During April, the Fund fell -0.79% (after fees). This compares to a decrease of -0.85% for the S&P/ASX200 and a fall of -1.50% for the Small Ords.
During April, the Fund was on the right side of a few stock specific announcements. This explains its relative outperformance this month, despite its bias to smaller cap companies which have generally been underperforming large cap. This is explained in more detail later in this commentary.
Inflation has been building and central banks have failed to raise interest rates early enough or high enough. They are now playing catch up, and it has all the makings of a classic economic cycle, the like of which we have not seen for decades.
It is fair to say that interest rates have never been this low while inflation has been this high. At the same time unemployment is at record lows, supported by generous government spending and perhaps helped by a net loss in migration last year.
Now that the economy is opening up, Australians are unleashing pent up spending outside Australia on overseas travel. There will also be less discretionary spending, particularly on goods, by consumers in Australia, with inflation driving higher spending on petrol, food and mortgage payments. This in turn will dampen domestic business profits and employment. Eventually (typically) the RBA will still be trying to dampen inflation even as the economy is stalling.
The stock market anticipates economic downturns and this hurt the portfolio in the first quarter of 2022. As fund managers we have seen this scenario play out several times in the past. After some time, the portfolio typically rebounds much stronger than its drawdown to yield good returns for our investors. This is evident from our performance over the last 10 years. The portfolio is well positioned for the likely business winners and losers (for our shorts), while also holding a cash level that allows us to take advantage of the opportunities as they present themselves.
As referenced above, the Fund benefited from a few positive stock specific announcements. This includes from companies such as PTB Group and Johns Lyng (ASX: PTB, JLG) which rose 5% and 2% respectively, where trading updates occurred and lead to increase in share price. Likewise, evident competition headwinds for Tyro (ASX: TYR), a stock that we have sold short, led to it falling -28%. Once again, bad news is being dealt with far more harshly than good news is rewarded.
The major detractors were Nearmap and Lovisa (ASX: NEA, LOV) which fell -17% and -12%. Neither of these two companies had any bad news during the month. Both trade on relatively high (but not excessive) multiples because of their strong profit growth outlook and so are susceptible to falling in the current market. Indeed, at the time of writing (early May) both companies have since confirmed their growth and guidance.
The announcement that was of most consequence to the portfolio was one for a stock that we no longer owned, which would have caused us a significant additional loss if we had not exited beforehand.
EML Payments (ASX: EML) is a stock that had been in the portfolio since 2013. We have made excellent returns from this investment with the share price ultimately rising 30 fold from our entry due to the rapid expansion of its business. During this time our weight in the stock varied considerably based on our calculation of its remaining upside pay-off and also as we controlled for risk and portfolio weight.
It fell significantly in price as the Covid pandemic worsened and has generally been very volatile since February 2020 with several high profile announcements. Our weight in the stock also has been much more volatile since then too, more recently because recent events have triggered our “early warning” selling discipline.
At the February result, the company missed its expected first half profit expectations due to cost increases. At that time it did not change its full year guidance, claiming that it would make up the profit shortfall by the end of the year. We have a two strike rule and this was its first strike. We sold one third of our holding. A few weeks later short interest in EML spiked to 9%. This signals that other investors are very pessimistic about its prospects, and we treat this signal with respect. It could flag that we are missing something. This was its second strike and we exited the position.
Admittedly, it was quite painful to sell it. We do not think there is anything fundamentally wrong with the company, and we expect it will grow its earnings very strongly over time. Furthermore, we were selling at a time of price weakness. Nevertheless, the early warning triggers and our selling discipline are there to stop us otherwise falling in love with a company and suffering “a death of a thousand cuts” due to growing headwinds against it that we may otherwise downplay.
In April EML came out with a further update. Unfortunately it has now downgraded its full year guidance by -8%. The day of this announcement the stock price fell -38%.
Our long-term view on EML hasn’t changed. We still think it’s a great business, with very strong profit growth ahead over the next five years. And it’s now very cheap. However our investment discipline keeps us from re-entering the stock until we can see that the growth is back on track and the next announcement is not another early warning trigger.
We retain our energy position in Woodside, Santos and Karoon Energy (ASX: WPL, STO, KAR) as well as a broader exposure to resources through BHP, RIO and South32. (ASX: BHP, RIO, S32).
Return Summary Since Inception1(after all fees)
|Since Inception (p.a.)||10.96%|
1Inception date of Fund is 2 July 2012.
The Monash Absolute Investment Fund ARSN 606 855 501 (Fund) seeks to implement the investment strategy by investing in a diversified portfolio of predominantly Australian equities (long and short), with overseas assets expected to average no more than 5% over time.
The investment strategy is Benchmark Unaware and there is no predetermined asset allocation; rather, the Fund only invests when suitable opportunities are identified. As such, asset exposures may vary significantly over time and without notice.
The Fund seeks to only invest in compelling opportunities. To identify these investment ideas, Monash Investors primarily employs fundamental, bottom-up company research and the judgement of its experienced portfolio managers.
Portfolio Analytics Since Inception
|Standard Deviation (p.a.)||16%|
|Avg Gross Exposure||91%|
|Avg Net Exposure||80%|
Monthly Portfolio Metrics
|Outlook Stocks (Long)||14 Positions: 61%|
|Outlook Stocks (Short)||1 Positions: -2%|
|Event, Pair and Group (Long)||3 Positions: 29%|
|Event, Pair and Group (Short)||1 Positions: -2%|
Key Fund Information
|Management Fee||1.2813% p.a.|
|Performance Fee||20.5% above the RBA Cash Rate + 5% with High Water Mark|
|Distributions||Quarterly , targeting 1.50% p.a. of NAV each quarter|
|Morningstar Category||Alternatives Strategies|
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This document is issued by Monash Investors Pty Limited ABN 67 153 180 333, AFSL 417 201 (“Monash Investors”) as authorised representatives of Winston Capital Partners Pty Ltd ABN 29 159 382 813, AFSL 469 556 (“Winston Capital”) for the provision of general financial product advice in relation to the Monash Absolute Investment Fund ARSN 606 855 501 (“Fund”). Monash Investors is the investment manager of the Fund. The Trust Company (RE Services) Limited ABN 45 003 278 831, AFSL 235 150 (“Perpetual”) is responsible entity of, and issuer of units in, the Fund. The inception date of the Fund is 2nd July 2012.
The information provided in this document is general information only and does not constitute investment or other advice. The content of this document does not constitute an offer or solicitation to subscribe for units in the Fund or an offer to buy or sell any financial product. Accordingly, reliance should not be placed on this document as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation. Monash Investors, Winston Capital and Perpetual do not accept liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information. Any investment decision in connection with the Fund should only be made based on the information contained in the disclosure document for the Fund. A product disclosure statement (“PDS”) issued by Perpetual dated 1 July 2021 is available for the Fund. You should obtain and consider the PDS for the Fund before deciding whether to acquire, or continue to hold, an interest in the Fund. Initial Applications for units in the Fund can only be made pursuant to the application form attached to the PDS.
Performance figures assume reinvestment of income. Past performance is not a reliable indicator of future performance. Comparisons are provided for information purposes only and are not a direct comparison against benchmarks or indices that have the same characteristics as the Fund.
Monash Investors, Winston Capital and Perpetual do not guarantee repayment of capital or any particular rate of return from the Fund and do not give any representation or warranty as to the reliability, completeness or accuracy of the information contained in this document. All opinions and estimates included in this document constitute judgments of Monash Investors as at the date of this document are subject to change without notice. Perpetual is not responsible for this document.
The rating contained in this document is issued by SQM Research Pty Ltd ABN 93 122 592 036 AFSL 421913. SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale clients, utilising a proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to change at any time. Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure statement and consult a licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment scheme.
The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (assigned MON0001AU June 2021) referred to in this document 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 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 http://www.zenithpartners.com.au/RegulatoryGuidelines