NovaPort Microcap Fund Update – May 2021

Alex Milton, NovaPort Principal and Co-Portfolio Manager

Transcript:

The following is an update on the NovaPort Microcap Fund for the year to 30 April.

While the fund finished the month 81 basis points below index albeit up 4.17% (net of fees), the quarterly gain was a solid 8.83% versus the Small Ordinaries Accumulation Index which was up 7.44% over the three months to April 30.

Overall, the fund has seen a marked improvement since late last year with vaccines, overall better management of the virus in Australia, enormous fiscal stimulus and a much better than expected recovery in broader economic conditions prompting the widely discussed rotation of growth into value which has been to our benefit performance wise.

On the topic of the widely discussed growth vs value and the rotation into the latter, while we’ve always held growth companies in our funds, we are mindful of the sustainability of valuations, especially in frothy or bullish markets where investors have a tolerance for high valuations and where a lot of attention is paid to the upside risk and very little focus to the downside should news flow or earnings not meet highly optimistic expectations.

We’ve seen that reflected in our six-month performance. For example, for the six months to 30 April this year the fund is up 25.39% which is 3.95% better than index and is a material improvement on the six months to 31 August last year when the fund was 4.04% below index.

On a rolling one year basis to 30 April, the fund has posted a 16.94% turnaround in performance versus last year to finish up 53.21% for the twelve months which compares favourably to the 39.78% return for the index.

At a high level this reflects our reluctance to have too high an exposure over the COVID rally to some of the long duration growth companies, in many cases loss making companies, where the short term price was being driven by aggressive monetary policy in response to an unfolding pandemic and revenue growth expectations predicated on a large percentage of the population remaining in lock down.

However, since late last year our absolute and relative performance has improved as investors turn to companies that were ignored over 2020 but with fiscal stimulus, vaccines and broadly positive economic conditions these companies now present as opportunities with both earnings and valuation upside.

Turning to fund positioning given this environment and then the key contributors to performance for the year to 30 April, key companies in the fund include Think Childcare which is a childcare operator we’ve owned since the IPO in 2014 at $1. It’s been subject to multiple competing takeover bids with the board recommending acceptance of the latest one at $3.20 which will likely see it approved by shareholders and subsequently delisted.

Australian Vintage is another major holding and despite the disruption of COVID has posted very strong financial results. The company produces and markets four wine brands including Tempus 2, Nepenthe, McGuigan Wines and new one called Barossa Valley Wine Company. Of note recently has been the trade disruption between China and Australia adversely impacting several Australian exporters including winemakers. However, on that we’d note that less than 2% of its expected sales this year are to China which gives us a level of comfort.

Our third largest holding is fertility and IVF services company Monash IVF. It’s only been in the fund since May last year but has been a good performer with the stock up over 50%. As would be expected, activity levels have recovered from pandemic lows but pleasingly the company has posted better than market growth rates which points to some market share gains likely assisted by their focus on the shift in consumer preference towards the type of premium services Monash provides.

GR Engineering is an engineering, procurement and construction company managing a range of resources related infrastructure projects. Recent earnings have recovered after some contracts performed below expectations in prior years. We held on despite these issues given the longer term track record is of good management and a very conservatively run balance sheet that gave us the assurance we needed to maintain a position in the fund.  

Last of the top five is Mincor Resources which is a nickel miner with operations in the Kambalda region of Western Australia. Nickel usage in batteries for electric vehicles is a big growth industry and is expected to underpin significant demand longer term for the commodity.

The above top five positions in the portfolio account for just under 24% of the fund.

Pleasingly, these companies and the performance for the year was achieved without having to rely on speculative growth stocks (such as those in the technology or buy now pay later space) which need a continuation of low interest rates and ample central bank liquidity to underpin continued share price growth in the above consensus news flow.

Looking at our 1-year performance on a stock attribution basis, our top five positive contributors include in order Think Childcare which we’ve already highlighted and after that the well known baby products retailer Baby Bunting.

Our third best performer was IT services company Data #3 which benefited from expedited technology spend by business to transition staff to a work from home environment on the breakout of COVID last year.

NZME the New Zealand based news publisher, radio company and digital real estate portal posted a very strong share price recovery from its lows of March last year and our fifth best contributor was GR Engineering which is another one we’ve already highlighted.

Turning to our top five detractors to performance for the year, Clover Corp is a manufacturer of encapsulated powder that enables infant formula manufacturers to add fish oil to their product with all the health benefits that it brings but without the odour which makes it more appealing to babies. Sales in the current financial year have been impacted by demand brought forward in the prior year by customers concerned about potential supply chain issues as well as some plant shutdowns due to COVID. Nevertheless, the outlook as conditions normalise post COVID justify a position in the fund.

Our third worst detractor was investment and funds management group, 360 Capital. COVID did present some challenges to the company such as delays in raising capital and travel restrictions curtailing deal activity.

Clover and 360 Group are stocks that we owned over the period whereas the remaining three of the top five negative performers include Lynas, Mineral Resources and Pilbara Minerals which saw very strong price appreciation over the period when did we didn’t own which as a result adversely impacted our performance relative to the index. Having said that, these three companies would have been precluded as potential investment for the microcap fund anyway given their large market capitalisations.


This material has been prepared by NovaPort Capital Pty Limited (ABN 88 140 833 656, AFSL 385 329) (NovaPort), the investment manager of NovaPort Smaller Companies Fund and NovaPort Microcap Fund (Funds). Fidante Partners Limited ABN 94 002 835 592 AFSL 234668 (Fidante), is the responsible entity of the Funds. Other than information which is identified as sourced from Fidante in relation to the Funds, Fidante is not responsible for the information in this material, including any statements of opinion. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The PDS for the Funds, issued by Fidante, should be considered before deciding whether to acquire or hold units in the Funds. The PDS can be obtained by calling 13 51 53 or visiting www.fidante.com. Neither Fidante nor any of its respective related bodies corporate guarantees the performance of the Funds, any particular rate of return or return of capital. Past performance is not a reliable indicator of future performance. Any projections are based on assumptions which we believe are reasonable, but are subject to change and should not be relied upon. NovaPort and Fidante have entered into arrangements in connection with the distribution and administration of financial products to which this material relates. In connection with those arrangements, NovaPort and Fidante may receive remuneration or other benefits in respect of financial services provided by the parties.