13 Dec 2019
The Cyan C3G Fund had a disappointing month, both absolutely and relatively, with a fall of 3.2% in November. Many of the companies in which we had enjoyed strong gains in prior months have endured selling pressure. However despite the recent retracement, the Fund’s one year return remains a respectable 19.6% after all fees.
When we invest in a new company, we typically look at an investment timeframe in excess of 2 years. Businesses do not tend to have huge changes in underlying value in a period of weeks or months, it’s the old adage of “It took 5 years of hard work to become an overnight success”. However the stock market does value and price companies on a daily basis; sometimes the market is too optimistic, and sometimes it under-appreciates the creation of shareholder value. What that means, to a large extent, is that we have to accept fluctuations in short-term prices in order to achieve meaningful positive long-term returns.
Last month we elaborated on why we believe it’s a mistake to attempt to ‘trade’ the market’s volatility and those 3 rationales remain relevant.
As always, we aim to remain as transparent as possible and will discuss stock specific factors in detail.
Month in Review
Amongst the 30 odd positions in the Fund we saw only around a third rise in the month and only one of these, Schrole (SCL), rose more than 10%. On the negative side of the ledger, we had 5 of our core holdings fall by 15% or more.
It was certainly a far cry from September 2019 where we saw 7 of our holdings rise more than 30% in the month and a further 6 more delivered double-digit percentage gains
Some of the major moves in October:
Jaxsta (JXT) -23%: JXT has a market cap (now) of around $50m and due to limited liquidity its shares can be quite volatile. At the time of writing the company has just raised around $2m which may well have accounted for the recent weakness. JXT’s paid-for site is currently going live and we remain confident their product (a comprehensive database of official music credits) will find a significant commercial user base.
Quickstep (QHL) -10%: We attended a site visit to QHL’s Sydney manufacturing facility in Bankstown during the month. QHL has run up strongly this year (from 7c to 15c) and in light of the positive update given during the visit, the recent pullback to ~12c appears to have been profit taking as opposed to negative operational outcomes.
AMA Group (ALC) -10%: Smash repair consolidator AMA has come under some recent pressure post its large acquisition in October of competitor Capital Smart from Suncorp and subsequent $200m+ capital raising.
Schrole (SCL) +21%: We first invested in SCL in May 19 but because of the small size of the company at that time, felt it prudent to limit the public disclosure of our investment. Schrole provides a software platform that facilitates both the recruitment and verification of teachers for international schools. Critically SCL now enjoys a recurring revenue stream in excess of $4m p.a. from its growing client base of schools and teachers. If the company’s momentum it has gained in 2019 continues, it’s likely 2020 could be a watershed year for the stock.
Despite the underwhelming performance of the Fund over the past two months (albeit after 9 consecutive positive months) we still have much to be upbeat about with respect to the Fund’s outlook.
In addition to the positive expectations for our core holdings there has been a deluge of corporate activity and new issues, some of which have the potential to be attractive longer-term investments. Indeed, Graeme Carson mentioned both Carbon Revolution (CBR) and Aerometrix (AMX) in his AFR article which have both debuted strongly.
We thank all our investors for their support and look forward to keeping you all updated with the Fund’s progress.