OC Premium Small Companies (OPS0002AU) Report & Performance

The OC Premium Small Companies Fund kicked off FY24 in a positive fashion returning a solid +3.4% for the month of July. This was broadly in line with the S&P/ASX Small Ordinaries Accumulation Index which returned +3.5%, although it trailed the S&P/ASX Small Industrials Accumulation Index which was up a robust +4.8%.

Key contributors to the performance included: GQG Partners (GQG, +17.0%) which rallied largely in response to improved investor sentiment, being a strong beneficiary of rising equity markets; SiteMinder (SDR, +44.2%) which traded sharply higher on news that it expects to be EBITDA positive and free cashflow positive in H2 FY24; and Corporate Travel Management (CTD, +16.9%) which issued a trading update that confirmed strong trading in H2 FY23. Detractors for the month were smaller in scale and included APM Holdings (APM -6.1%) and Kelsian Group (KLS, -4.5%), both of which traded down despite no negative news after recent rallies, perhaps reflecting investors moving to riskier (higher beta) positions in the rising market.

The domestic economic outlook appears to be more challenging with conflicting signs as to the strength of the economy. Nevertheless, a near 50-year low unemployment rate of 3.5% and a solid (albeit falling) household savings buffer still leaves consumers in a reasonable position even allowing for near-term inflationary pressures and the lagged impact of the more recent interest rate hikes.

Reporting season has kicked-off, although the Fund is yet to have any companies report. We remain upbeat on the prospects of our core portfolio holdings and will share further thoughts with our investors in early September once we have analysed the numbers and met with the management teams.

Global equity markets enjoyed a solid quarter, led by a buoyant US market, with the US economy continuing to remain resilient and inflation continuing to moderate in the world’s biggest economy. Investor enthusiasm around artificial intelligence (AI) also provided a sugar hit to the big cap technology sector, with a stunning result from chip maker NVIDIA igniting the ‘animal spirits’ of investors and fuelling a mini boom in AI exposed big-tech stocks, including Microsoft Corporation and Alphabet (Google’s parent company). Local stocks to catch a bid on the back of the thematic included Fund holdings NEXTDC and Macquarie Technology Group, both of whom performed well during the quarter.

Key US indices were up strongly in the June quarter led by the tech heavy Nasdaq (+12.8%), the S&P 500 (+8.3%) and the Dow Jones Index (+3.4%). Other developed world bourses to perform well included the Japanese Nikkei (+18.4%) and the German DAX (+3.3%), whilst Australia’s ASX 200 eked out a positive return of 0.4%. The Chinese equity market was under pressure on the back of underwhelming economic news with the Chinese Shanghai Composite down 2.2% and the Hong Kong Hang Seng was not immune, falling 7.3% for the quarter.

The domestic small-cap space was mixed during the June quarter with a raft of negative stock specific news-flow from consumer facing companies and weakness in the Materials sector being balanced by more positive news out of the Information Technology and Industrials sectors. The S&P/ASX Small Ordinaries Accumulation Index was down 0.5% for the quarter, materially behind the S&P/ASX Small Industrials Accumulation Index which was up 2.3%. The OC Premium Small Companies Fund significantly outperformed both small-cap indices, finishing the June quarter up 4.1%.

Despite all the doom and gloom in the media, the small-cap space bucked inflationary pressures and rising interest rates to finish the financial year comfortably in positive territory with the S&P/ASX Small Ordinaries Accumulation Index and the S&P/ASX Small Industrials.

May lived up to its reputation as a difficult month for equity markets as sticky core inflation and rising interest rates began to take a growing toll on leading economic indicators across global markets. Stock markets were also jittery ahead of the US Congress’ latest legislative action to raise the government’s borrowing limits, with the gravity of a potential default further reinforcing a ‘riskoff’ bias across the back end of the month. Key global bourses including the US Dow Jones (-3.5%), the UK FTSE (-5.4%), the Hong Kong Hang Seng (-8.3%) and the Chinese Shanghai Composite (-3.6%) sold off heavily. The US tech heavy Nasdaq bucked the trend and rallied 5.8%, fuelled by a stunning result from chip maker NVIDIA which lifted sentiment to other big-tech stocks exposed to the artificial intelligence (AI) thematic including Microsoft Corporation and Alphabet (Google’s parent company).

The domestic small-cap equity indices too were choppy throughout May. A raft of profit warnings across the retail space, including from City Chic Collective, Adairs, Best and Less Group Holdings, Dusk Group and Universal Store Holdings spooked investors and liquidity remained below average for much of the month. The S&P/ASX Small Ordinaries Accumulation Index and the S&P/ASX Small Industrials Accumulation Index were sold down -3.3% and -1.7%, respectively, during the month. The OC Premium Small Companies Fund again held up better than the small-cap indices but still finished May down -1.0%.

OC Funds Management is pleased to announce the nomination of the OC Dynamic Equity Fund for the prestigious 35th Annual Money Management Fund Manager of the Year Awards in the Australian Small Cap Equity category. This recognition reflects the Fund’s strong performance and dedication to delivering outstanding results to its investors. The Money Management Fund Manager of the Year Awards is a highly regarded industry event that acknowledges excellence in the investment management industry. It is Australia’s longest-standing independent and ‘wholeof-market’ fund awards program. The Small Cap Equity category specifically focuses on funds that demonstrate exceptional expertise in navigating the dynamic and challenging small-cap equity market segment. The Fund’s nomination (alongside two other Funds) follows on from the OC Premium Small Companies Fund’s recent nomination in the Morningstar Fund Manager of the Year awards in the Domestic Equities – Small Caps category. It underscores the team’s consistent track record of success in managing small-cap and micro-cap investments over a long time horizon. It also marks the fourth time since 2018, when OC Funds Management actually won the award, that OC Fund’s has been nominated as a finalist in the Australian Small or Small/Mid Cap Equity Fund of the Year category at the Annual Money Management Fund Manager of the Year Awards.

Global equity markets rallied in April as fears of a global banking crisis moderated and investors became more comfortable that peak interest rates were approaching in key markets such as the US. Global bourses that rallied in April included the US Dow Jones +2.5% and the S&P 500 +1.5%, the UK FTSE 100 +3.1%, the German DAX +1.9%, the Japanese Nikkei +2.9%, and our own ASX 200 +1.8%.

The US first quarter reporting season is underway, with roughly 45% of S&P 500 companies reporting by the end of April. Results to date have moderately surprised on the upside with earnings numbers generally underpinned by margin resilience. This has engendered some confidence that the economic slowdown that is likely coming in the US will not deteriorate into a steep and protracted recession in the world’s biggest economy.

The domestic small cap market also had a buoyant April with both the S&P/ASX Small Ordinaries Accumulation Index and the S&P/ASX Small Industrials Accumulation Index rallying, up 2.8% and 3.6% respectively. Corporate activity was again in focus in the small and micro-cap end of the market with Blackmores (BKL) entering a Scheme Implementation Deed with Kirin Corporation and SILK Laser Australia (SLA) receiving a non-binding, indicative and conditional offer from Wesfarmers’ (WES) subsidiary Australian Pharmaceutical Industries. This is hopefully a sign that some confidence is returning to the space following a difficult period since the beginning of calendar year 2022.

The OC Premium Small Companies Fund enjoyed a positive month, up 2.3%, although it did slightly lag both the smallcap indices. The Fund has preserved investors’ capital under the difficult equity market conditions of the past 12 months. The OC Premium Small Companies Fund is down just -0.4% which is well ahead of both the S&P/ASX Small Ordinaries Accumulation Index and the S&P/ASX Small Industrials Accumulation Index which are down -9.4% and -7.6%, respectively, over the same time horizon.

The March quarter was a volatile period across global markets with the ongoing battle between inflationary forces and central banks continuing to take centre stage. March itself was a particularly turbulent month for equities, with steep falls early in the month brought about by regional bank failures in the US that undermined confidence in the global banking system before US and European regulators and central banks steadied the ship with a series of guarantees and liquidity backstops which restored confidence across financial markets. This led to a sharp recovery late in the month as investor concerns about a full-blown solvency crisis from mark-to-market losses on banks’ portfolios receded.

The domestic small-cap equities indices also seesawed around key macro-economic news flow with the February reporting season providing a welcome respite by giving investors some stock specific insights. Whilst the reporting season across small caps was overall mixed, the Fund’s holdings, on balance, reported stronger results than the overall market which allowed us to outperform our benchmark during the quarter. The OC Premium Small Companies Fund finished the quarter up 3.6% which was comfortably ahead of the S&P/ASX Small Companies Accumulation Index and the S&P/ASX Small Industrials Accumulation Index which were up 1.9% and 1.3%, respectively, for the quarter.

The OC Premium Small Companies Fund has navigated the challenging macro-economic environment of the past three years well, posting a return of 20.0% p.a. This is ahead of both the S&P/ASX Small Ordinaries Accumulation Index and the S&P/ASX Small Industrials Accumulation Index which have returned 13.1% p.a. and 9.3% p.a., respectively, over the same time horizon.

After a strong start to the calendar year, global equity markets retraced in February driven largely by fears that inflation will prove to be stickier and more persistent than had previously been contemplated by many investors. Increasingly hawkish central banks drove up real bond yields and most key global indices ended the month lower including the US DOW (-4.2%) and S&P 500 (-2.6%), the Hong Kong Hang Seng (-9.4%) and the MSCI All Country World Index (-1.9%).

The February reporting period was a mixed bag across the market, with divergent performance across the board from companies, often in the same sector, and few unequivocal macro-call outs. As expected, few management teams and boards were prepared to give numerical forward guidance, and most were guarded in their commentary on the economic outlook. The S&P/ASX Small Ordinaries Accumulation Index and the S&P/ASX Small industrials Accumulation Index were both softer in February, falling by -3.7% and -1.7% respectively. The OC Premium Small Companies Fund produced a relatively solid return of -0.9% with most of our core holdings producing results indicating that our investment theses remain intact.

The Fund has weathered the sell-off in small companies well over the past year and has protected investor capital in what has been a challenging investment environment. The OC Premium Small Companies is up 3.2% over the past 12 months versus the S&P/ASX Small Ordinaries Accumulation Index and the S&P/ASX Small industrials Accumulation Index which are down -8.0% and -7.4%, respectively, over the same time horizon. The Fund’s performance was recognised by rating house Morningstar when it was one of three finalists in its recent Fund Manager of the Year awards in the Domestic Equities – Small Caps category.