The Monash Investors Small Companies Fund (Fund) is an unlisted retail unit trust offering investors an Australian equity exposure with a strategy of outperforming the S&P ASX Small Ordinaries Total Return Index over the medium term (5yrs).

The Fund has been in operation since July 2012, and over this time after all fees has outperformed the Index by approximately 4% per annum and deliver an average total return of approximately 10% per annum.

This fund is appropriate for investors with “High” and “Very High” risk and return profiles. A suitable investor for this fund is prepared to accept high risk in the pursuit of capital growth with a medium to long investment timeframe. Investors should refer to the TMD for further information.

Dear Investor,

The Monash Investors Small Companies Fund had a strong month, rising 7.0% and outperforming the Small Ordinaries Index which continues to be strong, up 3.4% for the month. Our results have been somewhat different from the market, in our view reflecting our minimal exposure to the inflated segments of the market that continue to charge ahead but which are carrying a greater degree of risk. We aim to deliver clients an idiosyncratic exposure to a thematically diverse collection of hand-picked, highly prospective smaller ASX companies. An exposure that performs differently from other assets clients are exposed to, and that carries the potential to outperform over the medium to long term.

Commentary

The portfolio once again benefited from takeover activity, with RPMGlobal receiving a proposal to be acquired by global giant, Caterpillar, for $5 cash per share. The 23% price increase on the back of this contributed nearly 1% to performance, and we exited our holding, utilising the liquidity to effectively increase our exposure to other prospective opportunities across the portfolio. Likewise, we exited holdings in Johns Lyng, Mac Copper, and Smartpay, all of which are subject to current takeover offers. In each case, we view the probability of these deals closing as being very high, and the probability of higher offers very low (with the exception of RPMGlobal, which is unlikely to receive a competing offer, but may extract a slightly higher final price through its exclusive due diligence process). These positions have become very much cash-like, and we’ve preferred to focus your capital, again, on the most prospective of our opportunity set.

As we look across the portfolio, we continue to own a diverse group of attractively priced ASX smaller companies. None of our remaining companies are subject to takeovers, but many of them – we believe – would be interesting targets, and we would not be surprised to see the portfolio benefit from continued corporate activity in the periods ahead.

The portfolio also enjoyed healthy re-rates on a number of our small resources positions. Metro Mining continued its strong run, up 25%, Bellevue Gold recovered value, up 33%, Peninsula Energy rose 56% following its balance sheet re-set, and AIC Mines – a copper producer we’ve recently introduced as a replacement exposure for New World and Mac Copper – rose 18%. Together, these contributed nearly 4% to the fund. We’ve actively managed exposures to these names, adding to Peninsula through its recent cap raise, and increasing our position in Bellevue at distressed valuations in the wake of its cap raise earlier in the year. These incremental investments have added value as prices recovered, and subsequently we’ve been trimming positions back to manage position sizing and risk on a stock-by-stock basis.

Finally, to note on the positive side is EDU Holdings, which has emerged as a key holding for the portfolio and, as we write, has become our largest holding. Across the DMX & Monash Funds, EDU is our largest position, and we are a substantial shareholder in the company. The company is a higher education provider, relying on international students, and offering a small but growing range of courses. Its shares had been incredibly cheap, and earlier in the year the company sought to delist and buyback shares at 16.5cps. As a firm, we added to our position, becoming substantial, engaged with other key shareholders and advised the company we wouldn’t support the proposal. The plan was aborted and subsequently the company has printed stellar results and its shares have risen nearly 400%. Liquidity was a barrier for us initially, but as its shares rose, so too did trading volumes and we were able to initiate a small position for the Monash Fund. While early gains were missed due to the company not being investable for us, we were able to build exposure in the 40-50cps range. The rise to 61cps by month-end saw the stock contribute handsomely to NAV, and its further rise to 78cps October month-to-date sees further gains accrue, and the position – for now – becoming the Monash Fund’s largest. On current metrics, EDU is trading for less than 10 times current year earnings, and around eight times what we expect for the year ahead. It has a strong net-cash balance sheet. Insiders have been adding to their holdings, and the company itself repurchased 4% of its shares outstanding in September. Enrolment growth continues to surprise to the upside, and while regulatory risks and competitive pressures need to be factored in, the company is clearly executing remarkably well and we look forward to seeing what management can continue to deliver here with the platform now developed.

Offsetting some of these gains has been modest declines to our remaining payments-oriented positions. While in the same sector, each has a very different and somewhat unique business. EML Payments, Findi, and Tyro Payments each fell 10-12%. EML is a top holding, and as we’ve talked about in recent monthly reports, has seemingly turned a corner with new leadership, the exit of non-core and troublesome operations, and a re-focus on organic growth. Its shares have been progressively discounting these improvements, and September saw some consolidation perhaps following full-year results which to our mind were fine, but yet to carry strong tangible evidence of organic growth. Sales cycles are long, and we believe EML has a good chance of surprising to the upside as revenue wins come through in the year or two ahead.

Findi is an ASX-listed holding company of a majority stake in an Indian ATM and payments company. Its growth and development over the past few years has been strong, and the company is working towards a local market IPO of its Indian subsidiary in the year ahead. Multiples achieved for similar businesses imply material upside potential for Findi’s shares, but in the wake of a capital raise back in March, and with the market taking a wait and see approach here, its shares have been languishing. As we write, Findi’s shares are under continued pressure as a very public war of words has erupted between a former executive and the company. We eagerly await newsflow on the company’s roll-out, its balance sheet position, and progress toward a potential 2026 local market IPO.

Tyro Payments is a relatively recent position for us which rose strongly in August on the back of takeover speculation, but has been drifting back in September as speculation hasn’t been met with follow-through. The company has announced multiple approaches, but pricing hasn’t been acceptable to the Board. In terms of corporate activity, we’re working with imperfect information as we’re not privy to what those offers are. But on a stand-alone and going concern basis, we’re attracted to the asset which we believe has strategic value and will either sooner or later be taken out, or will continue to exist and grow in its current independent form. Either way, we believe Tyro is an attractive asset for the portfolio.

Process and Team Update

It’s now been more than two years since we commenced work on bringing together the two complementary investment processes of DMX Asset Management and Monash Investors. There have been lots of learnings for us all through this process, with the key feature being the broadening of our combined coverage across the highly prospective ASX smaller companies universe. The respective investment processes and coverage universes of both firms have now been fully merged and we’re operating effectively as one team, one process covering our combined stock investment universe, with maximum input and cross-pollination of ideas across the firm. In practical terms, what we’ve also seen is a progressively overlapping exposure set across our portfolios, with around half of the Monash Fund overlapping with the DMX Australian Shares Fund. This has been a two-way progression, with key holdings in the Monash Fund making their way into the DMX Fund, and vice versa.

With our merger now effectively complete, Monash co-founder, Shane Fitzgerald, will shortly leave the firm. Having established Monash alongside Simon Shields, Shane has been a key member of the team for the past 13 years, and has made a significant contribution to the portfolio and firm over this period. The broader team is grateful for Shane’s contribution in particular over the past two years as we’ve integrated our processes, ensuring continuity of the portfolio’s coverage. Portfolio Manager, Michael Haddad, will assume full responsibility for the Monash Fund, and will continue to be supported by the broader team including Steve McCarthy who is Portfolio Manager for DMX Capital Partners, our Investment Analyst, Chris Steptoe, and Simon Shields who remains actively involved as a member of our Investment Committee.

Summary

We’re pleased with developments across the portfolio with meaningful re-rates and recoveries to key positions, and the continued rotation out of mature holdings and into fresh, prospective names. The portfolio is comprised of a thematically diverse group of mispriced, smaller ASX opportunities, exhibiting interesting combinations of value, growth, quality, and compelling valuations. Our team is enthused about the potential for our current portfolio, and excited about what we can achieve in the periods ahead as we continue to diligently execute on our robust investment philosophy and process.

Thank you for your trust and support. We welcome your direct enquiry any time.