17 Feb 2020
The new decade kicked off with a bang in January as the ASX surged ahead on renewed optimism about the economic outlook and ongoing enthusiasm for Australian equities in light of sustained low interest rates.
Unfortunately the Cyan C3G Fund returned -0.3%, behind both the S&P/ASX Small Industrials Accumulation Index (+4.1%) and the S&P/ASX All Ords Index (+4.7%). Nevertheless the 12 month return of 14.6% remains at the top end of our long term target of 10-15% p.a.
At Cyan, our primary focus is to deliver growth to our investors, whilst carefully managing risk. To do so, we invest in companies at various points of maturity and weight the portfolio according to the underlying risks versus the potential returns. This typically results in a portfolio of 20 to 40 companies ranging in market capitalisation from $50m to $1bn. The graphic below puts this in context versus the overall market.
Such a concentrated portfolio (20-40 stocks versus 500 in the All Ords) results in the C3G Fund being largely uncorrelated to the return of the overall market. Particularly when the market is very strong, and taking into account our sometimes conservative cash balance, there will be times we fail to keep pace with the market.
Month in Review
During the month the Fund had 16 positions deliver positive results, 15 negative and four flat. Our strongest positive contributor by price movement rose 39% and our weakest contracted 21%.
Some of the top contributors that are enjoying current support are:
Quickstep (QHL) +23%: This advanced manufacturer of high-value carbon-fibre products has been making great progress in turning around its existing operations and is now well positioned to truly scale the business through new material long-term contracts. We are hoping for further near-term catalysts to drive the price higher in coming months.
RPM Global (RUL) +30% This provider of software solutions to the mining industry is successfully transitioning from a more traditional provider to one of recurring revenue through its Software as a Service model. It contains a number of characteristics we look for by way of operating leverage and return on capital employed. We see a very strong couple of years ahead.
Others positive contributors included long-term Fund holdings Readcloud (RCL) +10% andAlcidion (ALC) +11%. We remain confident in the outlook for both businesses.
We also enjoyed some early success from two recent IPO’s in which we subscribed:
Icetana (ICE) +39% is a software company focussed on video analytics for surveillance and security. Existing clients include University campuses, manufacturing facilities and military operations. The company is now capitalised to increase its technical offering and expand its sales effort.
Open Learning (OLL) +22% is a small, but growing, provider of online learning platforms for education providers. It operates in all types of online education, from short courses through to online degrees. It currently has in excess of 2.5m enrolments across 8,000 courses provided by over 60 education providers and is looking to expand aggressively.
As always, we experienced some negative price movers over the month. Two notable under-performers were Oventus (OVN) -21% and Schrole (SCL) -17%, both on the back of cashflow statements released to the market during the month. In both instances it was more of a case of over-hyped expectation by the market rather than genuinely poor results. We have since taken the opportunity to add to our position in SCL.
We also took some pain from our investment in Webjet (WEB)-10% on the back of the emergence of the coronavirus and subsequent negative sentiment toward the travel sector. WEB is a relatively small holding in the Fund, but we will look to increase our position at some stage in the coming weeks or months if the short term risks appear to abate.
The portfolio contains companies as various stages of the growth lifecycle. We remain confident that our investment positions will be rewarded over time, whilst being completely aware that this never happens in a straight line. The volatility can be particularly extreme for some of the less mature companies, the share prices of which tend to be catalyst driven as they prove to be executing their growth strategies. We expect that the upcoming reporting season will provide some of those catalysts.
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 and encourage you to do so if you have any questions for us.