May 2017
Monthly Report
Schroder Microcap Fund
Total return %
8
Schroder Microcap Fund (pre-fee)
S&P/ASX Small Ordinaries Accumulation Index
Relative performance (pre-fee)
1 mth
3 mths
1 yr
-0.35
-2.05
1.70
-5.05
0.31
-5.36
13.99
3.55
10.44
3 yrs p.a. 5 yrs p.a.
18.24
6.04
12.20
22.76
4.22
18.54
10 yrs p.a.
11.38
-2.07
13.45
Please refer to www.schroders.com.au for post-tax returns
Inception Date: 28 Feb 2006, 11 years and 3 months.
Market cap
ASX 1 - 50
ASX 51 - 100
ASX 101 - 300
Non Index
Cash
Portfolio1
0.0%
0.0%
33.3%
60.0%
6.7%
Benchmark2
0.0%
0.0%
100.0%
The S&P/ASX Small Ordinaries Accumulation Index fell by 2.1%, while the Schroder Microcap
Fund (pre-fee) fell by 0.3%, outperforming by 1.7% for the month.
Top five holdings %
SMS Management & Technology
Grays eCommerce Group Ltd.
Macmahon Holdings Limited
RCR Tomlinson Ltd
Mortgage Choice Limited
Total
Portfolio1
4.8%
3.7%
3.5%
3.3%
3.3%
18.6%
Benchmark2
0.0%
0.0%
0.0%
0.3%
0.2%
0.5%
Grays Ecommerce Group is a position initiated through the past year which contributed to
performance as a result of a takeover offer being received from Eclipx during the month.
The transformation of Grays was nascent and, fair to say, behind expectations after the
first half result released earlier this year. It was not a stock that attracted broad investor
interest because it did not yet have momentum in its earnings, and yet the portents from
such a restructuring were clear given the resolve to delete loss making activities and
refocus purely upon core areas of competence, business to business auction based
transactions, where it is a fast growing and dominant participant in the Australian market.
This business is not neatly correlated with the consumer cycle, and was exiting this market
altogether unless it supported the B2B activity. We recall Pacific Brands as a similar,
unloved rationalisation story several years ago which was ultimately acquired as it cleaned
its corporate structure by shedding unprofitable activity, just as has been the case with
Grays.
Characteristics
No. of stocks
Portfolio turnover* (1 yr)
Sharpe Ratio (1 yr)
Volatility (5yr standard deviation)
Tracking error (3yr historic)
1
Portfolio
64
33.8%
1.05
11.1%
9.2%
2
Benchmark
199
0.16
13.5%
Commentary
RCR Tomlinson (RCR) performed well during the month as investors increasingly reacted
to consumer linked profit downgrades by seeking out anything related to infrastructure
spending with increasing enthusiasm. RCR has nearly tripled since reporting a poor result
almost 18 months ago, as flat, albeit volatile earnings through the past five years whilst run
by the same management team is overlooked given the current force of earnings
momentum. The group is well run and provides value to its customers, and can earn
excess returns through a cycle, which is why it has a place in the Portfolio. Having said
that, as a contractor, becoming more positive on the value in the equity as earnings and
multiples rise would be foolish, even though momentum is a magnetic force for many
investors in the micro cap segment of the market.
SMS Management and Technology (SMX), another holding of the Portfolio, was bid for last
quarter but performed well during the month given the emergence of a counterbid.
Structural and company specific headwinds notwithstanding, we saw compelling relative
value in SMX. We believed that there is a coherent case for some mean reversion in
profitability in the medium term, notwithstanding the poor FY16 and H117 results, noting
that SMX had not lost any customers to date, and the market for their services remained
strong. The recently installed CEO Rostolis had been with the company for many years as
the CFO including through the firm’s most profitable years, and Mr Rostolis acted
decisively and presented a clear vision on what needed to change in order to improve
profitability. DWS Limited (DWS) agreed with our view, because it offered to acquire SMX
in a recommended transaction. The formerly ASX listed Autosports Group (ASG), acquired
by Nomura last year and still run by the former management, who are now incented on
profit hurdles above a very low capital charge and hence are keen to acquire, and then
acquire some more, have now outbid DWS for SMX .
Finally, Elders Limited also contributed to performance following the release of an
outstanding result. Strength in soft commodity prices in recent years has clearly aided
performance and yet execution is also strong, as is evident in the results of some listed
peers being weaker than those posted by Elders. A focus upon return on capital has also
aided pricing decisions and rationalisation of service lines, and our field trip spending days
with agents through different states highlighted how the focus upon return on capital isn’t
just a corporate mantra but is understood and lived by customer facing agents, which
hopefully provides some comfort that improved corporate performance is more durable
than that which would arise due to just commodity price gyrations.
1 The 'Portfolio' is the Schroder Microcap Fund
2 Benchmark is the S&P/ASX Small Ordinaries Accumulation Index
Unless otherwise stated all figures are as at the end of May 2017
Please note numbers may not total 100 due to rounding
*Turnover = ½(Purchases + Sales - ∑Cashinflows + ∑Cashoutflows) / ½(Market
Value(T0)+ Market Value(T1) - ∑Cashflows)
Past performance is not a reliable indicator of future performance
Of performance detractors, Salmat continues to struggle with a declining revenue
environment with yet another change in CEO being announced during the month. Within
this industry there are some exceptional managers, who freely admit that, save industry
rationalisation, profits will continue to be under sustained pressure. A strategy based upon
M&A in these circumstances is rarely one which ends with smiles on the faces of any party
other than those kindly service agents that introduce the transaction to the purchaser, and
we fear that Salmat may, in the face of history, consider further acquisitions the panacea to
their corporate ills.
Monthly Report
Schroder Microcap Fund
May 2017
Fund objective
Commentary Continued
The objective of the Fund is to outperform the S&P/ASX Small Ordinaries
Accumulation Index over the long term by investing predominantly in listed
companies with a market capitalisation in excess of AUD10 million but
which are outside the top 250 ASX listed companies by market
capitalisation and companies listed on the New Zealand Stock Exchange
with an equivalent market capitalisation ("Microcap stocks"). These limits
apply as at the time of investment.
Finally, the Vita Group share price collapsed more than 50% during the month, detracting
from performance, proving that Porter’s five forces work even on ASX listed micro caps.
With one material supplier, namely Telstra, Vita Group was left with two options when
Telstra informed them that they were changing the terms of the commercial arrangement,
such that Telstra was taking all of the excess return from Vita Group. Firstly, Vita Group
could tell Telstra to take all of its business, and Vita Group itself then be left with nothing.
Or, secondly, Vita Group can accept the outcome and accept the commercial reality of
having a dependency of any type – customer or supplier, or regulatory – is that earnings
are subject to material disruption at any time, no matter how excellent the operational
execution may be (and Vita Group management have, indeed, been excellent). This reality
has confronted many companies, across many sectors and sizes, across the ASX in recent
years, and is only likely to be more prevalent as the economy and profit growth slows.
Investment style
Schroders is a bottom-up, fundamental, active growth manager of
Australian equities, with an emphasis on stocks that are able to grow
shareholder value in the long term.
Fund details
APIR code
Fund size (AUD)
Redemption unit price
Fund inception date
Buy / sell spread
Minimum investment
Distribution frequency
Management costs (p.a.)
SCH0033AU
$25,399,354
$1.6370
February 2006
0.75%/0.75%
$500,000
Normally twice yearly - June and Dec
1.10% pa plus performance fee of
20.5% pa of net out performance
Sector exposure versus the benchmark %
-10.0
Energy
-5.0
0.0
5.0
10.0
15.0
20.0
-4.2
Materials
Chemicals
-1.3
Construction Materials
-1.5
Containers & Packaging
Oroton Group is another detractor from performance that seems further away than ever
from becoming the luxury goods retailer of choice for Asian consumers. As crazy as that
notion now seems, it was a source of excitement for the Australian equity market several
years ago as the brand entered the Asian market. Again, the outlook is dire for Oroton and
we see little prospect for material earnings improvement anytime soon, and movements on
the Board, which concern us more than management changes, would suggest that others
may share that view.
Outlook
Market multiples are still high, and multiples and liquidity across the small-capitalisation
spectrum exaggerate these trends, albeit well off the record levels set twelve months ago.
Much as some commentary suggests that small and micro cap earnings and multiples
have been savaged, we do not agree; we think they are now approaching more normal
levels after several years of extreme buoyancy. As always, the spectrum of opportunity in
the micro cap end of the market spectrum remains wide and more prone to management
intent and execution. We remain wary of companies and sectors where promoters have
arbitraged investors keen to embrace unsustainable business models; in recent years, we
have highlighted education providers and aged-care operators as betraying these
characteristics, and we remain wary of the sustainable earnings available to capital
providers in the IP services sector, especially once escrow matures for the vendors in less
than 12 months time. Having said that, the new opportunities that have presented
themselves this calendar year have tended to produce good returns, and we expect that
the idiosyncratic factors, which often create short-term market dislocations, will continue to
present us with good investment opportunities.
-0.7
Metals & Mining
-2.9
Industrials
Andrew Fleming
11.2
Consumer Discretionary -7.9
Consumer Staples
-3.1
Health Care
-0.3
Information Technology
15.6
Telecommunication Services
-1.1
Utilities
0.6
Capital Markets
-1.8
Financials
0.0
Consumer banks
Diversified Fin Services
-0.5
Insurance
Property Trusts
-3.0
-5.7
Unless otherwise stated all figures are as at the end of May 2017
Benchmark is the S&P/ASX Small Ordinaries Accumulation Index
Contact
www.schroders.com.au
E-mail: [email protected]
Schroder Investment Management Australia Limited
ABN 22 000 443 274 Australian Financial Services Licence 226473
Level 20 Angel Place, 123 Pitt Street, Sydney NSW 2000
Phone: 1300 136 471 Fax: (02) 9231 1119
Investment in the Schroder Microcap Fund ('the Fund') may be made on an application form accompanying the current Product Disclosure Statement available from the Manager,
Schroder Investment Management Australia Limited (ABN 22 000 443 274 AFSL 226473) (“Schroders”).
This Report is intended solely for the information of the person to whom it is provided by Schroders. It should not be relied on by any person for the purposes of making investment
decisions. Total returns are calculated using exit price to exit price, after fees and expenses, and assuming reinvestment of income. Gross returns are calculated using exit price to exit
price and are gross of fees and expenses. The repayment of capital and performance of the Fund is not guaranteed by Schroders or any company in the Schroders Group. Past
performance is not a reliable indicator of future performance. Unless otherwise stated the source for all graphs and tables contained in this report is Schroders. Opinions constitute our
judgment at the time of issue and are subject to change. This report does not contain and is not to be taken as containing any financial product advice or financial product
recommendation. For security reasons telephone calls may be recorded.