Perennial Value Microcap Opportunities aims to grow the value of your investment over the long term by investing in a portfolio of Australian companies, that are either listed or unlisted companies found outside the S&P/ASX Top 100 Index, and to provide a total return (after fees1) that exceeds the S&P/ASX Small Ordinaries Accumulation Index measured on a rolling three-year basis.
The Trust was down 3.8% outperforming the Index which was down 4.0%. For the quarter, the Trust is up 3.0%, outperforming the Index (which is down 1.9%) by 4.9%.
Financials markets were clearly in a risk-off mode again with long term bond rates moving higher and pockets of stubborn inflation around the world.
Given results were released in August, there was very little in the way of stock news. It was, however, the first chance for directors to trade post results as well as companies to commence buy-backs once the market had digested result announcements.
For our portfolio the signaling here was positive:
– 11 directors buying (1 selling)
– 2 active buybacks across the portfolio
Given the weak macro backdrop, such positive signaling from those closest to the fundamentals of the company was encouraging.
Several of our companies announced acquisitions during the month with Firstwave acquiring Saisei Networks and Hancock and Gore buying the remaining shareholding in Mountcastle (providing access to a growing and dependable cashflow profile).
We used the month to further engage with our portfolio companies on corporate strategy and governance and continued to build further conviction in the fundamentals. The average PE ratio of the portfolio is 11.1x, a sizeable discount to the Index which is 14.1x for FY25. A high portion of our holdings have low balance sheet risk (80% have net cash) and a superior growth profile to the Index.
What is Perennial Value Microcap Opportunities Perennial Value Microcap Opportunities is an Managed Funds investment product that is benchmarked against ASX Index Small Ordinaries Index and sits inside the Domestic Equity - Micro Cap Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The Perennial Value Microcap Opportunities has Assets Under Management of 330.56 M with a management fee of 1.2%, a performance fee of 2.02% and a buy/sell spread fee of 0.6%.
How has the investment product performed recently? The recent investment performance of the investment product shows that the Perennial Value Microcap Opportunities has returned 5.29% in the last month. The previous three years have returned -14.21% annualised and 20.03% each year since inception, which is when the Perennial Value Microcap Opportunities first started.
How is risk measured in this investment product? There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since Perennial Value Microcap Opportunities first started, the Sharpe ratio is NA with an annualised volatility of 20.03%. The maximum drawdown of the investment product in the last 12 months is -5.13% and -48.69% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.
What is the relative performance of the investment product? Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The Perennial Value Microcap Opportunities has a 12-month excess return when compared to the Domestic Equity - Micro Cap Index of -4.12% and -2.11% since inception.
Does the investment product produce Alpha over its Peers? Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. Perennial Value Microcap Opportunities has produced Alpha over the Domestic Equity - Micro Cap Index of NA% in the last 12 months and NA% since inception.
What are similar investment products? For a full list of investment products in the Domestic Equity - Micro Cap Index category, you can click here for the Peer Investment Report.
What level of diversification will Perennial Value Microcap Opportunities provide? Perennial Value Microcap Opportunities has a correlation coefficient of 0.91 and a beta of 0.84 when compared to the Domestic Equity - Micro Cap Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.
How do I compare the investment product with its peers? For a full quantitative report on Perennial Value Microcap Opportunities and its peer investments, you can click here for the Peer Investment Report.
How do I compare the Perennial Value Microcap Opportunities with the ASX Index Small Ordinaries Index? For a full quantitative report on Perennial Value Microcap Opportunities compared to the ASX Index Small Ordinaries Index, you can click here.
Can I sort and compare the Perennial Value Microcap Opportunities to do my own analysis? To sort and compare the Perennial Value Microcap Opportunities financial metrics, please refer to the table above.
Has the Perennial Value Microcap Opportunities been independently verified by SMSF Mate? This investment product is in the process of being independently verified by SMSF Mate. Once we have verified the investment product, you will be able to find more information here.
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Comments from SMSF Mates SMSF Mate does not receive commissions or kickbacks from the Perennial Value Microcap Opportunities. All data and commentary for this fund is provided free of charge for our readers general information.
Performance Commentary - August 31, 2023 The Trust was up in August +0.4% (net of all fees) outperforming the Index which was down -1.3% and delivering 6.0% excess returns over the quarter.
The strong performance in August was a delayed response to strong guidance in prior months by Veem (+43.5%) and Viva Leisure (+12.8%), with the actual delivery of the results being the catalyst rather than the guidance itself.
Likewise, there may be a delayed response to clear progress at the likes of Lark (+4.4%) with a renewed debt facility and an export deal in Malaysia, Envirosuite (down 15.2%) despite gross margins lifting from 47.9% to 51.6%, and Enero (down 12.8%) despite moves to unlock shareholder value by selling their stake in OBMedia.
Lumos Diagnostics (+75.4%) continued to recover from very depressed levels and now has a clean and simple balance sheet post the capital raise in July.
It was also another strong month for DUG Technology (+12.9%) with very strong earnings growth and cash flow resulting in a materially improved balance sheet. The order book for July is already ahead of FY23 revenues underpinning another strong year of growth in FY24.
The average PE ratio of the portfolio is 10.3x, a sizeable discount to the Index which is 15.0x for FY25. A high portion of our holdings have low balance sheet risk (80% have net cash) and a superior growth profile to the Index.
Performance Commentary - July 31, 2023 The Trust was up strongly in July +6.6% (net of all fees) outperforming the Index which was up 3.5%.
As mentioned in recent newsletters, there are signs of renewed interest in the sub $500m market cap space and it was pleasing to see the beginning of a broad recovery in the fund (12 stocks were up 15% or more in the month).
Most encouraging however was the improved earnings updates as well as strategic outcomes from several companies in the portfolio.
Companies confirming a transition to positive cashflow were embraced by a broader investor base. One example was Catapult which we added to the portfolio in June. It was up 18.6% in July after confirming their positive cashflow projection and 1Q revenue growth of >20%.
Earnings guidance from Alliance Aviation, RPM Global, Viva Leisure and Navigator also led to a lift in broker forecasts.
There were also strong strategic updates at Lumos Diagnostic (FDA approval), EcoFibre (Under Armour contract) and DUG Technology (a government grant for a new renewable powered data center).
The average PE ratio of the portfolio is 9.5x, a sizeable discount to the Index which is 15.0x for FY25. A high portion of our holdings have low balance sheet risk (80% have net cash) and a superior growth profile to the Index.
Performance Commentary - June 30, 2023 For the month of June, the Trust was up 1.0% (net of all fees), outperforming a flat Index. We continue to expect two themes to come to the fore over the balance of the calendar year, namely: – Corporate activity/strategic interest in undervalued names; and – Renewed investor interest in stocks below $500m market cap.
As evidence of the first point, we were very pleased with the takeover of Limeade at $0.425 per share – a 254% premium to the prior month close. This is clear evidence the market is not accurately pricing stocks at the micro end of the market. This under pricing of many microcaps has caused recent poor performance but also highlights the potential upside from future takeovers.
Navigator (+34.3%) benefited after a strategic shareholder agreed to a placement at a significant premium to simplify the acquisition structure. Stocks below $500m that have defensive and growing revenue streams are beginning to attract market attention such as Qoria (+40.0%) and Envirosuite (+11.1%).
Despite these positives a significant part of the portfolio continued to be impacted by tax loss selling. Logically this ended on the 30th June, and we have seen a strong bounce in many names post month end.
The average PE ratio of the portfolio is 8.5x, a sizeable discount to the Index which is 13.8x for FY25. This is despite a higher portion of our holdings with low balance sheet risk (80% have net cash) and a superior growth profile to the Index.
Performance Commentary - May 31, 2023 For the month of June, the Trust was up 1.0% (net of all fees), outperforming a flat Index. We continue to expect two themes to come to the fore over the balance of the calendar year, namely:
– Corporate activity/strategic interest in undervalued names; and
– Renewed investor interest in stocks below $500m market cap.
As evidence of the first point, we were very pleased with the takeover of Limeade at $0.425 per share – a 254% premium to the prior month close. This is clear evidence the market is not accurately pricing stocks at the micro end of the market. This under pricing of many microcaps has caused recent poor performance but also highlights the potential upside from future takeovers.
Navigator (+34.3%) benefited after a strategic shareholder agreed to a placement at a significant premium to simplify the acquisition structure. Stocks below $500m that have defensive and growing revenue streams are beginning to attract market attention such as Qoria (+40.0%) and Envirosuite (+11.1%).
Despite these positives a significant part of the portfolio continued to be impacted by tax loss selling. Logically this ended on the 30th June, and we have seen a strong bounce in many names post month end.
The average PE ratio of the portfolio is 8.5x, a sizeable discount to the Index which is 13.8x for FY25. This is despite a higher portion of our holdings with low balance sheet risk (80% have net cash) and a superior growth profile to the Index.
Performance Commentary - April 30, 2023 For the month of April, the Trust was down 0.7% (net of all fees), compared to the Index which was up 2.8%.
Fundamental newsflow was more limited in April and trading volumes were down given the holiday period. Sentiment towards the micro end of the market remains poor with size remaining the dominant driver of performance instead of fundamentals – the latter being the true driver of shareholder value over the long term.
Sentiment (and therefore share prices) can change quickly and there may already be a shift underway with several encouraging articles about the attractiveness of small and microcaps in Australia from prominent investors during the month. If this smaller end of the market is ‘re-discovered’ by both institutional investors and mainstream funds, then share price moves can be dramatic.
The Trust is fully invested and provides a large exposure to stocks below $500m and also below $150m, and thus is well positioned should this shift occur in coming months. Early signs of renewed investor interest was seen in Superloop, Lark and Acrow during the month but is not yet widespread across the portfolio. We suspect corporate activity is the likely catalyst to realise value in other names.
The average PE ratio of the portfolio is 10.2x, a sizeable discount to the Index which is 16.6x for FY24, despite having a superior growth profile vs the Index.
Performance Commentary - March 31, 2023 For the month of March, the Trust was down 5.2% (net of all fees), compared to the Index which was down 0.7%. Relative performance was impacted by not holding takeover targets Liontown Resources (+89.7%, we had avoided given likely cost blowouts at the project) and United Malt (+33.0%, we avoided given very high debt levels).
We expect takeover activity to continue to be a feature this calendar year and believe several of our holdings are more logical targets given reliable and growing earnings streams as well as low debt (or in most cases no debt). Sentiment remains poor amongst microcap companies – by contrast this is where we have high levels of conviction in earnings, compared to a trickier outlook at the Index level. Our conviction in the portfolio increased further during March as we did follow up meetings with our key holdings.
We expect other investors and corporates will also notice these improving fundamentals in coming months. At this stage only DUG has gained investor attention (+16.2% for the month) but this provides a good preview of what is possible as investors return to microcap names. The average PE ratio of the portfolio is 9.6x, a sizeable discount to the Index which is 13.3x for FY24 given the superior growth on offer.
Performance Commentary - February 28, 2023 For the month of February, the Trust was down 5.6% (net of all fees), compared to the Index which was down 3.7%. The market returned to a pessimistic and “glass half empty” approach in February which in the context of continuing rate rises makes sense at an Index level but less so for those companies reporting strong fundamental improvements – such as those in our portfolio. There were plenty of earnings updates in February reporting season with JPMorgan reporting an average drop in earnings per share expectations for Small Cap Industrials of -1.7%. Against this the average adjustment in consensus earnings for our portfolio was +6.1%. While this was not rewarded in the short-term, we are confident this fundamental improvement cannot be ignored for long by other investors and corporates. As Warren Buffet’s mentor Benjamin Graham was reported as saying, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” Pleasingly, post results there has been director buying in 4 of our names and a share buyback recommenced as the trading window reopens. The average PE ratio of the portfolio is 10.8x, a sizeable discount to the Index which is 14.1x for FY24 given the superior growth on offer.
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