Cyan Newsletter – 31 October 2016

14 Nov 2016

The C3G Fund fell 2.1% in October, comfortably outperforming the market with the Small Industrials Accumulation Index tumbling 5.3%.

The C3G Fund continues to do better than all comparable market indices over all timeframes since inception. Since inception the Cyan C3G Fund has delivered a return of 85% (31% p.a.) after all fees. Again we note in achieving this return the Fund’s volatility, at 11.7%, has remained well below both the large and small cap indices.

Full Report here


October was a weak month with high quality companies across almost all sectors sold down, as illustrated in the table below.


Within the Small Industrials Index (which the Cyan C3G Fund portfolio can be most closely compared) consensus analyst forecast downgrades heavily outweighed upgrades at a magnitude of 2:1. This was driven by 1) a pare back of previously overly-bullish forecasts that now look too aggressive given the benign economic environment, or 2) negative company commentary either at AGMs or through the release of company specific earnings guidance.

The poorest share price performances came from The Reject Shop (TRS), Ardent Leisure Group (AAD), Bega Cheese (BGA) and Ten Network Holdings (TEN), all of which retracted more than 20% over the month. Cyan owns no shares in any of these companies.

Within the Cyan portfolio, only a handful of investments bucked the trend and delivered positive returns, including Praemium (PPS), Opus Group (OPG), Speedcast (SDA) and PSC Insurance (PSI).

Within the portfolio of 25 investments, the majority experienced some price weakness, although diversification protected performance against some of the larger company specific declines.

Our most disappointing performance came from a company that has previously been a strong performer for us in Vita Group (VTG) -18%. This retailer, which operates more than 100 Telstra retail stores, recently revealed that:
“…in line with commercial practice, Telstra briefed Vita Group and the broader Telstra licensed channel in confidence about some potential changes to the remuneration construct, reflecting a number of market and commercial factors. Vita and Telstra are currently in confidential discussions about those potential changes, and other strategic and tactical opportunities available to the partnership”.

The outcome of the negotiation is obviously difficult to predict, but the market understandably has focussed on the risks instead of the opportunities. Having recently reduced our exposure, VTG currently represents approximately 2% of the Fund and we watch with interest as developments come to light.

Other underperformers included Freelancer (FLN), Bellamy’s (BAL) and Afterpay (AFY).

Throughout the recent market volatility we have deployed a small portion of our high cash balance to opportunistically increase positions in some of our preferred companies on share price weakness.

Due to our strong focus on risk management, and as shown in the chart below, the Cyan C3G Fund has historically done relatively well during periods of market decline which was again the case through October.



Recent market sentiment has been driven by macro events, most notably the US election. Obviously we now know the outcome, so in one sense speculation has been removed and in another, given the outcome, it may only be just beginning. To date the reaction of global share markets has been surprisingly strong although we have a heightened sense of uncertainly and will be following any rhetoric, particularly with respect to China/US trade, very closely.

As we have stated previously, whilst we are always looking for exciting new investments, we also aim to protect capital by being very selective about where we invest and not over-exposing ourselves to any particular company.

The vast majority of our larger positions contain our preferred characteristics of high return on equity, strong cash conversion and below average dividend payout ratios, which positions them well to deliver ongoing earnings growth and share price appreciation.

We thank our investors for their support and look forward to keeping you all updated with the Fund’s progress.