12 Apr 2016
The Cyan C3G Fund gained a credible 2.2% in March 2016 after all fees, albeit this was below the performance of comparable indices.
Fortunately the losses that had been incurred in the first two months of calendar 2016 were largely eliminated in the strong March. The All Ords Accumulation Index rose 4.7% and the Small Industrials had a solid rebound of 6.0%.
(Full Report here: Cyan C3G Monthly Mar 2016)
In the 3 months to date of 2016, the Cyan C3G Fund has performed broadly in line with All Ordinaries and the Small Ordinaries indices but has experienced far less investment risk doing so. It is worth highlighting that the annualized volatility of the C3G Fund so far in 2016 is 10.0%; versus 17.7% for the All Ords and a massive 19.9% for the Small Industrials. The lower volatility clearly represents our risk averse investment framework.
Those that follow our investment strategy closely will be aware that the Cyan C3G Fund does not invest in direct resources (we believe the speculative nature of the sector and high risk/return bias makes it one we actively avoid). Obviously March was a month in which many of these stocks had very strong returns (after a prolonged period of terrible performance) and was one of the major reasons the fund did not keep pace with the broader indices.
Cyan C3G Fund Return since inception (July 2014)
FUND PERFORMANCE
It was more-or-less business as usual for the Fund in March. Great portfolio returns are generated by holding quality stocks over long periods of time (much like real estate) and hence it is unlikely, unless we get our strategy completely wrong, that there will be major portfolio changes month-to-month.
Of course the beauty of the liquid stock-market is that small changes can be implemented easily and cost-effectively when required. So whilst the names of the core stocks remain reasonably constant, the weightings and allocations to these stocks are quite dynamic as prices, and hence investment attractiveness, change.
More specifically, we have recently reduced our holding in Vita Group, and increased our weightings in BlueSky, Freelancer and Opus Group. In respect to March’s performance, our top holdings all produced double digit returns including BlueSky (+21%), AMA Group (+12%), Vita Group, Opus Group and Adadcel. The only meaningful negative returns were weathered in Freelancer (-11%) and Touchcorp (-15%) that both appeared to be impacted by some investor rotation out of the technology sector rather than any company specific factors.
Despite the reasonably static core holdings we were quite active with our shorter-term portfolio. In the month we took placements or sell downs in Aconex, Melbourne IT, Nick Scali and Silver Chef and happily all of these have proven to be profitable transactions for the Fund.
FUND PERFORMANCE (after all fees)
Cyan C3G Fund monthly returns (Blue) typically show great resilience in the months in which the market falls (Red)
OUTLOOK
There are some investments to be excited about in the near future. We have researched a number of upcoming IPO’s and have identified a couple we believe could produce some solid returns in the near future. This includes Afterpay (a business that is part owned by current fund holding, Touchcorp) and which we believe we understand relatively well.
Afterpay will list in its own right through an IPO in April. This technology-driven payments company allows customers to “Buy now – pay later” for online retail products. The concept has gained significant traction in Europe and Afterpay is well-positioned to capitalise domestically. We have confidence that the high-calibre management team will execute the company’s commercialisation strategy successfully.
We continue to focus on sustainable growth and note that 7 of our top 10 holdings generate what we believe to be maintainable return on equity above 20% and are reinvesting at least half of their earnings back into their businesses. In terms of size, more than half of our holdings are in companies with a market capitalisation between $200m and $500m. That said, we reiterate our ongoing strategy, based on the following key themes:
1. Invest in companies, not markets
2. Invest in quality
3. Avoid high risk and volatile sectors
4. Invest in companies that earn through the cycle
5. Invest in companies with specific growth
6. Deploy a portion of our high cash balance to build opportunistic positions as we identify them
(Full Report here: Cyan C3G Monthly Mar 2016)
Dean Fergie & Graeme Carson
Cyan Investment Management
AFSL No. 453209