Cyan Newsletter – 31 July 2020

In the early stages of the pandemic we wrote:

“The Fund was particularly active in February and March as the spread and impact of Covid-19 emerged. During that period we repositioned the portfolio, corner-stoned by a fourfold strategy:

1. Divest the businesses that appear directly exposed or overly leveraged to the virus fall-out;
2. Hold those businesses through the volatility that may be experiencing short-term challenges but have solid balance sheets, defensive recurring revenue streams or dominant market shares that will see them through the present challenges;
3. Add holdings in companies we have researched and liked for a long time but had previously found too expensive and taking positions in companies that are now likely to benefit from the current crisis;
4. Keep ample cash available for upcoming opportunities.”

The strong recent fund performance has unfolded because of these decisions. Looking forward these strategies remains relevant, however large moves in stock prices and other market gyrations mean individual stock holdings and weightings will continue to be monitored and adjusted accordingly with respect to their perceived risks and expected future returns.

Throughout July, we enjoyed many strong contributions including:

2.  Existing businesses held:

• QuickFee (QFE) +26%: As electronic payment processing and buy now pay later services accelerate under current conditions, this US growth business is enjoying strong market traction and associated market support.
• Readcloud (RCL) +46%: The digitisation of education material has always seemed inevitable, however this structural change to online learning is accelerating as a result of Covid-19 and school closures and RCL is materially benefitting.

3.  New holdings added at attractive prices:

• City Chic (CCX) +13%: A retailer with deep experience in women’s apparel and a clear offshore growth strategy. CCX is rapidly increasing its exposure to online sales through a geographic and brand expansion process, driven mostly through acquisition. The unexpected tailwind is the increasing availability of potential acquisitions as bricks and mortar retailers in the US go into administration and sell their online business.

• Pinnacle (PNI) +29%: As a consolidator of a diversified suite of fund managers, PNI is a high quality growth business in the financial sector. Over the past few months we have been buying on price weakness with a three-year timeframe, however the recent market recovery has provided a short term catalyst for share price appreciation.
• Jumbo Interactive (JIN) +14%: An online lottery company with a strong strategic partner and a growth strategy built around a white-labelled SAAS model. The shift from physical to online sales due to Covid-19 is likely to be a positive catalyst.

4.  Cash deployed into attractive opportunities:

• New Zealand Coastal Seafoods (NZS) +211%: NZS listed about 12 months ago and processes, distributes and exports seafood products for both consumer consumption and the nutraceuticals industry. The company is rapidly increasing its sales into regions including China, Europe and the US and was recently featured in major NZ new site, Stuff.co.nz – Fishing for a winner.
• Schrole (SCL) +27%: A recent investment from US-based partner Faria has validated the company’s technology and its strategic importance in the international schools sector. We expect sales to scale strongly over the next 12 to 18 months.

Outlook

The investment environment remains interesting (to say the least) with the obvious economic impacts of Covid-19 and associated declines in business confidence being countered by government stimulus packages and largely buoyant (but somewhat surprising) consumer behaviour.

As we enter August this scenario is being further complicated by reporting season, requiring investors to find a balance between short-term earnings impact and long-term business and financial strength and pitting all this against a backdrop of record low interest rates.

Nevertheless there are many investment sectors thriving in this challenging environment and enthusiastic investor sentiment is further contributing to strong performances which is creating the opportunity to deliver some significant returns (as evidenced by the Fund’s recent strong numbers).

Again the Fund has begun the new month on a positive note and there certainly appears to be no downturn in the number of opportunities being presented at the smaller end of the market.

If you have any questions about the Fund, our current exposures or investment philosophy and strategy please contact us directly.