Cyan Newsletter – 31 December 2017

12 Jan 2018

The Cyan C3G Fund achieved a strong 4.3% return in December (after all fees), bookending an exceptional gain of 33.6% for calendar 2017.

The annualised performance of the Fund since inception in July 2014 is now over 28% p.a. (after all fees), considerably ahead of the All Ordinaries Accumulation Index which has returned just 7.7% p.a. This equates to the Cyan C3G Fund outperforming the All Ords by more than 100% when compounding is taken into account.

Detailed charts, figures and unit prices are available at: http://www.cyanim.com.au/performance/

The Fund did well due to the impact of many names familiar to our longer-term investors. Afterpay Touch (APT) rose almost 20%, Bluesky Alternative (BLA) +13%, Kelly Partners (KPG) +9% and Motorcycle Holdings (MTO) up +7%.

The Fund had a good win by subscribing to a placement in Longtable (LON) (previously Primary Opinion) that raised money to acquire the South Australian based biodynamic-organic dairy business, BD Farm Paris Creek. http://www.bdfarmpariscreek.com.au/ LON shares ended December trading more than 50% higher than the placement price.

The Fund also took a small position in Credible (CRD) https://www.credible.com/ an emerging (and revenue generating) US fintech company that facilitates student loans. CRD ended December 10% higher than its issue price.

In terms of 2017 all our major holdings experienced significant gains mirroring their positive underlying business achievements.

The 2017 honours role included:
Afterpay Touch (APT) +136%, https://www.afterpay.com/en-AU/index
Bluesky (BLA) +108%, http://blueskyfunds.com.au/
PSI Insurance (PSC) +63%, http://www.pscinsurance.com.au/
Experience Co. (EXP) +40%, https://www.experienceco.com/
Additionally, a number of newer holdings added during 2017 performed well including Kelly Group (KPG) +74%, Moelis (MOE) +62%, Motorcycle Holdings (MTO) +22% and Family Zone (FZO) +86%.
Press
Graeme Carson wrote about Axsess Today (AXL) for Livewire’s Christmas Cracker series. https://www.livewiremarkets.com/wires/livewire-christmas-cracker-10-a-small-company-with-all-the-attributes-of-stellar-growth

We produced a couple of short introductory videos about Cyan and the C3G Fund that are available on our modest YouTube channel at: https://www.youtube.com/channel/UCggx2N1FuE2pQvySU8revig

Whilst it was great to end a positive year (it’s fair to say a positive 3½ years) so well, we are keen to note that the 2017 year was assisted by some market tailwinds that contributed to this outstanding outcome. Of course we clearly made some valuable investment decisions that amplified returns so excessively for our unitholders.

What is unique about the stock market is that the value of companies (in the market) changes almost every day, and yet the inherent value of those business, necessarily, does not. Or, indeed, the opposite occurs. Our long-term investment in Experience Co. (EXP) (previously Skydive the Beach) is an excellent example.

In the 12 months from September 2016 to September 2017 the company made three significant – and arguably company transforming – acquisitions and yet the share price in EXP barely moved. However in the three months from September 17, the share price rocketed over 40% with the market only choosing to recognise this value creation in a brief and arbitrary time-frame.

Experience Co (EXP) performance and acquisitions since Jan 2016

What we would like our investors to appreciate, is that shorter-term (month to month) movements in share prices (which determine the monthly NAV of the Fund) do not always accurately reflect the underlying fundamentals of the companies in which the Fund has invested. With a diversified portfolio comprising 20-30 individual investments, these anomalies tend to balance out (hence the orderly increase in the Fund’s NAV this year), but during any market surge or pull-back, they will have the propensity to move together.
Outlook
At the start of any new year one has the temptation to consider what the coming 12 months will hold, particular in the financial world. This time last year with a new US President and a benign growth outlook you would not have found us, even privately, predicting a 34% outcome for the Cyan C3G Fund. Understandably, we will not be doing that this January either.

We know from experience that attractive investment opportunities will present themselves and we will be there to take advantage of them.

The Fund remains well diversified with 26 individual holdings and no position accounts for more than 7% of the total Fund. The weighted average market cap is approximately $300m and all have met or exceeded recent expectations for business performance. In addition, they all contain what we believe to be positive business catalysts over the short to medium term.

We also continue to hold a significant defensive cash balance (currently over 35%) which we will look to carefully deploy as opportunities arise.

Dean Fergie and Graeme Carson
Cyan Investment Management

AFSL No. 453209

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