10 Nov 2015
After rising 11.4% in September we were delighted that the Cyan C3G Fund posted a gain of 4.1% in October 2015, taking the quarterly return to 13.3% after all fees, well ahead of all relative benchmarks and comparable funds.
In the past 12 months, the Cyan C3G Fund has gained 42.9%, well ahead of the All Ords Accumulation Index’s modest 1.3% rise, highlighting the outstanding returns that can be generated from selective small cap equity investment.
Full report: Cyan C3G Monthly Oct 15
We were remarkably busy in the month having attended 4 conferences (spotlighting more than 50 listed companies); embarked on interstate site visits; organised local one-on-one meetings with our core holdings; and attended a number of key company AGMs. In addition to these company meetings, we were presented with more than a dozen corporate transactions including placements, reverse takeovers (RTO’s) and initial public offers (IPO’s) for possible Fund inclusion.
THE FUND
In terms of the month’s performance, the main contributors included:
Skydive the Beach (+10%) (SKB) made its first offshore acquisition buying the NZ based Skydive Queenstown for $15.5m and raising $20m at $0.30 (presently $0.35). Having supported the company since its March 2015 listing, the Fund obtained a meaningful allocation in the capital raising and benefitted accordingly. SKB is capped at over $100m and will increasingly find itself on the radar of larger funds looking for an impressive organic and acquisitive growth story.
Sealink (+10%) (SLK) has a market cap of over $300m after its $125m Transit Systems Marine acquisition last month and the market appears to be appreciating the increased economies of scale the business is enjoying. In addition, the mainstream press detailed a possible tie-up of Sealink with Paul Little to provide Melbourne based ferry services, further attracting interest to the company.
The Fund added a position in the recently listed online retailer AHA Life (+25%). Whilst we passed on the IPO of this business back in July 2015, recent price weakness combined with improved sales numbers has now proved the business attractive enough for Fund inclusion.
We took a stake in the IPO of Link Administration Services (LNK) (+10%), given its strong market position in both share registry and superannuation fund administration services.
Other stocks in which we have made recent investments include Integral Diagnostic (IDX) and Paragon Health (PGC) .
As always there will be some detractors to overall Fund performance. This month we weathered the following:
Capitol Health (-28%) was severely impacted by an impending government enquiry into imaging referrals which generated a significant fall in imaging scans for the business in the quarter. We calculate this could see earnings impacted by up to 32% in 2016. The stock has been under pressure for much of the year but we had not added to our holding during the weakness and as such the impact to the Fund overall was limited to less than 0.5%
CV Check (-21%) fell sharply as some of the hype from this stock’s stellar performer in September (+275% on issue price) subsided as the market tempered somewhat its prior enthusiasm for the business. As mentioned last month we took a lot of stock off the table following the strong price rise last month and thus the impact on Fund performance was not material.
OUTLOOK
Whilst we wouldn’t suggest the market is primed for a large pullback, we are conscious that the supply side is at risk of overwhelming the demand side given the sheer number of capital raisings that have come across our desk in the past 8 weeks.
The silver lining from the abundance of activity is that with some experience and a critical eye, profitable enterprises can be found amongst the myriad of deals. We believe we have effectively made some astute investment decisions this year and expect this trend will continue.
However we would like to reiterate last month’s commentary where we stated:
“Clearly the fund has had in incredible run and whilst we are always looking closely at attractive investment opportunities, we remain laser-focussed on investment risk. We are relentless in implementing our cautious and conservative investment framework in respect to the quality of the Fund’s holdings. “
As such our Fund is positioned conservatively and we have taken some profits from the stocks which have gained ground. The Fund holds a cash balance of ~35% accompanied by a well-diversified portfolio of 25 companies.
In the coming months we expect to see further activity in the corporate sector and have presently committed funds to a diverse range of businesses including Melbourne-based corporate cleaning business, Millennium and automotive motorsport cooling business PWR Holdings.
We sincerely thank our investors for their ongoing support and look forward to providing further updates.
Full report: Cyan C3G Monthly Oct 15