over the past quarter

The leading detractor was employee access software company Damstra which fell 61% after downgrading its earnings and being forced to do an emergency capital raise at a heavily discounted price. The Fund participated in the raise and we have been engaging actively with the company.

Software-as-a service company Bigtincan which fell 20%. Bigtincan sells documents management software that equips sales representatives with the most relevant marketing information, while tracking client digital interactions and providing digital coaching for sales reps. We attribute the share price decline to a broad sell-off in earlier stage US technology companies on inflationary concerns.

Strata and facilities management software provider Urbanise fell 35% over the quarter with the market being frustrated with the company’s revenue growth. We also attribute the share price decline to a broad sell-off in earlier stage US technology companies on inflationary concerns.

 

Detractors over the past 12 months 

Employee access software company Damstra fell 78% after downgrading its earnings and being forced to do an emergency capital raise at a heavily discounted price. The Fund participated in the raise and we have been engaging actively with the company.

Mach7 Technologies which sells database and reader technology to radiology practices globally fell 34%. The company is growing impressively however its business model is still reliant on upfront license sales making short-term profitability quite volatile.

Employee wellbeing software provider Limeade fell 70% after losing clients during Covid-19. We believe there is a role for technology in monitoring large workplaces and shining a light on staff that need support. This software can raise employee engagement and reduce employee turnover which is valuable to employers.

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Portfolio changes during the past quarter

We have introduced EML Payments into the Fund after its share price was significantly de-rated on the back of an Irish regulatory investigation. We expect EML to be able to satisfy the regulator early in 2022 and return to growth thereafter.  We participated in packaging and recycling company Close the Loop at IPO, while opportunistically participating in placements for software company Prophecy and childcare operator Mayfield. We built a small position in Australian Clinical Labs before the share price rallied.

We divested our holding in IT system integrator Empired and cloud licensing company Rhipe on respective takeover offers, while divesting from lithium producer Pilbara Mineral as the stock entered the large-cap ASX100 Index. We sold out of Janison Education as the price exceeded our valuation.

 

Portfolio changes during the past 12 months

We added 16 new names in 2021 while divesting from 14 companies. Of the 14 companies divested, five occurred through takeover offers. The takeover offer offers accepted included:

  • IT system integrator Empired

  • IT systems integrator RXP

  • Consumer products company Asaleo

  • Corporate telecommunications company Vocus Communications

  • Cloud licensing company Rhipe

We have generally been adding to holdings of our underperforming names over the year.

Our significant IPO participation in 2021 was Rubicon Water which sells water solutions for large scale gravity feed irrigation schemes.   We believe reliable irrigation water and the infrastructure that can manage it efficiently will be increasingly valued in the future.

 

Outlook for the fund

The Emerging Companies Fund is overweight in more growth-orientated healthcare and information technology sector companies and is significantly underweight materials. With the emergence of inflation and ongoing debate around whether the inflation is transitionary in nature, earlier stage growth companies typically underperform in this environment while commodity-orientated companies benefit. While inflationary concerns are evident, we are bottom-up stock pickers using fundamental investment analysis and have confidence good opportunities will present in this environment.


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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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