20 Jul 2016
The Cyan C3G Fund finished the 2016 financial year strongly, delivering a return of 13.7% for the June quarter (after all fees), versus the Small Industrials Accumulation Index of 1.6%.
For the 12 months to June the C3G Fund delivered a total return of 41.4%, outperforming the All Ordinaries Accumulation Index by 39.4% and the Small Industrials Accumulation Index by 28.6%.
It is worth noting that in achieving this return, the Fund’s volatility has remained comfortably below both the large and small cap indices.
Again in a falling market, the Cyan C3G Fund held up well in June, retracing just 0.3%.
In addition to our portfolio of higher quality smaller companies, the C3G Fund benefitted from our defensive positioning with a moderate cash balance in response to many stretched company specific valuations.
In response to our ongoing philosophy of managing absolute fund risk, we reduced our exposure in Abundant Produce (ABT), Aha Life (AHL) and TouchCorp (TCH). However in light of price changes and specific company dynamics, we increased our positions in Afterpay (AFY), Bellamy’s (BAL) and Skydive the Beach (SKB).
Skydive the Beach (SKB) specifically made another acquisition in the purchase of its second New Zealand based competitor, Skydive Wanaka. The company successfully raised $15m through a 42c institutional placement in which the C3G Fund participated. With the stock ending the month at 51c it was a solid contributor.
Other key positive performers for the month included Adacel Technologies (ADA) +16%, Abundant Produce (ABT) +20%, Nick Scali (NCK) +11% and TasFoods (TFL) +28%.
Investments negatively impacting our return included AMA Group (AMA) -12%, Speedcast International (SDA) -10%, and Sealink Travel (SLK) -12%.
FINANCIAL YEAR 2016 REVIEW
Over the year the Cyan C3G Fund (after all fees) outperformed the broader market in 9 out of the 12 months. Encouragingly, not only did the Fund experience fewer negative months (4 versus 6); when it did fall, it fell significantly less than the market average by way of magnitude. To detail this, a negative month in the market averaged -3.3%, whereas the C3G Fund averaged -1.2% in its down months.
Within the portfolio itself, we have held between 20 and 35 companies at any one time, with our largest holdings rarely exceeding 6% of invested capital. We have maintained or expanded a number of our core portfolio positions, including:
Vita Group (VTG): This telco retailer has delivered impressive returns from its footprint of ~100 Telstra retail stores. The business has successfully streamlined its existing operations and enhanced value from its footprint of stores, but still has an eye on growth and expansion (share price +123% in FY16).
Blue Sky Alternatives (BLA): This alternative asset investment manager has achieved strong growth in assets under management and is now comfortably past the inflection point of its development, with further growth from here (share price +97% in FY16).
AMA Group (AMA): This panel beating consolidator has built an enviable position, both from a strategic and capital funding perspective, to continue to drive the structural change in the industry. In some ways we feel the easy money has been made, but on the other hand, we believe patience will be further rewarded as the complete story plays out (share price +40% in FY16).
Bellamy’s (BAL): This, now well known, organic baby formula producer has enjoyed serious share price success on the back of market share gains in Australia, and more notably, China. We retain some exposure due to our belief that the China penetration still has a long way to play out (share price +122% in FY16).
Abundant Produce (ABT): Backed by technology out of the University of Sydney, ABT is focussed on the intellectual property of agricultural seeds. It has a strong future pipeline of differentiated products, with its first variety rapidly approaching commercialisation. The company floated in April and returned ~300% in its first month of listed life.
Afterpay (AFY): This fintech (another over-used term that we had previously never heard and now hear every day) business allows customers to “Buy now, pay later” for retail products online, and potentially in-store (as a much better replacement for lay-by and other financing products). AFY listed in early June 2016 and at month’s end was trading at a 44% premium to its issue price. Although not yet profitable, the business metrics prove it is gaining incredible traction and is still in the very early stages of what will prove to be a phenomenal growth profile.
Adacel (ADA): This developer of control systems for the civil aviation and defence sectors is transitioning its now commercialised product to a business model generating strong recurring revenue. The improving profitability and earnings visibility has resulted in strong share price gains.
The macroeconomic and financial environments continue to create uncertainty however we continue to search for listed companies at the right stage of their lifecycle (as illustrated below).
We also try to protect capital by not over-exposing ourselves to any particular company or sector and holding a level of cash to protect the downside and take opportunities as they arise. We believe our portfolio is currently well positioned to find some sort of balance between growth and conservatism. We hold a cash balance of ~30% accompanied by a well-diversified portfolio of listed companies.
We would like to thank our investors for their support to date and are pleased we have been able to reward them with strongly positive and yet low-risk returns to date. We will strive to continue to find attractive business that we expect will provide solid returns to investors.
We look forward to keeping our investors updated with the Fund’s progress.