The Spheria Australian Microcap Fund returned -2.8% (after fees) for the month of June, underperforming the S&P-ASX Small Ordinaries Accumulation Index by 1.5%.
Performance
1 Spheria Australian Microcap Fund. Returns of the Fund are net of applicable fees, costs and taxes.
2 Benchmark is the S&P/ASX Small Ordinaries Accumulation Index.
3 Inception date is 16 May 2016. Past performance is not a reliable indicator of future performance. All p.a. returns are annualised.
a Microcap Index refers to S&P/ASX Emerging Companies Accumulation Index.
Overall Commentary
Top 5 Holdings
Market Cap Bands
Source: Spheria Asset Management
Active Sector Exposure
Source: Spheria Asset Management
Markets
Smaller companies continued to drift lower over June with micro caps and smaller companies underperforming large caps. While trying not to turn ourselves into macro economists it was pertinent to note that Canada, the ECB (Eurozone), Switzerland and Sweden all cut interest rates over June by 25bps. Several major countries – the US, UK and Australia all held rates over the month with the US providing its strongest hints yet that rates could come down later in the year. This is relevant because our view is that the Australian economy is rapidly moving into a recession like situation which has been somewhat masked by high immigration and the drawdown of significant personal savings consumers built up during the Covid period. With these buffers now showing signs of exhaustion, we are starting to see companies struggle to grow toplines and maintain cost discipline.
Cost reduction hasn’t been a strong skill set amongst Australian corporates and to be fair, hasn’t for some time been a core skill requirement. Given a tougher consumer outlook with some wage pressures still evident, now is the time to flex these muscles. Cost reduction, innovation and staff motivation will be key differentiators between how smaller companies execute over the next 12-18 months.
Major Contributors to Performance
Over the month the largest contributors to performance were from overweight positions in Praemium (PPS.ASX, +14%), NZME (NZM.ASX, +8%), and Regis Healthcare (REG.ASX, +10%)
NZME (NZM.ASX) share price rose 8% in June on no new company specific news. The business delivered their full year result in February with revenue down 5% due to a challenging advertising market, however the rate of decline decelerated in 2H vs 1H (-3.7% vs -6.3%) relative to the prior period. Despite this, the businesses radio market share grew to 43.1% the highest since measuring in 2016. OneRoof, which is the 2nd largest property portal in New Zealand generated a profit for the first time in Q4 with revenue up 80% for the first two months of the new year as discounts to major real estate agencies unwound. Cost growth was also constrained to 3% with management being cognisant of the tougher macro environment. Whilst the short-term macro environment remains a challenge for the business, we think long term there is tremendous value owning the leading radio and print business in New Zealand and the 2nd largest property portal trading on 5x CY24 EV/EBIT.
Major Detractors from Performance
The largest detractors from performance included overweight positions in City Chic Collective (CCX.ASX, -51%), Adore Beauty (ABY.ASX, – 18%) and Southern Cross Media (SXL.ASX, -14%).
City Chic Collective (CCX.ASX) share price fell over 50% in June after the company announced a capital raise and trading update for the financial year. Trading conditions have remained challenging with sales expected to be down 30% for the 2024 financial year as higher interest rates have significantly impacted consumer spending for CCX’s core demographic. As a result, the business has undergone a strategic review to simplify the business and realign the cost base (expecting to strip out $20.3m of cost). The capital raise of $23m ($17.5m underwritten), offered at a 50% discount to the last closing price, will be used to support the balance sheet and re-structure the business after the sale of the UK and US businesses. Post the raise the business will have ~$10m of cash and a $10m debt facility available. The recent trading update was disappointing as we had expected trading conditions in the business to have stabilised. With the business now greatly simplified back to the Australian core and a stronger balance sheet we believe the business can cycle through the tough economic environment.
Outlook & Strategy Going Forward
As we discussed last month, Australia is lurching toward recession like conditions. Backward-looking statistics aren’t fully reflecting the toughening labour market conditions nor capturing consumer sentiment. Merely raising prices (as cafés around us want to do) without looking to trim costs where possible is going to see consumers shift their preferences. We are entering a time when better management teams will earn their stripes. We think the upcoming reporting season could be a tough one for smaller companies, however this is likely to somewhat assist Central Banker’s moves with respect to interest rates which in turn will go some way to stimulating the recovery in the economy. We believe businesses with strong balance sheets and a proven ability to generate cash are likely to come through market challenges in better shape and we continue to focus on unearthing these types of opportunities.
Platform Availability List
If a fund is not available on your preferred platform, please contact us. Please check with your platform for minimum investment requirements and fees.
Acclaim Wealth
AMP North
Asgard
BT Panorama
DASH
HUB24
Insignia Expand
Macquarie Wrap
mFund
Netwealth
OneVue
PowerWrap
Praemium
| Spheria Australian Microcap Fund | value |
|---|---|
| Benchmark | S&P/ASX Small Ordinaries Accumulation Index |
| Investment Objective | The Fund aims to outperform the S&P/ASX Small Ordinaries Accumulation Index over the medium to long term |
| Suggested Minimum Investment Timeframe | 5 years or more |
| Investing Universe | Primarily listed companies on the ASX and New Zealand Stock Exchange with a market capitalisation less than A$500m at time of initial purchase |
| Suitable Investor Profile | This product is intended for use as a minor allocation for a consumer who is seeking capital growth and has a very high risk and return profile for that portion of their investment portfolio. It is likely to be consistent with the financial situation and needs of a consumer with a 7-year investment timeframe and who is unlikely to need to withdraw their money on less than one week’s notice. |
| Risk | Very high |
| Holdings | Generally 20-65 stocks |
| Distributions | Annually |
| Fees | 1.35% p.a. management fee & 20% performance fee of the Fund’s excess return versus its benchmark, net of the management fee |
| Portfolio Allocation1 |
80-100% Australian and New Zealand equities 0-20% cash and cash equivalents |
| Expected Turnover | 20% - 40% |
| Style | Long only |
| APIR | WHT0066AU |
| Minimum Initial Investment | $25,000 |
Fund Ratings
Further Information
For more information, please contact Pinnacle Investment Management Limited
on 1300 010 311 or email distribution@pinnacleinvestment.com
Disclaimer
This communication is prepared by Spheria Asset Management Pty Limited (‘Spheria’) (ABN 42 611 081 326, Corporate Authorised Representative No. 1240979) as the investment manager of the Spheria Australian Microcap Fund (ARSN 611 819 651) (the ‘Fund’). Pinnacle Fund Services Limited (‘PFSL’) (ABN 29 082 494 362, AFSL 238371) is the product issuer of the Funds. PFSL is not licensed to provide financial product advice. PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited (‘Pinnacle’) (ABN 22 100 325 184). The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.
Link to the Product Disclosure Statement
Link to the Target Market Determination
For historic TMD’s please contact Pinnacle client service Phone 1300 010 311 or Email service@pinnacleinvestment.com
This communication is for general information only. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. Past performance is for illustrative purposes only and is not indicative of future performance. Unless otherwise specified, all amounts are in Australian Dollars (AUD).
Whilst Spheria, PFSL and Pinnacle believe the information contained in this communication is reliable, no warranty is given as to its accuracy, reliability or completeness and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Spheria, PFSL and Pinnacle disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. This disclaimer extends to any entity that may distribute this communication.
Any opinions and forecasts reflect the judgment and assumptions of Spheria and its representatives on the basis of information available as at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from Spheria. Pinnacle and its associates may have interests in financial products and may receive fees from companies referred to during this communication.
This may contain the trade names or trademarks of various third parties, and if so, any such use is solely for illustrative purposes only. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with, endorsement by, or association of any kind between them and Spheria.
Zenith Disclaimer: The Zenith Investment Partners (‘Zenith’) (ABN 27 103 132 672, AFSL 226872) rating (assigned Spheria Australian Microcap Fund – February 2024) referred to in this piece is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual, including target markets of financial products, where applicable, and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at Fund Research Regulatory Guidelines.
Lonsec Disclaimer: The Lonsec rating (Spheria Australian Microcap Fund issued September 2023) presented in this document is published by Lonsec Research Pty Ltd (‘Lonsec’) (ABN 11 151 658 561, AFSL 421445). The Rating is limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial products. Past performance information is for illustrative purposes only and is not indicative of future performance. They are not a recommendation to purchase, sell or hold Affiliate Name products, and you should seek independent financial advice before investing in these products. The Ratings are subject to change without notice and Lonsec assumes no obligation to update the relevant documents following publication. Lonsec receives a fee from the Fund Manager for researching the products using comprehensive and objective criteria. For further information regarding Lonsec’s Ratings methodology, please refer to our website at: https://www.lonsec.com.au/investment-product-ratings/.
