13 Feb 2018
The Cyan C3G Fund delivered a -0.3% return in January 2018 (after all fees) in a seasonally quiet market with both big and small company indexes also down a similar amount at month’s end.
After digesting a strong finish to 2017, Australian investors appeared disinterested by a strong lead out of the US market in early January (although very happy to follow the lead now!) and instead seemed willing to wait for company reporting season to kick-in during February.
From a portfolio perspective there was some volatility on the low trading volumes and in the end, the negatives marginally outweighed the positives:
Key positive contributors:
- Spirit Telecom (ST1) +33%: Good momentum in underlying sales and integration of recent acquisitions resulted in buying support.
- Afterpay Touch (APT) +23%: Strong December quarter numbers and an announcement around a strategic partnership and expansion in the US.
- Axsess Today (AXL) +18%: Price strength driven by expectation around a strong upcoming interim result and potential securitization program.
Key negative contributors:
- Longtable (LON) -15%: The perceived overhang of stock issued in the recent capital raising led to price weakness.
- Experience Co (EXP) -12%: A one-off unfortunate event in the NZ business caused the price to decline after a strong performance in December quarter.
- Motorcycle Holdings (MTO) – 11%: Concerns around bike sales to impact the upcoming interim result competed against the longer term growth prospect in the business.
At the time of writing we find ourselves in the midst of “global equities market turmoil”. The Dow Jones is leading the charge down and other markets are following. Increased volatility is likely to be the end result for at least the short term. A few things to consider:
Firstly, the key reasons for the correction appear to be:
- Increasing speculation that the global low interest rate environment we’ve been operating in for a long time is now coming under pressure.
- The leading indicator of this, and the catalyst for the stock market correction, is the sell off in the US bond market, meaning bond yields are going up (representing assumed interest rate rises going forward). This makes sense to an extent in strengthening economies.
- Higher interest rates generally put pressure on asset prices and company valuations.
Secondly, this needs to put into perspective:
- The Australian stock market (and particularly the US) have been quite strong for an extended period, and will continue to strengthen over the long-term, but inevitably corrections will occur along the way. Forecasting the timing and magnitude is obviously the difficult part.
- The current correction is making headlines, but in the scheme of the overall market it is still relatively immaterial. The chart below shows the US and Australian markets over the past 4 years.
- The underlying economic conditions are relatively solid, albeit with asset prices that may prove to be stretched in a rising interest rate environment (think housing in Australia and the economic impact of a property downturn).
- Markets can overshoot in both directions so we can’t predict index movements over the short term.
Thirdly, the Cyan philosophy and positioning of the C3G Fund portfolio:
- We invest in companies that have significant growth ahead of them and positive share price catalysts over the medium term.
- We are comfortable that all our investments are fundamentally sound and continue to offer growth and value opportunities. We do not invest in companies because we think they are cheap at a certain point in the economic cycle (and are therefore not heavily exposed to the economic cycle in real terms).
- We don’t invest in companies that are heavily geared or laden with debt.
- We currently have in excess of 40% of our total capital invested in cash.
In summary, we do not pretend to know what the market will do in the coming weeks, but we do know that the companies in which we are invested are in strong positions and will be inherently more valuable in the coming 12 months. Companies mostly don’t change in value significantly over short periods of time – but sentiment certainly does.
At Cyan we will continue to adhere to our long-held investment philosophies, ride-out the current volatility and make opportunistic investments we deem appropriate within our risk parameters. Throughout the rest of February we plan to focus on company fundamentals as our Fund holdings report their earnings results and provide outlook statements.
Thanks for the support from our investors and we are available to be contacted at any time.
Dean Fergie and Graeme Carson
Cyan Investment Management
AFSL No. 453209