11 Sep 2020
We are pleased to report that the Cyan C3G Fund enjoyed its greatest ever monthly gain in August, with a rise of 11.7%. This was well ahead of the All Ords’ return of 3.7% and sees the Fund outperforming the broader market index over all periods and after all fees.
Many market watchers may be scratching their heads at the optimism the markets are displaying, both here and overseas. We put this recovery down to a handful of factors: 1. Government handouts have been swirling through the economy (as is their intention) providing a massive, concentrated boost for consumer spending in specific retail sectors. This was evident in the recent reporting season when a number of companies in these favoured industries released surprisingly robust financial results. 2. Low interest rates are conducive to strong equities markets. Company valuations get written up significantly with lower interest rates, whilst meaningful returns in other asset classes such as government bonds and property are almost impossible to find. Importantly, when the relative pricing of the equities market and the bond markets are considered (for example the spread of earnings yields) the equities market does not look at all stretched. 3. Investors appear willing to focus on long-term earnings rather than short-term challenges as evidenced by the resilient performance of sectors such as travel, gaming and infrastructure. 4. Certain sectors are strongly outperforming, particularly as a result of the aforementioned government handouts which is helping to drive investor optimism and subsequently the overall market. 5. Retail stock market investing has surged. A side-effect of the lock-down has been a surge in online retail trading with a massive increase in retail traders driving trading volumes and positive price action. Click here for a PDF of this newsletter
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Month in review Pleasingly, the fourfold investment strategy that we implemented at the beginning of the pandemic in March 2020, has proven effective at both capturing opportunities and avoiding declines.
Indeed since the lows at the end of March the Fund’s NAV has increased by more than 45% after all fees. Throughout August there were less than a handful of positions that fell and more than half of the positions in the Fund enjoyed double digit rises. Of the more notable gains: Quickfee’s (QFE +25%) full year result showed increases across the board in its domestic client lending (+17%) and its expansion into the US (lending +63%). There’s no doubt the stock is also benefiting from some of the hype in the Buy Now Pay Later sector which, in some cases, we are extremely skeptical about elevated valuations. Raiz (RZI +23%) is an online investment platform (it was known as Acorns and is very similar to Spaceship) and has been benefiting from an increase in client investing interest and organic growth in asset prices. Customers were up 15% to 223,000 and FUM rose 30% to $460m in the year to June 2020. Importantly its push into Asian markets is gaining traction. Kelly Partners (KPG +22%) has enjoyed a rise in its share price as investors appreciate the strong dividend yield (4-5% p.a.) and the defensive nature of accounting revenues in the current environment. Jumbo Interactive’s (JIN +24%) online presence continues to be attractive in this environment, with more and more customers avoiding physical interactions turning to online alternatives for their lottery purchases. JIN re-negotiated its reseller agreement with Tabcorp out to 2030 providing investor certainty. New Zealand Coastal (NZS +89%) continued its incredible run after signing a supply agreement into Europe and the company is presently raising additional capital to fund its expansion plans and capabilities. Through a number of recent corporate opportunities including IPOs and placements we have committed to making both some new and existing investments in companies such as: Spirit Telecom (ST1), Universal Biosensors (UBI), City Chic (CCX), Kip McGrath (KME) and Harvest Technologies (HTG). Outlook The dichotomy between the strong performance of sections of the market and the current economic outlook feels acute. The challenge is striking a balance between enjoying the market tailwinds whilst being cognisant of the challenging economic headwinds. This has also created challenges when trying to value individual companies and in some cases we have experienced investment positions exceeding our near-term valuations. For that reason we have been actively re-balancing the Fund by taking profits from the positions that have run hard and re-allocated some of this capital into new growth opportunities. Additionally the Cyan C3G Fund also has the scope to maintain excess cash balances whilst waiting for new investment opportunities. Despite the recent volatility, our active stock management means the Cyan C3G Fund remains well-diversified across both industry sectors and business life-cycles and with varying positive catalysts ahead.
Last month we wrote:
One of the real benefits of buoyant markets is the opening of the ‘corporate window’. Listed companies can raise capital for growth and new companies come to market through IPOs. We are seeing numerous opportunities and have taken a number of new investment positions. There is no doubt that the buoyant market backdrop for an active and nimble fund like the Cyan C3G Fund is an incredibly attractive environment in which to invest. We do expect to experience periods where volatility spikes but, particularly in light of sub 1% interest rates, we firmly believe the balance remains in favour of ongoing attractive equity market returns given the activity we’re seeing at the smaller end of the market. If you have any questions about the Fund, our current exposures or investment philosophy and strategy please contact us directly. |
