Cyan Newsletter – 31 August 2017

19 Sep 2017

The Cyan C3G Fund reported an impressive 3.6% gain in August. This latest result drove the absolute return of the Fund to in excess of 100% in just over three years since inception in July 2014, an annualised return of 25.8% p.a.

Happily, the August result of 3.6% was also well ahead of both the 0.8% gain in the ASX All Ordinaries Accumulation Index and the 1.7% delivered by the ASX Small Industrials Accumulation Index.

Importantly, it was delivered through earnings season and most (if not all) of the Fund’s return this month was driven by holdings reporting impressive business performance.

Full report: here

Highlights included:

Afterpay Touch (APT)https://www.afterpay.com.au/
Again this business delivered ahead of market expectations and its price rose accordingly. Reported revenue at $29m was almost 10% ahead of expectations and all metrics – customer numbers at 1m, merchants over 7k, bad debts at 0.6% – were all better than expected. Notably, a flagged entry into the travel market with a major airline (just announced as Jetstar) will further pique the market’s interest. APT rose 21% in August.

Blue Sky Alternative Investments (BLA) http://blueskyfunds.com.au/ – Yet again Blue Sky reported figures ahead of expectations driving the stock 13% higher. In the past year: FUM was up 50% to $3.2bn; revenue rose 35% to $85m; and NPAT gained 56% to $25.5m. Whilst any ‘market’ related stock is likely to fluctuate with stock market gyrations, the underlying momentum in the business is clear and we expect significant price appreciation over the medium term.

Moelis (MOE)https://moelisaustralia.com.au/ The Fund has recently taken a small position in this newly listed Sydney based investment bank (MOE floated in April 2017). Already the company has made two large acquisitions in property and funds management and has had two earnings upgrades. Tight liquidity and significant management ownership have made this business looks very much like it could, over time, become the next Macquarie Bank. (MOE +33% in August).

Skydive the Beach (SKB)https://www.skydive.com.au/ For long-term Fund holding Skydive FY17 was a year of consolidation. The company integrated two large acquisitions (Raging Thunder and Reef Magic), consolidated disparate IT systems, upgraded airplane engines and improved its ground transport fleet, catering services and shop presence. Whilst some poor weather impacted top-line revenue, profitability met expectations, a credit to management performance. In light of the company’s diversity away from skydiving – it now offers ballooning, rafting, canyoning, and island day cruises – a name change to Experience Co is being proposed to shareholders.

Press

Dean Fergie was interviewed by the new online business news site Stockhead which gives a good overview about how we look at investing: https://stockhead.com.au/experts/humility-and-cynicism-key-traits-of-successful-stockmarket-investors/

Cyan wrote about the prospects for diagnostic imaging provider Capitol Health (CAJ) http://www.capitolhealth.com.au/ in Livewire: https://www.livewiremarkets.com/wires/capitol-health-s-continued-recovery

We were also interviewed about the upcoming Afterpay Touch (APT) result in Livewire: https://www.livewiremarkets.com/wires/afterpay-one-of-the-most-exciting-stocks-on-the-market

Outlook

For us the most illuminating market move during the month was the fall in the very well-held Telstra (that we have never owned), which plummeted 15% from its intra-month highs after cutting its dividend. TLS now finds itself trading at a 5 year low, 45% below recent highs in July 2015.

This highlights three important aspects of share-market investing:

  • Large ASX listed companies are not necessarily defensive;
  • There is significant risk in having large ownership in a single stock;
  • Dividend yield (particularly when it is not covered by cash earnings) does not mitigate capital risk.

Whilst our Cyan C3G Fund only invests in ASX listed shares and cash (or short dated term deposits) our overriding investment philosophy avoids many pitfalls from individual share ownership.
To recall:

  • The absolute maximum Fund weighting in any single company is 10% (currently our largest holding is 7% of the Fund);
  • We typically invest for capital gain (not yield) and hence we are likely to avoid the market’s ‘value traps’;
  • The Fund may hold a reasonable weighting in cash (currently this is around 37%);
    In over three years, the maximum loss the Cyan C3G Fund has sustained in a single month is 3.6%.

Our successful investment philosophy has remained unchanged and we have not, and will not, invest in very high-risk sectors including resources, biotechnology or any companies that are yet to be commercially proven (i.e. they are yet to generate commercial revenue).

It’s always hard to know what to expect in the short-term, 3 months ago we certainly wouldn’t have been game to predict an 8% gain!

All we can say is that the Fund remains very well diversified with 24 individual holdings and no position accounting for more than 7% of the total Fund. The companies span 6 broad industry sectors including: consumer staples and discretionary; industrials; health care; technology and financials. The weighted average market cap is approximately $300m. All produce revenue, 90% are profitable and recently all have met or exceeded our expectations for business performance.

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

As always we are contactable in person if investors wish to discuss any aspect of their investment in the Cyan C3G Fund.

Dean Fergie and Graeme Carson
Cyan Investment Management

AFSL No. 453209

To invest in the Cyan C3G Fund online click: http://www.cyanim.com.au/how-to-invest/ 

(Full Report: Cyan Monthly Aug 17)