13 Oct 2020
The Cyan C3G Fund underperformed the broader market in September with a return of -5.2% versus the All Ords’ return of -3.4%.
The annualised return (after all fees) since the inception of the Fund now sits at 15.1% p.a., significantly outperforming the All Ords and Small Industrials indices by between 7.5% and 10.0%.
Click here for a PDF of this newsletterCyan_Newsletter_Sept20
Month in review
During September more than half of the Fund’s holdings encountered some price pressure, notably as a result of weak market sentiment and investor profit taking rather than negative company-specific news.
Whilst it’s not pleasing to report soft Fund performance, recent volatility has been so extreme that some weakness was inevitable, especially in context of the large gains the Fund has enjoyed in recent months.
The most material contributors to the month’s performance were:
Kip McGrath Education (KME +17%): This children’s education and tutoring business released metrics that proved it has successfully navigated the Covid-19 challenges and is now well placed to generate sustained growth as a result of evolving its business model from face-to-face tutoring to a predominantly online offering.
Quickfee (QFE -33%): QFE was our most disappointing performer in the month but the share price weakness has come after a more than 200% rise in the prior four months. This was a result of weakened investor sentiment in the sector and some indigestion from a $15m capital raising to provide funding for a partnership with BNPL provider Splitit (SPT). Importantly this deal materially increases QFE’s addressable market which we see as a major long-term positive.
Swift Networks (SW1 -25%): Again, the recent weakness in SW1 has come after a rise of more than 150% since our most recent share purchases in May 2020. Whilst the company’s sales pipeline into aged-care has been somewhat restricted due to Covid-19, its sales in the mining sector have remained strong and company’s positive outlook remains.
City Chic (CCX -11%): Unfortunately CCX fell slightly after it missed out on being the successful bidder for the e-commerce assets of US-based retailer Catherines. As CCX had raised capital to the fund the purchase, it is now extremely well financed to acquire alternative opportunities and we remain invested and supportive of management’s growth strategy.
Jaxsta (JXT +191%): Our investment in music data provider JXT enjoyed a massive spike in September after announcing an investment and commercial agreement with music licensing company Songtradr.
The divergence of financial performance from month-to-month and across differing companies and industry sectors remains significant, which is providing both challenges and opportunities.
Notably we are seeing an enormous flow of capital raisings from companies impacted both positively and negatively by Covid-19 and a regular stream of new IPOs coming to market. Given Cyan operates so actively in this environment, we’re optimistic about the near-term opportunities for the Fund.
Many companies have been forced into a defensive path through the crisis and have raised capital to support their balance sheet, whilst others have found themselves with outstanding opportunities and are coming to the market to fund their growth aspirations, be they organic or through acquisition. This, combined with the fact that investors are finding it challenging to find growth in any mainstream asset class other than equities (and indeed many blue-chip companies), provides a set of circumstances whereby investment capital will continue to be directed towards the smaller end of the share market over the short to medium term (in our opinion).
We are not alone in expecting ongoing volatility in the broader market, particularly in light of the US election, Covid-19 concerns and the analysis and digestion of the resulting economic environment and associated government stimulus packages. But we are confident that markets will remain in an overall upward trend as interest rates remain at historical lows.
As such, we have taken some new investment positions in a mix of companies at various stages of their growth lifecycle. We believe our current portfolio is well balanced from a risk return perspective and look forward to some of our key holdings delivering positive results in the coming weeks and months.