10 Jun, 2025

Letter to Investors - May 2025

Letter to Investors • 13 mins read

May was a record-setting month for Ophir. In this Letter to Investors, we:

Reveal the exact above-market returns our Funds generated for investors this month, making it our best ever
Examine 4 crucial lessons from this month of big outperformance
Highlight two Australian stocks that delivered outsized gains for the Funds after reporting very strong results
And for the Stock in Focus this month, we look at former market darling, Bravura Solutions. After several years in the wilderness, we explain why it is now one of the most exciting holdings in our Aussie Funds

May 2025 Ophir Fund Performance

Before we dive into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned +11.9% net of fees in May, outperforming its benchmark which returned +5.8%, and has delivered investors +23.3% p.a. post fees since inception (August 2012).

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The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned +11.4% net of fees in May, outperforming its benchmark which returned +5.9%, and has delivered investors +14.1% p.a. post fees since inception (August 2015). ASX:OPH returned +11.3% for the month.

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The Ophir Global Opportunities Fund (Class A) returned +8.7% net of fees in May, outperforming its benchmark which returned +5.0%, and has delivered investors +17.3% p.a. post fees since inception (October 2018).

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The Ophir Global High Conviction Fund (Class A) returned +7.8% net of fees in May, outperforming its benchmark which returned +5.0%, and has delivered investors +13.0% p.a. post fees since inception (September 2020).

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Our best month ever

At Ophir, amongst the hundreds of emails we receive daily, there is only one that is guaranteed to be read by every single member of the Ophir team.

It is our daily performance email of the Ophir Funds versus their benchmarks, which gets sent around at about 4.15pm after market close.

Now you might think a day is way too short a timeframe to be judging performance, and in many ways it is. But as much as anything we are trying to see two things:

How much any stock news helped or hurt fund performance, and
Whether there were any market factors (like quality, growth, size, momentum, sectors or geographies) that had a big influence.

But if you think daily performance gets our attention, monthly performance gets exponentially more focus by us – particularly the months where we have many companies report.

For our Aussie Funds that’s mostly February and August, and for our Global Funds it’s those same months, plus May and November.

So, May is a really important month for us, and we are pleased to report May was our best month EVER for Ophir investors!

All our Funds were up between about 8-12%, net of fees, in May; and all outperformed their benchmarks which were each up 5-6%.

The benchmarks and share markets, in general, had a very good month in May with the TACO (Trump Always Chickens Out) trade in full force. Markets bet that we’ve seen the worst of tariff news from the U.S. and that an Armageddon scenario is seemingly now off the table.

Setting records

It was the best month ever because we generated about AUD$115 million of above-market returns (outperformance) for our investors.

From when we started in 2012, that result represents a record.

Based on absolute returns, each of our four Funds in May ranked near their best-ever month, as shown in the chart below.

One of Ophir’s Top Performing Months – Gross Returns

Source: Ophir. Data as of 31 May 2025.

Most of those small number of months with better returns were ones driven by the market ripping higher and not necessarily because of strong outperformance by us.

Last month we had both strong market returns AND strong outperformance.

Our flagship Fund, ‘the Ophir Opportunities Fund’, led the way. While the market was up +5.8% in May, the Opportunities Fund surged +11.9% after fees. That was the third-highest-returning month for investment performance from the 154-month history of the Fund!

So, which months beat May 2025?

As you can see from the chart below, it was April and May 2020 when the market recovered from the Covid Collapse in March 2020 after central banks slashed interest rates.

Source: Ophir.

4 Lessons from May

Our four key observations from the May result across the Ophir Funds are:

1. Position sizing matters

Our biggest positions, like Life360, were our biggest winners in May.

As George Soros said: “It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.”

While May typically isn’t a big news or reporting season month for Australian companies, we did have a smattering of companies report quarterly results, and some of our biggest positions delivered good news for our Australian Funds, two in particular:

Life360 – the family safety app – reported a great Q1 result on the back of surging user subscription numbers.
Also, Generation Development Group, led by former Olympic champion Grant Hackett, announced a tie-up with Blackrock, one of the world’s largest financial services companies, to provide retirement solutions to the Australian market. It also received a boost for its tax-effective investment bonds business, which will become more attractive with the government’s $3m super tax still on the agenda, a policy that lowers the attractiveness of super for the uber wealthy.

Below, we show the average return in each quartile of the Ophir Opportunities Fund by weight for May. So, for example quartile 1 (Q1), which is the top 25% of the Fund by average weight over May (in this case the largest 10 stocks by weight out of the 40 in the Fund) – or in other words our highest conviction stocks – provided an average return of +21.5%.

Whereas our fourth quartile (Q4) stocks – the bottom quarter of the fund by weight – only provided a +0.7% return on average.

Source: Ophir. Bloomberg.

Bottom line: the stocks with the biggest weights in the Fund generally had the best returns; and stocks that lost ground on the month or just treaded water were generally our lowest-weight positions.

As a fund manager, this is exactly what you want.

Our highest-weight positions are generally the stocks we have done the most work on, that we have the biggest edge in, and that the market is most underappreciating.

It’s best to knock it out of the park on a big bet and keep your losers (of which there will always be some) to those stocks where you’ve got less money at risk.

For the Ophir Global Funds, May was a key month because the majority of our stocks reported their March quarter Q1 results.

Again, here our biggest weights were often our best.

For example, iRhythm, a stock we wrote about last month here, was one of our top-3 holdings going into May. The company posted a cracking result that saw its share price up just over +30% for the month.

2. Compounding is a marvellous thing

A foundation investor who invested $100,000 into our Ophir Opportunities Fund when we started in 2012 saw their investment increase by around $170,000 in May alone.

That’s an almost doubling of their initial investment in a single month!

This clearly illustrates that returns on your returns (ie compounding) truly is the 8^th wonder of the world, as Einstein supposedly said.

You just need to start early, be consistent, and let time and hopefully high returns work their magic.

Over a lifetime, you can think of investing as a marathon, with compounding essentially acting like a slowly building tailwind at your back as the race rolls on.

3. The best months usually accompany the worst months as the market recovers from the bottom.

If you miss the best months trying to time the market, it is very costly.

In investment speak, volatility “clusters”. That is, the best and the worst months often happen side by side.

As we showed in a chart above, we had two of our best months in April and May 2020, right after two of the worst in February and March 2020 when Covid hit.

If you get scared out on the way down, you often don’t get back into the market in time to benefit from the rebound, and you destroy the ability of compounding to work its magic.

The siren song of trying to time the ups and downs of markets is a strong one. In theory billions could be made from successfully doing it.

But as Yogi Berra said, “In theory there is no difference between theory and practice – in practice there is”.

Just because market timing COULD be done doesn’t mean it CAN be done.

One of the best investors of all time Peter Lynch said:

“I can’t recall ever once having seen the name of a market timer on the Forbes’ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it”.

And we’d add that, if anyone could time the market, they are not going to sell/tell you their way of doing it. They’d keep that almighty secret to themselves, lest the benefit get competed away if others knew about it.

4. Never get ahead of yourself

We have no doubt that tough months will be ahead at Ophir. It’s part and parcel of investing. And there are always new lessons to learn.

Good months of performance can easily reverse, particularly if it’s not driven by sustainable increases in the earnings of the companies in which you are invested (pleasingly, though, better earnings drove much of our May result).

We always have new investors who haven’t benefited from past results and have high expectations. This, along with our love of investing, is what keeps us motivated to keep generating attractive returns.

For the remainder of this month’s Letter to Investors we wanted to take you through one of our key holdings in our Aussie Funds that we are particularly excited about: Bravura Solutions.

A Brave New Solution

Bravura Solutions (ASX:BVS) is an enterprise software business that provides the funds and wealth management industries with mission-critical software. Bravura counts as clients some of the largest global investment management firms and Australian superannuation funds.

Back from the brink

After many years of poor capital allocation and mismanagement, Bravura had a near-death experience in 2023.

With revenue going backwards and costs going up, it seemed the writing was on the wall.

Bravura wasn’t winning any new business, and their existing clients were delaying investment decisions over fears Bravura wasn’t a going concern.

At the same time, cost inflation was out of control and the business was burning cash on unscalable Research & Development.

Following an emergency capital raise in March 2023, things needed to change.

Up stepped Pinetree Capital.

Pinetree are an investment firm founded by the Chairman and founder of $100bn+ global software behemoth, Constellation Software, one of the most respected operators in global software.

Action was swift and decisive …

Source: Bravura FY24 presentation

The Board and management team underwent an immediate overhaul.

New management embarked on an aggressive cost-out program where:

A large number of staff that hadn’t been doing much were tapped on the shoulder
Excessive R&D spend was reined in
Lavish London offices full of empty desks were replaced with more appropriate surroundings; and
Specific roles and operations were shifted to the much cheaper jurisdictions of India and Poland.

… and we believe there are more efficiencies to be achieved.

Source: Bravura 1H25 presentation

Revenue starting to grow again

When businesses take such aggressive cost-cutting measures, it’s not uncommon to see revenue growth suffer.

However, with the business now a going concern Bravura’s clients have regained enough confidence to reallocate spend to in-house software development, which means revenue for Bravura.

Despite the reduction in staff numbers, customer feedback has also improved.

As you can see in the chart below, the company has upgraded guidance twice during FY25, with an expected increase in revenue the primary contributor to the guidance upgrades (driven by both the business and FX movements).

Source: Bravura FY25 presentation, Ophir

With Bravura now able to focus on building a pipeline, the next phase of the revenue growth story will be new customer wins. The wins will likely come across both smaller, modular-type sales (shorter sales cycle) and larger-ticket enterprise sales (longer sales cycle).

Should Bravura’s existing customers continue to increase their activity levels, and some new customers start to land, it’s possible for revenue growth to move from the current mid-single digits to low-to-mid double digits in FY27.

Rule of 40?

While Bravura isn’t a pure SaaS (software as a service) business, we see it on a trajectory to becoming a Rule of 40 stock – a software business where profit margin and revenue growth combined equal or exceed 40%.

If Bravura can continue to manage costs well, and they can hit double-digit revenue growth, 25% cash EBITDA margins would be within reach.

And Rule of 40 software companies don’t trade on 3x sales – they trade on 6-7x.

So we think there is big upside for Bravura.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

This document has been prepared by Ophir Asset Management Pty Ltd (ABN 88 156 146 717, AFSL 420082) (“Ophir”) and contains information about one or more managed investment schemes managed by Ophir (the “Funds”) as at the date of this document. The Trust Company (RE Services) Limited ABN 45 003 278 831, the responsible entity of, and issuer of units in, the Ophir High Conviction Fund (ASX: OPH), the Ophir Global Opportunities Fund and the Ophir Global High Conviction Fund. Ophir is the trustee and issuer of the Ophir Opportunities Fund.

This is general information only and is not intended to provide you with financial advice and does not consider your investment objectives, financial situation or particular needs. You should consider your own investment objectives, financial situation and particular needs before acting upon any information provided and consider seeking advice from a financial advisor if necessary. Before making an investment decision, you should read the relevant Product Disclosure Statement (“PDS”) and Target Market Determination (“TMD”) available at www.ophiram.com or by emailing Ophir at ophir@ophiram.com. The PDS does not constitute a direct or indirect offer of securities in the US to any US person as defined in Regulation S under the Securities Act of 1993 as amended (US Securities Act).

All Ophir Funds are deemed high risk within their respective Target Market Determination documentation. Ophir does not guarantee the performance of the Funds or return of capital. An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment. Past performance is not a reliable indicator of future performance. Any opinions, forecasts, estimates or projections reflect our judgment at the date of this information and video was prepared, and are subject to change without notice. Rates of return cannot be guaranteed and any forecasts, estimates or projections as to future returns should not be relied on, as they are based on assumptions which may or may not ultimately be correct.

Actual returns could differ significantly from any forecasts, estimates or projections provided.

The Trust Company (RE Services) Limited is a part of the Perpetual group of companies. No company in the Perpetual Group (Perpetual Limited ABN 86 000 431 827 and its subsidiaries) guarantees the performance of any fund or the return of an investor’s capital.

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23 May, 2025

Letter to Investors - April 2025

Letter to Investors • 15 mins read

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What small caps need to outperform – and does it even matter for us?

After a dramatic period for markets, in this month’s Letter to Investors, we examine:

Why markets bounced back strongly from April’s shock sell-off
The headwinds that have led to small caps underperforming large caps
The key factors that will trigger a much-anticipated small-cap revival
How Ophir’s Funds managed to outperform both small and large-cap indexes in 2024, including the S&P 500, despite smalls struggling
Why the sheer number of opportunities in small-cap stocks means investors should stick with quality active small-cap managers during periods of small-cap index underperformance
A historical perspective on why U.S. small caps have rarely been this cheap relative to large caps

April 2025 Ophir Fund Performance

Before we jump into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned +1.0% net of fees in April, underperforming its benchmark which returned +1.8%, and has delivered investors +22.4% p.a. post fees since inception (August 2012).

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The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned +1.5% net of fees in April, underperforming its benchmark which returned +2.6%, and has delivered investors +13.0% p.a. post fees since inception (August 2015). ASX:OPH returned -0.7% for the month.

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The Ophir Global Opportunities Fund (Class A) returned -0.9% net of fees in April, outperforming its benchmark which returned -1.7%, and has delivered investors +16.0% p.a. post fees since inception (October 2018).

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The Ophir Global High Conviction Fund (Class A) returned -0.6% net of fees in April, outperforming its benchmark which returned -1.7%, and has delivered investors +11.4% p.a. post fees since inception (September 2020).

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See latest performance for the Ophir Global Opportunities Fund (Class B) here and the Ophir Global High Conviction Fund (Class B) here.

“Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it” – Ferris Bueller

If you only check the markets once a month, you’d have seen the S&P 500 fell just -0.8% in April. Ho-hum. Big deal.

But what you would have missed is one hell of a rollercoaster ride.

After U.S. President Donald Trump announced higher-than-expected tariffs on ‘Liberation Day’, the S&P 500 crashed -11.2% from the start of the month to its April 8^th low.

Then, by month end, it had recovered almost all that fall.

Clearly, since we last spoke in our mid-April Letter to Investors a lot has happened – most of it investor friendly.

From its April 8^th low – when Trump paused tariffs for 90 days – the Nasdaq, at writing in mid-May, has put on an incredible +25.4%.

That’s the third-largest rally in any 27-day period in the last two decades, behind only the April 2009 and April 2020 explosions coming out of the GFC and COVID bear markets.

The S&P 500 has also clawed back all its post-Liberation Day losses and is within a whisker of the all-time high reached in February of this year.

Fender bender fades

Is the rally because expectations for U.S. corporate earnings have suddenly improved?

No.

Corporate earnings expectations for the S&P 500 over the next 12 months are marginally lower now than when the market bottomed on April 8^th.

But over the last month global trade uncertainty and recession risk in the U.S. and globally has receded. It’s become clearer that President Trump isn’t willing to drive the economic car off the cliff in pursuit of his tariff agenda.

That’s not to say a crash is totally off the cards; but a truly horrific fender bender looks less likely, particularly with airtime starting to increase for growth-positive U.S. tax cuts and deregulation.

The probability of a U.S. recession in 2025, according to Polymarket, has dropped from a high of 66% earlier in May to just 38% now.

And despite some deteriorating softer economic data (mostly survey data of households and businesses), hard economic data such as actual consumer spending and employment, for now at least, have remained rock solid.

While Trump continues to fill the headlines – and that’s not about to change – we thought we’d turn our attention this month to our No.1 question from investors:

“As a small caps manager, what do you think it’s going to take for small caps to start outperforming?”

The recent small cap ride

Given U.S. small caps make up about 60% of global small caps (with Japan in a distant second place at 13%), it makes sense to focus on the U.S. because it’s in the cockpit for launching small-cap outperformance.

Below, the orange line shows U.S. small-cap performance (S&P 600 index) divided by U.S. large-cap performance (S&P 500 index).

When the orange line moves up, small caps are outperforming large caps, and when it moves down small caps are underperforming.

Source: Bloomberg. Data to 16 May 2025

In March 2020, when COVID first hit and markets sank, small caps underperformed. Investors shunned the less liquid small end of the market in favour of less risky and more liquid large caps.

The Federal Reserve in the U.S., and most other central banks, cut interest rates in short order, and share markets recovered through the middle of the year. The rally was similar across U.S. small and large caps.

Then came November 2020, when first news of an effective COVID vaccine spread, and small caps shot ahead. We all knew we’d be able to go out again and the market looked forward to a recovering economy.

That small cap bullishness started to wane, though, around mid-2021 when inflation began shooting up as a result of the COVID lockdowns clogging supply chains, and – in hindsight – when the U.S. government and its handout cheques created overstimulus.

This would start the current four-years-and-counting underperformance of small caps through to today.

Why have small caps underperformed?

The inflation/rates headwind for smalls

Higher inflation is typically harder for smaller companies to pass on to consumers because they have less pricing power than large caps.

But, most importantly, higher inflation means higher interest rates.

Small caps in the U.S. typically have more short-term floating rate debt, making them more sensitive to higher interest rates.

At the same time, when war between Russia and Ukraine broke out in early 2022, pushing up oil prices and inflation again, it turned a gentle Fed interest-rate tightening cycle into the fastest hiking in 40 years.

Almost every economist you could find was predicting a U.S. recession in 2022 on the back of those rate hikes. That worry drove continued underperformance of small caps which historically have fallen more in recessions.

But by the third quarter of 2022 it had become clear inflation was peaking, and the U.S. share market finally reached a bottom after a brutal bear market.

This current bull market started in the U.S. (and globally) in October 2022, fuelled first by “the worst is over” for inflation hopes.

The bull market then received extra fuel after the release of ChatGPT in November that year, which boosted large cap tech performance amid optimism they would dominate the AI arms race.

All the while U.S. small caps continued to underperform.

Big clues

However, it’s important to note that this action historically is VERY unusual.

Every other bull market that we have small-cap data for going back to the late 1970s shows small caps outperform in the initial days, weeks and months of a new bull market.

Not this time.

There have been three periods during this bull market, however, when small caps have outperformed for two to four weeks.

That gives us a BIG clue of what the market is looking for to drive a more durable small-cap rally.

Those periods of small-cap outperformance occurred in December 2023, July 2024 and November 2024.

The first two were driven by soft inflation data and hopes for imminent interest rate cuts by the Fed. No surprise here: High inflation/rates were the catalyst for small-cap underperformance, lower inflation/rates should be the antidote.
The third was a big small-cap rally when Trump was elected late last year that had investors salivating for a cyclical upswing in economic and corporate earnings growth from the more business-friendly President.

The reality since then, however, is that the Fed has held off further rate cuts, preferring to wait and see how Trump’s tariffs impact inflation.

Though the Fed has taken rates down by 1%, they are still restrictive at 4.25% to 4.5%, and they remain above its estimates of a ‘neutral’ rate of 3.0%.

The good news is that markets are pricing in approximately almost 1% of rate cuts over the next year which will make rates much less restrictive and more small-cap friendly.

Earnings drive share markets – small caps need some!

Ultimately, lower interest rates are just a means to an end for small-cap outperformance. And that end is better earnings growth.

U.S. small-cap earnings growth in aggregate has been on the fast train to nowhere over the last two years or so.

And while mid caps have eked out some tiny growth, both mid caps and small caps have been well and truly bested by large-cap earnings growth driven, of course, by a Magnificent 7-induced earnings spree.

Source: Bloomberg. Data to 19 May 2025

Here’s some more good news: U.S. small-cap earnings have never flat lined or gone backwards before for more than about two years. So history says this earnings wilderness might be getting a little long in the tooth.

Rate cuts for more rates-sensitive small caps will help.

Greater tariff clarity would also help. The U.S. tariff situation is a mixed bag for U.S. small-cap revenues and earnings. Small caps are less likely than large caps to have supply chains weaving throughout the world which run afoul of tariffs.

But if they do source goods from overseas, they are less likely than large caps to have the bargaining power to rework those supply chains through lower tariffed countries (if it was even possible to identify who they are yet!).

The bottom line is that when tariff uncertainty is high, economic growth uncertainty is also high. And while that’s happening investors are likely to prefer larger and more liquid companies, which will keep the share prices of large caps comparatively higher than small caps until the tariff dust settles.

The good news is that tariff dust will likely clear at some point this year.

How the Ophir Funds can thrive even if small caps underperform

So should investors shun small caps, or the Ophir Funds, until lower rates, broader growth and more tariff certainty arrives?

Of course, the answer is no.

Exhibit A is the returns of the Ophir Funds in 2024.

The Aussie and Global small-cap benchmarks had average-ish years in 2024. The ASX Small Ords returned +8.4% and the MSCI World SMID index in AUD terms returned +20.7%, but was close to 10% in local currency terms as around half of that gain was due to a falling Aussie dollar.

Each small-cap index underperformed their large-cap index counterparts – in 2024 the ASX 200 rose +12.7% and the MSCI World index (AUD) rose +31.8%.

But, at Ophir, during 2024 we notched up some great results including:

Our Aussie Ophir Opportunities Fund returned +42.8%, and
Our Global Opportunities Fund returned +45.1%

Not only did our Aussie and global small-cap Funds comfortably beat our small-cap benchmarks, but they also beat the large-cap benchmarks.

How is that possible?

As we show by examining the two charts below, it’s because of a huge number of opportunities for savvy investors in the small-cap space.

Yes U.S. large caps did outperform small caps in 2024 – the S&P 500 returned 25.1% while the Russell 2000 and S&P 600 small-cap indices returned 11.4% and 8.6% each.

Approximately 21% of U.S. large cap stocks outperformed the U.S. large-cap index. A similar percentage of U.S. small-cap stocks – 25% and 21% respectively for the Russell 2000 and S&P 600 Index – also outperformed the large-cap index.

Source: Bloomberg. Data for 2024.

But because there are more stocks in the U.S. small-cap indexes than large caps, there were actually MORE small-cap stocks, by number, that outperformed the U.S. large cap index.

That meant that if you’re a good active fund manager it’s possible to find lots of companies that outperform amid small caps, which in turn allows you to beat the large-cap indices. That’s exactly what we did in the Global Opportunities Fund in 2024. (Just don’t expect +40% returns every year! Our internal target is +15% p.a. returns in our funds over the long term.)

2024 isn’t just an anomaly though.

Source: Bloomberg. Data for 2025 to 16 May 2025.

As you can see above, year-to-date in 2025, despite U.S. small caps again underperforming the S&P 500 (-4.8% and -5.5% versus +1.8%) and a higher proportion of the large cap S&P 500 companies outperforming its index (52% versus 31% and 34% of small cap companies outperforming the large cap index) there are still heaps of small caps again beating the large cap index.

Bottom line: don’t shun all active managers in small caps because you think small caps will underperform.

There is still lots of small-cap stocks that are outperforming large cap indexes, providing opportunity for good small-cap managers.

Small caps are cheap

And despite a tough four years for small caps versus large caps, the tide will turn for the three reasons we mentioned above.

While we don’t feel we need small caps to outperform to necessarily generate attractive returns, it will be welcome when it arrives, nonetheless.

One final reason that small caps are highly attractive now; they are relatively cheap.

U.S. large caps are trading on a forward price-to-earnings (PE) valuation of 21.7x at writing. That’s in the 90^th percentile for most expensive in its history – so very expensive.

But at a forward PE of 15.6x, U.S. small caps are only in the 37% percentile of its valuation history – so cheaper than its historical average.

When you combine the two U.S. small cap valuations versus U.S. large caps, only during 9% of the time through history have small caps been this cheap compared with their large cap counterparts.

And it’s not just an expensive Magnificent 7 story driving the relative cheapness of U.S. small caps.

If you equal-weight U.S. large caps (nullifying the Mag 7’s normal huge influence on large-cap index valuations) – though the data doesn’t go back as far – U.S. small caps are still in just the 12^th percentile of expensiveness versus large caps.

As Buffett said, “price is what you pay, value is what you get”.

As relative valuations for U.S. small caps versus large caps are generationally cheap, we think you are getting a lot more value for your investment dollar.

And we expect that to play out in the years ahead.

So when we combine the fantastic opportunities on offer given the huge number of small-caps, lower rather than higher interest rates over the next couple of years, and their cheapness relative to large caps, I think we’ll look back in a few years as now being as good a time as any to be investing in the small-caps space.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

Actual returns could differ significantly from any forecasts, estimates or projections provided.

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17 Apr, 2025

Letter to Investors - March 2025

Letter to Investors • 15 mins read

Back to Insights Back to Insights

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Investing in the Age of Populism

Trade Policy uncertainty has been driving extreme levels of market volatility
As a result, both the Russell 2000 and the S&P 500 fell -6.8% and -5.6% respectively in March with more volatility seen in April post “Liberation Day”
Growth underperformed Value from an investing style perspective during March, with sectors we are typically more exposed to such as Consumer Discretionary and Tech most impacted
We reflect on the extreme starting point for tariffs compared with market expectations and its impact on the share and bond markets
We highlight some of the recent steps we have been taking due to the current tariff and economic backdrop
While we don’t profess to know the final outcome, 1-year and 5-year returns following such elevated levels of volatility have all been positive since 1990

March 2025 Ophir Fund Performance

Before we jump into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned -3.6% net of fees in March, in line with its benchmark which returned -3.6%, and has delivered investors +22.4% p.a. post fees since inception (August 2012).

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The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned -5.7% net of fees in March, underperforming its benchmark which returned -3.6%, and has delivered investors +12.9% p.a. post fees since inception (August 2015). ASX:OPH returned -10.9% for the month.

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The Ophir Global Opportunities Fund (Class A) returned -4.3% net of fees in March, underperforming its benchmark which returned -3.5%, and has delivered investors +16.4% p.a. post fees since inception (October 2018).

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The Ophir Global High Conviction Fund (Class A) returned -4.0% net of fees in March, underperforming its benchmark which returned -3.5%, and has delivered investors +11.8% p.a. post fees since inception (September 2020).

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See latest performance for the Ophir Global Opportunities Fund (Class B) here and the Ophir Global High Conviction Fund (Class B) here.

The 1987 stock market crash, the GFC, COVID and now Trump’s trade war. What do they have in common?

Extreme levels of share market volatility. In big and/or fast share market sell-offs we see that “volatility clusters”. The market doesn’t fall in a straight line. The very best and worst days on the market are not spread out like needles in a haystack. They more likely sit, like those on a blind first date, uncomfortably side by side.

Why?

In a word – “uncertainty”. Uncertainty has skyrocketed and investors are struggling during these periods to work out what is the right market reaction.

You can see this clearly below where we show the daily market moves in the worlds most followed share market index, the S&P 500.

The U.S. share market has gone up about 10% p.a. long term, which over ~250 trading days a year, means on average it goes up about 0.04% a day. Of course, it’s never so calm that it goes up that amount every day. If it did, it would cease to be as risky, and you wouldn’t get anything like a 10% p.a. long term return.

It’s in part because you occasionally get these days where it goes up +5% or -5% intraday, you get rewarded by higher long-term returns in the share market. Stomaching uncertainty, volatility and occasional big daily swings is the price you pay – and the prize inside is an asset class with the highest long-term returns.

Source: Bloomberg. Data to 14 April 2025.

Markets had already started becoming more volatile in February and March as Trump’s initial tariff moves on China, Mexico and Canada spooked investors with his 2^nd April Liberation Day “big daddy” reciprocal tariff announcement looming.

The Art of the Tariff Deal

As widely reported, the 2^nd April didn’t go well for investors. The following two trading days saw the S&P 500 down about -5% and -6% respectively. Basically, the fastest “correction” (>-10% fall) in history, outside of COVID.

Investors were struggling to comprehend the size of the tariffs announced by the U.S. on its trading partners (and some islands only inhabited by penguins! – story link).

The tariffs were much bigger than virtually anyone expected and if implemented would take the U.S. average tariff rate on imports from less than 3% in 2024 to a little over 25% – a level not seen for over a century! Effectively this would unwind 100 years’ worth of global trade liberalisation. A very big deal and why the market puked in response.

Of course, what Trump claimed – that he was placing reciprocal U.S. tariffs on countries that imposed tariffs on U.S. goods – was far from reality (see chart); in fact, it simply reflected the size of the U.S. goods trade deficit with those countries.

Sources: USA Census Data, World Trade Organisation, World Bank.

Perhaps this was just the typical Trump playbook of starting with a maximal opening offer to gain leverage in negotiations for better trade deals. We should all hope this is not the end position!

Deal or No Deal – the countries you should care about

As trade uncertainty at writing in mid-April looked to have peaked (at least for now) with Trump pushing back reciprocal tariffs for those countries above the 10% minimum baseline rate by 90 days (except for China), the market breathed a big sigh of relief staging an almighty +9.5% S&P 500 rally on the day. Subsequently Trump has also announced some tariff carve outs for tech equipment imports, such as laptops and smartphones, and also the possibility of concessions for the auto industry.

But does this mean the worst is over for markets from Trump’s trade war?

Maybe, however it’s still far from clear. The biggest “offenders” in Trump’s mind is those countries with the biggest goods trade deficit. As shown below, China, Europe, Mexico and Vietnam stand out. Trade deals with smaller deficit countries will no doubt be hailed as successes by the U.S. but won’t really move the dial in the trade war. Ultimately what happens with the big deficit countries like China, who retaliated and now each face over 100%+ tariffs on goods trade, is the main game.

Source: U.S. Census Bureau. P. Thal Larsen. 31 March 2025.

Trump blinks

Probably the most important piece of information for investors post Liberation Day was that Trump is willing to course adjust and back off when pushed.

So, what made Trump blink – pausing the reciprocal tariffs for 90 days and adding carve-outs for certain sectors and products?

It’s the market that bats 1,000 to use a baseball term – the bond market. In the second week of April the U.S. 10-year yield rose 0.5% to about 4.5%. A weekly rise that large hasn’t been seen since November 2001! (A bygone era where Sony Discman’s were the rage and the first Harry Potter movie had just been released).

Source: Bloomberg. Data to 11 April 2025.

Remember the U.S. runs a momentous US$2tr fiscal deficit (6.3% of GDP) alongside its trade deficit. That fiscal deficit must be financed through issuing debt, so Trump, and particularly Secretary of the Treasury Scott Bessent, are very sensitive to escalating debt costs to fund that deficit and the U.S.’s growing US$36tr debt pile. It might not be as sexy and lucrative as the share market, but you can bet the bond market still knows how to scare the most powerful man in the world, especially when debt interest costs make up the largest expense in your budget.

That’s not to say it was all beer and skittles for share investors recently.

How bad did it get for shares?

Below we show the drawdown (peak to trough fall) for U.S. and Australian Large and Small Caps. What’s clear is that U.S. small caps (Russell 2000) copped it the hardest, entering into bear market territory (>-20% down) and just shy of a -30% fall before the partial recovery. This is interesting because U.S. small caps have had a median drop of -36% during the six U.S. recessions since 1980 for which we have data. In other words, they fell about ¾ of the typical decline seen in a recession. However, despite the trade war, the U.S. has yet to experience a recession—and may still avoid one. (At writing, Polymarket currently places the probability of a U.S. recession in 2025 at 53%.)

The S&P 500 fell -19% by early April, roughly 80% of the way toward its median decline of -24%, calculated from the twelve U.S. recessions for which we have data, dating back to World War II. So, things got pretty rough. Australian Large and Small caps faired relatively better, falling near -15%, but are now less than -10% off their highs. This in many ways makes sense as the U.S. represents less than 4% of Australia’s total exports (and less than 1% of GDP), as well as having received the equal lowest announced tariff rate of 10% on Liberation Day.

Source: Bloomberg. Data to 14 April 2025.

The bigger worry for Australia is any slowing down in China, Australia’s largest export destination by far, as it gets targeted by the U.S. given its huge trade surplus.

What we’ve been doing

What does all this mean for us at Ophir and how we are managing our Funds in response?

Firstly, our Global Funds that are most directly impacted from recent tariff announcements. This is a result of those funds being about 60-65% allocated to U.S. based companies (in line with our benchmark) who are either at tariff risk to increase their costs of goods sold if they have supply chains going through newly tariffed countries, or from less purchasing power of consumers for their goods if tariff costs are passed on more generally to them.

Non-U.S. companies in our Global Funds, mostly European and U.K. businesses, if they sell into the U.S. may also find they are able to sell less volume or see margins squeezed as a result of the new tariffs.

It also means businesses impacted by tariffs are likely to pull back on capital expenditure and hiring until they know where the tariff end state is likely to be. There is a wide range of scenarios from a more mild increase to inflation and decrease to economic growth and corporate earnings in the U.S. – in which case the bottom of this sell-off has likely been seen – to something more sinister like a U.S. recession this year and stall growth globally.

We are not making a big bold tariff or macroeconomic call either way. We have been around for long enough to know that is not where our edge in investing is. And it’s been proven time and again for those who think it is that the vast majority have no edge here. Famed economics professor Paul Samuelson’s great quote “the stock market has predicated nine out of the last five recessions” is ringing in our ears. Even the economics team at Goldman Sachs suffered some recession call whiplash – dropping it 73 minutes after declaring it (story here).

We always want to let our bottom-up stock picking do most, if not all of the talking.

That said we have been making some incremental changes to portfolio positioning in reaction to what has been happening over the last 2-3 months, without making any big heroic forecasts. In response to evidence of slowing U.S. growth and tariff risks we have been positioning a little more defensively in our Global funds. Some of the key ways we have done this, for example, is through cutting exposure to stocks in the cyclical Consumer Discretionary sector and increasing exposure to those in the more defensive Health Care sector. These generally haven’t been in new names but rather by moving the weights in existing companies that we do like. From February onwards we’ve also deliberately adjusted upwards the Cash allocation in the Global Funds from less than 5% to closer to 10%.

All-in-all this has seen the so-called “beta” of the Global Opportunities Fund as an example reduce from 1.15-1.2 down to around 1.05. (Note: beta measures the sensitivity of the returns of the stocks in the Fund aggregated up to the portfolio level compared to the market. A Beta of 1 for example means that a Fund has average market risk).

Source: Bloomberg

We have also been careful to limit binary direct tariff risk to stocks in our funds as we don’t want President Trump’s thoughts on tariffs to be the primary determinant of whether we outperform or underperform.

Some hope ahead

This month’s Letter has mostly covered all the risks that the U.S.’s approach to tariff policy have introduced to the global economy and markets. And to be sure we still don’t know the final outcome. But one reason for optimism over the next few years comes from the below table.

The VIX index, or more formally the CBOE Volatility Index, which measures the market’s expectation of volatility for the S&P 500 over the next month recently broke through 50. This index is often called the “fear gauge” as it shoots up when investors get panicky.

In calm times it spends most of its day relaxing around the 10-15 level. Very very rarely does it get above 50, like it did on the 8^th April this year. Historically it’s been a good contrarian indicator for when to invest. As Buffett says, “be greedy when others are fearful, and fearful when others are greedy”.

Source: Creative Planning

Every time the VIX has closed above 50, S&P 500 returns have been positive over the next 1-5 years. Also, the average 1 year return is 35%, far higher than the average 12% returns earned when investing while the VIX is below 50. Does this guarantee success? No. All of these periods were during the GFC (2008/09) or COVID (2020). But getting scared away when markets have fallen is more than likely the wrong thing to do. It’s trite but true: time in the market beats timing the market.

We have chosen to mitigate as best we can some direct tariff risk through analysing our portfolio company’s supply chains and making a small number of changes where those risks were too high. We have also incrementally dialled back the risk a little in our Global Funds, increasing our allocation to more defensive growers that are less reliant on strong economic growth globally.

To us, this, along with staying invested, remains the best course of action. Share markets have weathered worse trade wars before, and they will do so again.

In times of market uncertainty I always remind friends of my favourite Buffett quote: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” Back the productive capability of good businesses. It wins time and again.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

Actual returns could differ significantly from any forecasts, estimates or projections provided.

13 Mar, 2025 Letter To Investors - February 2025

1 May, 2025 Press - How Australia’s best small-cap fund got its 39.6pc return

13 Mar, 2025

Letter To Investors - February 2025

Letter to Investors • 14 mins read

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What causes market corrections – and are we due for one now?

Trump’s policy uncertainty, particularly around tariffs, has soured investor sentiment and helped unwind 2024’s market themes including the Magnificent 7
Small and growth stocks underperformed in February, which our Global Funds offset by getting earnings calls right in the recent reporting season
With the S&P 500 down -9% (at writing from highs) investors are fretting about whether this is a correction or the start of a bear market
We examine the history of corrections and find 3 major causes that can help investors define the likely severity of a sell-off
We also explore which sectors and factors provide investment safe havens for investors during sharp corrections
Despite the recent sell-off, we find there is some evidence to suggest this ‘correction’ could be short and shallow, providing investors with a window of opportunity

After January’s rally, global share markets (with the notable exception of European and Chinese share markets) took a step back in February, a dynamic that continued into March at writing.

Despite a generally solid February Q4 reporting season out of the U.S., markets are starting to get fed up with the new Trump Administration’s policy uncertainty.

Tariffs remain front and centre here with everyone still guessing about their ultimate motivation and extent. Are they to stem illegal immigration and fentanyl? To raise U.S. government revenue to pay for tax cuts? Are they just on Canada, Mexico and China? What is the tariff rate? When do they take effect? The possibilities go on and on!

When these questions go unanswered, or are changed or delayed daily or weekly, companies and consumers unsurprisingly respond by reducing their activity until uncertainty is resolved.

The changing political and policy uncertainty has soured investor sentiment and helped turn many of the market themes from 2024 on their head in 2025. Last year’s outperformance of the Mag7, U.S. share market, and momentum and growth factors have now given way to European, value and defensive stock leadership.

Small cap underperformance has continued, though, with the Russell 2000 down over -5% in February, only edged out by the Japanese share market (Nikkei) as the worst performers in the month.

February 2025 Ophir Fund Performance

Before we jump into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned +1.3% net of fees in February, outperforming its benchmark which returned -2.8%, and has delivered investors +23.0% p.a. post fees since inception (August 2012).

Ophir Opportunities Fund Factsheet

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned -2.5% net of fees in February, outperforming its benchmark which returned -3.7%, and has delivered investors +13.7% p.a. post fees since inception (August 2015). ASX:OPH provided a total return of +5.6% for the month.

Ophir High Conviction Fund Factsheet

The Ophir Global Opportunities Fund (Class A) returned -1.9% net of fees in February, in line with its benchmark which returned -1.9%, and has delivered investors +17.4% p.a. post fees since inception (October 2018).

Ophir Global Opportunities Fund (Class A) Factsheet

The Ophir Global Opportunities Fund (Class B) returned +0.2% net of fees in February, underperforming its benchmark which returned +0.4%.

Ophir Global Opportunities Fund (Class B) Factsheet

The Ophir Global High Conviction Fund (Class A) returned -2.3% net of fees in February, underperforming its benchmark which returned -1.9%, and has delivered investors +13.1% p.a. post fees since inception (September 2020).

Ophir Global High Conviction (Class A) Fund Factsheet

The Ophir Global High Conviction Fund (Class B) returned -2.2% net of fees in February, underperforming its benchmark which returned -1.9%, and has delivered investors +25.1% p.a. post fees since inception (June 2023).

Ophir Global High Conviction (Class B) Fund Factsheet

Asset Returns – February 2025

Source: JP Morgan

Despite the Ophir team having a great Q4 reporting season, with our Global Funds in February getting our earnings calls right, it didn’t really show up on the scoreboard for the month, with both funds down around -2%, similar to our benchmark.

As a small cap growth-orientated investor this was because, within our SMID (small/mid) cap benchmark, mid-caps outperformed small caps, and value stocks outperformed growth stocks during the month.

Source: Bloomberg. Data as of 28 February 2025.

Those stocks with price momentum – which we typically have some exposure to as we’re looking for those companies doing well and outperforming the market’s growth expectations – were sold off hard, too, in February.

While this might have seen us ‘swimming upstream’ during the month, as we’ve stated many times before: if you get the earnings right – which we did during the reporting season –the share price performance will ultimately look after itself long term.

A history of U.S. drawdowns

With the S&P 500 down just over -8% from its all-time high in February, many investors are asking whether this is a correction (a >10% fall), or is there a bear market (a >20% fall) around the corner for the U.S.? And given the U.S.’s dominance, a bear market for global shares?

As we show below for the S&P 500 (since the mid 1960s) and the Russell 2000 (since the late 1970s), there have been plenty of falls greater than -10% and -20%, with even the odd fall of more than -30% or -40%. The only fall greater than -50% during this period was the gut-wrenching GFC.

Source: Ophir. Bloomberg.

Many of the biggest drawdowns (peak-to-trough falls) were associated with U.S. recessions, including those in the early and mid 70s, the ‘81/82 recession, the ‘90/91 recession, the Dot.com Bubble with its early 2000s recession, and of course the 2008/09 GFC, as well as the brief Covid-19 recession in 2020.

The benefits of understanding corrections

Why care about understanding market corrections in the first place?

One obvious answer is: knowing what tends to cause corrections might help you avoid them. But, despite thousands of studies and books trying, it is very difficult, or perhaps even impossible, to identify corrections ahead of time with sufficient accuracy to be useful.

While you may not be able to time a correction by going into or out of cash, if you understand what causes corrections you can identify when you are in the ‘danger zone’; where a correction is more probable. You then may be able to mitigate some of the fall by skewing your portfolio to companies with stronger fundamentals and less risk.

Knowing what caused a correction can also help you can understand what will likely stabilise it and trigger a market rebound.

The three causes of corrections

In the table below our friends at Piper Sandler have categorised every U.S. share market correction greater than -10% going back to 1964. There have been 27 of them! Or about one every 2.2 years. (Get used to them long term investors!)

Source: Piper Sandler.

As you can see, most of the deepest falls are associated with recessions. The 1987 Crash, and the 2022 fall courtesy of the rapid hiking of interest rates by the U.S. Fed, are key exceptions.

Importantly, most corrections are driven overwhelmingly by valuations (price to earnings ratios) shrinking as risk aversion increases, rather than corporate earnings falling off a cliff.

Each correction can be grouped into three main causes:

High interest rates
Higher unemployment
Exogenous global shocks (such as the Asian Financial Crisis or Euro Debt Crisis)

Of course some of these can overlap and have other intertwined causes, but there is usually one of these three causes that stands out as the major reason the correction starts and ends.

History shows that not all correction causes are created equal

The most important insight history tells us is that the cause of the correction will go a long way to explaining how deep and long it is.

The six charts below are great ones to commit to any investor’s memory bank.

S&P 500 Drawdowns Peak to Trough

S&P 500 Drawdowns Duration (Weeks)

Source: Piper Sandler.

They tell us that:

Higher rates have historically caused, and lower rates ended, the most corrections (52% of them), followed by higher unemployment (30%) and global shocks (18%). However, since inflation targeting was introduced in the U.S. in the 1990s, inflation and hence interest rates have been less volatile and caused fewer market corrections.
Those corrections associated with job losses should be the most feared because they typically see the largest falls (-36% on average) and last the longest. This is probably because they are the most likely to see corporate earnings fall the most, alongside valuation falls.
Those corrections based on exogenous global shocks tend to be the ‘best’, with similar average falls to those caused by higher rates (around -16%), but global shock corrections tend to be shorter lived.

While rising interest rates or unemployment might indicate a correction is ahead, getting the timing right is always difficult because markets are forward looking and the correction may begin when market participants EXPECT rates or unemployment to increase, before they actually do. It can still be useful though to understand the cause, because when rates or unemployment stabilise that can signal that the correction may be coming to an end, with a rebound to follow.

Almost by their very definition, exogenous global shocks are unpredictable, but at least their resolution can provide some guidance on what the market needs to see before it recovers.

How different sectors perform in corrections

Perhaps the most useful part of this history lesson is understanding which parts of the market do better when staying invested during a market correction. (And staying invested will be the best outcome for most investors.)

Here the evidence is pretty clear, though not infallible. First, at a sector level, during a market correction the sectors that tend to perform better provide more stable, reliable and defensive revenue and earnings.

Which ones are they?

Typically, Real Estate, Health Care, Consumer Staples and Utilities.

Each has, on average, outperformed the U.S. share market as a whole during the 15 market corrections that we have data for going back to 1990.

Each also has an 80% or better ‘Hit Rate’ – that is, they have outperformed the market in at least 4 out of every 5 corrections.

What do these sectors have in common?

Their revenues and earnings tends to fluctuate less, generally because consumers don’t cut spending on them easily (everyone has to pay their utilities, grocery or doctors bills). They can therefore provide something that is prized in market uncertainty: more certain returns to their shareholders.

Source: Piper Sandler.

The type of stocks (‘factors’) that outperform in sell-offs

But investment ‘factors’ are better guideposts for investing during corrections than Sectors. (Factors is just a fancy investment term for common characteristics of different stocks.)

So, what are the best and worst factors during market corrections?

Source: Piper Sandler.

The table above shows that during corrections there are a few types of stocks that tend to underperform:

Those with more volatile share prices compared to the market (so called higher Beta)
Those with volatile revenues; and
Smaller stocks.

By contrast, stocks with higher-quality cash flows, less debt and less volatile prices outperform.

It’s perhaps unsurprising that when markets are falling a lot, investors favour those businesses they can be more certain of their fundamentals and their share prices.

Important Point: While smaller companies tend to fall more during market corrections, the key exception to this in the table above is the 2000 to 2002 Dot.com-related market falls, where smaller companies significantly outperformed. This period shares some similarities to today where U.S. small caps have been the cheapest compared to large caps since the Dot.com Bubble. This was a key reason 25 years ago U.S. small caps fell less – they started from much cheaper valuations.

Where does that leave us today?

With the U.S. share market on the precipice of a correction (>-10% fall), it seems U.S. tariffs are the most likely cause of the drop and would fall in the ‘global exogenous shock’ bucket.

Neither interest rates nor unemployment has moved higher in the last few weeks to cause the sell-off. In fact, the most recent move in both short and long-term interest rates in the U.S. has been down.

It remains a risk, though, as tariffs are inflationary. So, it can’t yet be ruled out that the Fed may need to reverse course and hike rates as a result.

The U.S. unemployment rate has been moving up from its low in 2023, but this isn’t a new occurrence, and it is still near multi-decade lows.

If history is any guide this is good news because, as we’ve seen, exogenous shocks tend to see smaller market falls that recover more quickly.

Investors need to watch, however, that tariffs and policy uncertainty in general in the U.S. don’t morph into something more sinister like a recession, which would see job losses and a likely further fall in the share market. For now, though, this doesn’t seem the most likely outcome as the typical recession precursors like rising interest rates and lax credit conditions are absent.

We don’t even know if the U.S. share market will enter a correction at this stage.

At Ophir, we always remain bottom-up stock pickers first and foremost.

This is ultimately where our ‘edge’ lays, and what has driven the vast majority of our outperformance over the long term. Though from a portfolio management perspective we are not ignoring the lessons of history about what sectors and factors tend to do well during share market sell-offs.

We see this as just part and parcel of prudent management of ours, and our investors’ capital.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

This document is issued by Ophir Asset Management Pty Ltd (ABN 88 156 146 717, AFSL 420 082) (Ophir) in relation to the Ophir Opportunities Fund, the Ophir High Conviction Fund and the Ophir Global Opportunities Fund (the Funds). Ophir is the trustee and investment manager for the Ophir Opportunities Fund. The Trust Company (RE Services) Limited ABN 45 003 278 831 AFSL 235150 (Perpetual) is the responsible entity of, and Ophir is the investment manager for, the Ophir Global Opportunities Fund and the Ophir High Conviction Fund. Ophir is authorised to provide financial services to wholesale clients only (as defined under s761G or s761GA of the Corporations Act 2001 (Cth)). This information is intended only for wholesale clients and must not be forwarded or otherwise made available to anyone who is not a wholesale client. Only investors who are wholesale clients may invest in the Ophir Opportunities Fund. The information provided in this document is general information only and does not constitute investment or other advice. The information is not intended to provide financial product advice to any person. No aspect of this information takes into account the objectives, financial situation or needs of any person. Before making an investment decision, you should read the offer document and (if appropriate) seek professional advice to determine whether the investment is suitable for you. The content of this document does not constitute an offer or solicitation to subscribe for units in the Funds. Ophir makes no representations or warranties, express or implied, as to the accuracy or completeness of the information it provides, or that it should be relied upon and to the maximum extent permitted by law, neither Ophir nor its directors, employees or agents accept any liability for any inaccurate, incomplete or omitted information of any kind or any losses caused by using this information. This information is current as at the date specified and is subject to change. An investment may achieve a lower than expected return and investors risk losing some or all of their principal investment. Ophir does not guarantee repayment of capital or any particular rate of return from the Funds. Past performance is no indication of future performance. Any investment decision in connection with the Funds should only be made based on the information contained in the relevant Information Memorandum or Product Disclosure Statement.

27 Feb, 2025 Keeping you in the AIR

17 Apr, 2025 Letter to Investors - March 2025

20 Feb, 2025

Letter To Investors - January 2025

Letter to Investors • 14 mins read

Back to Insights Back to Insights

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Idea Bonanza!

In another good month for equity markets, January saw all of the Ophir funds outperform, with gains of at least +4% each, driven by good early Q4 earnings results for our Global Funds.
The Mag-7 took a back seat in performance during the month, and many investors are asking whether DeepSeek’s AI has turned their once-powerful moats into mere puddles.
Investors are focused on what could spark small-cap outperformance, but they should also be judging small caps on their superior reward-to-risk ratio relative to large caps which, in our opinion, should deliver outperformance over the next 5 years.
While small-cap performance has been hampered by sluggish earnings growth, there are promising signs this could be about to change.
In January we made the trek to the Needham Growth Conference in New York, leaving with a record number of fantastic ideas which should serve to significantly strengthen our portfolio.

At Ophir, we have notification alerts set up on our phones with many of the major news outlets including The Australian Financial Review, The Australian, The Wall Street Journal, The New York Times, Bloomberg News … the list goes on.

This year it has felt like almost every time a notification has popped up, in the headline has been the word ‘Trump’ or ‘Musk’. We don’t expect that to change much over the next four years. We just have to get used to it.

For investors, though, it helps to remember that, over the long run, almost the only thing that matters for a company’s share price is its earnings.

Not tariffs, interest rates, inflation, immigration policy, DOGE spending cuts, how many ‘illegal aliens’ are getting deported this week from the U.S., or whether a new ‘Riveria’ is being created in the Middle East.

Of course, some of these things will matter for some companies’ share prices, but mostly in the short term.

At a portfolio level, over the longer term, politics and government policy runs a distant second (or third or fourth) behind the idiosyncratic drivers of a company’s earnings.

Overwhelmingly, the things that have always mattered the most in investing will continue, such as:

The size of a company’s addressable market
The value the company offers its customers compared to its selling price
Its ability to scale cost effectively
The size of any moats that protect it from competition
The strength of its balance sheet
Its bargaining power with suppliers, and
The gap between current and assessed value of the business

It’s easy to forget this when the volume of Trump or Musk articles goes stratospheric.

January 2025 Ophir Fund Performance

Before we dive further into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned +5.2% net of fees in January, outperforming its benchmark which returned +4.6%, and has delivered investors +23.0% p.a. post fees since inception (August 2012).

🡣 Ophir Opportunities Fund Factsheet

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned +6.6% net of fees in January, outperforming its benchmark which returned +5.1%, and has delivered investors +14.1% p.a. post fees since inception (August 2015). ASX:OPH provided a total return of +2.0% for the month.

🡣 Ophir High Conviction Fund Factsheet

The Ophir Global Opportunities Fund returned +5.1% net of fees in January, outperforming its benchmark which returned +3.1%, and has delivered investors +18.0% p.a. post fees since inception (October 2018).

🡣 Ophir Global Opportunities Fund Factsheet

The Ophir Global High Conviction Fund (Class A) returned +4.5% net of fees in January, outperforming its benchmark which returned +3.1%, and has delivered investors +13.9% p.a. post fees since inception (September 2020).

🡣 Ophir Global High Conviction (Class A) Fund Factsheet

The Ophir Global High Conviction Fund (Class B) returned +4.3% net of fees in January, outperforming its benchmark which returned +3.1%, and has delivered investors +28.1% p.a. post fees since inception (June 2023).

🡣 Ophir Global High Conviction (Class B) Fund Factsheet

The Mag-7 finally takes a backseat

Putting aside some of the noise, it was a good month for equity markets overall in January, and for the Ophir Funds.

Each of the Ophir Funds were up +4% or more, and all outperformed for the month. A pleasing result, particularly for the Ophir Global Funds where the performance was driven by good Q4 earnings results for some of our stocks.

After a muddle through the first half of January, major equity indices put on solid, to- in some cases great, returns in the second half of the month.

What was most interesting was that U.S. exceptionalism and Magnificent-7 led outperformance over the last couple of years, took a back seat.

While the S&P 500 was up +2.7%, the Mag-7 actually underperformed, rising just +2.5%. The equal weighted S&P 500 (where all 500 stocks get a 0.2% weight) rose +3.4%, which highlights that smaller large caps did better than the behemoths.

The perennially underperforming European equity market (Euro Stoxx 50) put on a whopping +8.0% – eclipsing that index’s all-time high from way back in the year 2000!

It also reverses, albeit for just a month, a little of the 25-year underperformance of the European versus the U.S. share market.

The question for investors is whether this the start of a rotation in leadership for this current bull market in shares that started back in October of 2022?

Space Race redux

Undoubtedly the big news in January that put a chink in the armour of some of the Mag-7, and particularly U.S. chipmaker Nvidia, was Chinese firm DeepSeek.

We won’t go into the details here because it’s been thoroughly covered by the press. But many were calling it a ‘Sputnik’ moment for the U.S. – that is, the U.S. might not be as far ahead in the AI ‘arms race’ as previously thought. This had echoes of the USSR’s 1957 launch of Sputnik, the first earth-orbiting satellite, a development which shocked Americans and helped trigger the space race between the U.S. and Russia.

This raises several questions:

Is DeepSeek’s R1 – China’s new open sourced ‘reasoning’ AI large language model (LLM) – close in performance to the best U.S. models like Open AI’s ChatGPT? It appears so.
Is it significantly cheaper to build and train than the best U.S. models? That’s what is being claimed, with some saying R1 was built for only 5% of the cost of U.S. models, though others argue that figure is understated.
And has DeepSeek made some significant advances in software architecture that helped provide great performance at low cost? It seems the answer here too is yes, with U.S. competitors acknowledging the smarts behind DeepSeek’s code.

What is undeniable, though, is the meltdown that Nvidia’s share price suffered. After the DeepSeek announcement on the 27^th January, Nvidia fell -17.0%, wiping out US$593 billion in market cap from the then-largest listed company in the world.

To put that in perspective, below are the 30 largest listed companies in the U.S. below $US500 billion in value at the time.

Source: Jefferies.

So, in other words, Nvidia’s market cap loss was the equivalent of McDonalds and Coca Cola being wiped from the face of the earth. (New Secretary of Health and Human Services RFK Jr has assured us he’s not taking away McDonald’s, one of Trump favourite foods!)

Source: X (Donald Trump Jr)

Moats or puddles?

All eyes during the recent U.S. reporting season were on the big capex plans of the hyperscalers, such as Meta, Google and Microsoft. Given DeepSeek’s seemingly cut-price AI LLM build job, investors wanted to know the hyperscalers weren’t wasting that big capex spend.

Investors have given them the benefit of the doubt for now.

As Microsoft CEO, Satya Nadella, said: “Jevons Paradox strikes again! As AI gets more efficient and accessible, we will see its use skyrocket, turning it into a commodity we just can’t get enough of.”

The logic of the ‘Jevons Paradox’ is that a lower cost to produce = lower cost to consumers = higher demand from consumers as AI is built into all sorts of products.

But while the news from DeepSeek seems good for consumers and demand for AI applications more generally, the question now is whether the ‘moats’ for Meta, Google, Microsoft, and Co, are now more like shallow puddles in AI – that is, easier to be attacked by smaller upstarts?

What could spark small-cap outperformance?

Speaking of smaller upstarts, as small-cap investors, probably the most frequent question we get asked is: “We get small-cap valuations are very cheap versus large caps globally, but what might be the catalyst for small-cap outperformance?”

It’s an excellent question.

While small-cap valuations are very cheap globally versus large caps – and particularly in the U.S. where they really haven’t been this cheap in 25 years – small caps, in our opinion, will likely outperform large over the next 5-10 years.

It’s trickier to identify when that outperformance may start.

Firstly, we’d say don’t try pick the start. It’s better to focus on the fact that ultra-cheap relative valuations provide an asymmetric return payoff in small versus large caps. That is, should mean reversion in valuations occur like it has historically, small caps have more limited relative downside (it’s hard for them to get much cheaper in a relative sense) but much larger upside than large caps. This is why we are personally putting more money into our Ophir Global Funds now.

Earnings growth set to broaden out to small caps

One thing that’s likely been holding back small-cap outperformance is that for much of the last two years aggregate earnings of U.S. small caps (which make up almost 2/3’s of the global small cap market) have been stagnant. (Side Note: this is not the case for our Ophir Global Funds where through stock picking we have continued to be able to find companies growing earnings significantly).

This stagnant aggregate U.S. small cap earnings can be seen in the chart below with the yellow line of U.S. small cap earnings-per-share growth moving sideways, whilst mid, large and mega-cap earnings have grown.

Source: Bloomberg, Ophir

Why?

The Fed’s rate rise cycle has basically caused a bifurcated U.S. economy. Large caps earnings have been boosted by very strong Mag-7 earnings. But small caps, which hold disproportionately shorter-term floating-rate debt, have suffered under the weight of higher interest costs.

This may be about to change though.

Interest rates, not just in the U.S., but globally, are now being cut (yellow line below). That should lead to a cyclical upswing in the U.S. economy – as measured by the Institute of Supply Management’s New Orders Index – a key leading index of manufacturing activity in the U.S. (red line below).

Source: Piper Sandler

Historically, as seen in the below chart, upswings in manufacturing activity have tended to see a broadening out of earnings growth in corporate America.

Never before have we seen more than two years in a row of flat or negative aggregate earnings growth across U.S. small caps. So there is some hope that 2025 represents a return to growth and leads to further liquidity flowing into and supporting the cheap small-cap valuations.

Source: Piper Sandler

Big conference conversion

In last month’s Letter to Investors (read here) we spoke about how the election of Donald Trump has given a shot in the arm to U.S. small business optimism.

Over November and December, the NFIB Small Business Optimism Index jumped the most in any two-month period in the Index’s 50-year history!

The percentage of small business owners expecting the U.S. economy to improve in the next year also recently reached near record levels.

With this background we were very excited to head one of our favourite small-cap conferences globally in January, the Needham Growth Conference in New York.

Over a few days, we had 28 one-on-one company meetings.

Normally at conferences like this we would have 2 or 3 high-quality ideas that result in 1 or 2 investments.

This year we had 9 ideas! And we think 4 or 5 investments might come from it.

High grading the portfolio

Small-cap businesses are definitely more bullish heading into the New Year, with a new market and US-economy-friendly administration in place, and major central banks cutting rates (ex the Bank of Japan who is doing its own thing!).

On one hand our cautious nature has the team asking: have we lowered our threshold for great ideas?

But for us (Andrew and Steven), who have seen this movie before, our muscle memory would tell us it’s more likely that, overall, the businesses we have seen are indeed more confident that they can grow earnings faster than last year and faster than the market expects.

This is great news for our Global Funds because it keeps pressure on the portfolios and increases the quality of ideas.

If we do have 5 new stocks come into the Global Funds, the threshold for getting in usually means they are at least an average weight stock of say 3-4%.

This in turn means the bottom 5 get pushed out, and the strength of the overall companies in the portfolios gets high graded.

That is exactly what we want. New year, new ideas and high pressure for only the best companies to remain in our Funds.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

16 Jan, 2025 Letter To Investors - December

27 Feb, 2025 Keeping you in the AIR

16 Jan, 2025

Letter To Investors - December

Letter to Investors • 11 mins read

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Ho Ho Ho… Hum

2024 saw the fifth best year in the U.S. share market in the last quarter century, led by large caps, with material underperformance (albeit still positive) for small caps
Last year all Ophir Funds delivered strong outperformance and met their long-term investment objectives
We’re particularly pleased that our outperformance in 2024 was driven by our investment process, which focuses on stock selection, rather than other investing “factors”
The outlook for further U.S. interest rate cuts may be diminishing, but there is renewed optimism in small businesses and a continuing strong U.S. economy should finally deliver the anticipated earnings growth (and share price performance) of small caps

We hope Santa delivered what you wanted under the tree because he didn’t deliver what investors were hoping for – a Santa share market rally in December.

Perhaps it was too much to ask for after November’s generally stellar gains across the major bourses.

The cause of December’s weakness?

The most obvious was the U.S. Federal Reserve. Despite cutting rates by 0.25% during the month, the Fed signalled there may not be many more cuts (with a non-zero chance of no more cuts!) in 2025.

Most share markets fell in December, with the S&P 500, Russell 2000, MSCI Europe and MSCI Australia Indices down -2.4%, -8.3%, -0.5% and -3.1% respectively (local total returns).

Fortunately for unhedged investors, including those in our Global Funds, much of the fall in the U.S. share market was offset by a falling Australian Dollar, which helped protect returns when converted to the domestic currency.

But, overall, 2024 was still a great year for the global share market. Though, admittedly, this was mostly because U.S. large caps had such a stellar year … again!

The S&P 500 ended up +25.7% (total return) in 2024 – the 5^th best calendar year return in the last 25 years. You know what beat it out for 4^th spot? 2023 – with a return of +26.8%.

And when you consider 2019 (+31.3%) and 2021 (+30.6%) hold first and second place over the last quarter century, it’s hard to escape the conclusion that being invested in the biggest companies from the biggest economy in the world has been a great place to be recently.

Share markets rose in 2024 because of several factors:

U.S. macro risks, like recession, high inflation and employment worries, generally fell;
The Fed started cutting interest rates;
Trump was elected, raising economic and market hopes; and
The AI train rolled on, boosting the Magnificent 7’s earnings and share prices.

December 2024 Ophir Fund Performance

Before we jump into the Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned -2.5% net of fees in December, outperforming its benchmark which returned -3.1%, and has delivered investors +22.7% p.a. post fees since inception (August 2012).

🡣 Ophir Opportunities Fund Factsheet

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned -5.4% net of fees in December, underperforming its benchmark which returned -3.4%, and has delivered investors +13.5% p.a. post fees since inception (August 2015). ASX:OPH provided a total return of +0.0% for the month.

🡣 Ophir High Conviction Fund Factsheet

The Ophir Global Opportunities Fund returned -0.9% net of fees in December, in-line with its benchmark which returned -0.9%, and has delivered investors +17.4% p.a. post fees since inception (October 2018).

🡣 Ophir Global Opportunities Fund Factsheet

The Ophir Global High Conviction Fund (Class A) returned -1.3% net of fees in December, underperforming its benchmark which returned -0.9%, and has delivered investors +13.0% p.a. post fees since inception (September 2020).

🡣 Ophir Global High Conviction (Class A) Fund Factsheet

The Ophir Global High Conviction Fund (Class B) returned -1.2% net of fees in December, underperforming its benchmark which returned -0.9%, and has delivered investors +26.3% p.a. post fees since inception (June 2023).

🡣 Ophir Global High Conviction (Class B) Fund Factsheet

Small cap struggle

Last year small caps continued to underperform large caps, and nowhere was this more evident than in the U.S.

In fact, in 2024, U.S. small caps (Russell 2000) lagged large caps (S&P 500) by +13.3% – the most since 1998.

A good chunk of this came in December just gone, where the almost 6% underperformance delivered the 5^th worst monthly underperformance by U.S. small caps to U.S. large caps this century.

Longer term, as seen in the chart below, U.S. small caps have now underperformed for four years in a row.

Source: Ophir, Bloomberg. Calendar year returns are provided for the S&P 500 (US Large Caps) minus the Russell 2000 (US Small Caps) from 1980 to 2024.

But Ophir Funds provided great returns and outperformance in 2024

Whilst one-year returns are too short a period to get overly excited about, we are happy that, despite the small-cap underperformance, the Ophir Funds provided returns between +21% to +45% over 2024:

Starting off with our Ophir Opportunities Fund. Despite operating for more than 12 years now, we’ve been able to continue with the good results, returning +42.8% last year.
Not as strong but still a great outcome, our Ophir High Conviction Fund provided an investment portfolio return of +21.2%. But based on its ASX listed price, it returned an even higher +26.7%, as its discount to Net Asset Value shrank over the year.

Ophir Australian Funds – Performance to 31 December 2024

Turning to our Global Funds, given their high level of stock overlap, they provided very similar returns at +45.1% and +44.7% each for the Global Opportunities Fund and Global High Conviction Fund.

Ophir Global Funds – Performance to 31 December 2024

Source: Ophir. Bloomberg. Data as of 31 December 2024.

These numbers mean that the Ophir funds even outperformed the Australian and global large cap Indices in 2024.

While we would never want investors to extrapolate those sorts of one-year numbers into perpetuity, or think we are going to repeat them year in and year out, they have comfortably met our long-term goal of 5% outperformance versus our market benchmarks, and the 15% absolute return per annum we target over the long term.

It was stock picking that drove Ophir’s 2024 outperformance

So what drove the outperformance in the Ophir funds last year?

As we highlighted in our Investment Strategy Note last month (link) it has continued to be stock picking.

We show this below for our Global Opportunities Fund (which is mirrored very closely with outperformance from our Global High Conviction Fund).

When we look at the ‘factors’ (see article linked above for further details) or common characteristics that might have caused this outperformance, we see things like our allocation to different countries, the market sensitivity of the companies we held in the portfolio (‘beta’), or the size of those businesses, amongst other things, made very little contribution to our outperformance.

Source: Ophir. Bloomberg. Data as of 31 December 2024. Benchmark is the MSCI World SMID Cap Index NR (AUD). Factor analysis uses proxy of Bloomberg Global Developed Mid Small Index.

Ultimately, it was good old fashioned stock picking (here formally called “selection effect”).

This is great news because that is what our investment process targets.

If it was exposure to some other factor – like being overweight U.S. stocks when the U.S. share market did well (which would show up as a positive “Country” factor attribution) – we’d be worried (and so should you!) because it’s not a sustainable way to outperform with our investment process. We don’t try to invest based on factors other than stock picking because a) it’s very difficult to do; and b) we have no skill in it.

We are happy our hard work finding mispriced companies that are growing faster than the market expects has been rewarded in 2024.

Of course, the work doesn’t stop. We need to keep “pounding the rock” (see link to this great motto from the NBA San Antonio Spurs Hall of Fame coach Greg Popovich here).

We are acutely aware new investors are coming on board all the time and for you our very long-term returns are just numbers on a page, not tangible results.

U.S. small business gets excited about Trump 2.0 from 2025

Returning to U.S. small caps, one thing holding back the relative performance of U.S. small caps over the last few years is that their earnings have not been growing as fast as their larger brothers and sisters, such as the Magnificent 7.

When may that change?

We were encouraged in December when the NFIB (leading U.S. small business association) Small Business Optimism Index – closely followed by economists – jumped 8 points in November after Trump’s election win.

This was the third-biggest monthly jump in U.S. small business optimism in the last half century! It also took the reading back above its 50-year average of 98, a level it had been below for the last almost 3 years.

Source: Bloomberg. Data to 31 December 2024.

As NFIB Chief Economist Bill Bunkelberg wrote at the time:

“The election results signal a major shift in economic policy, leading to a surge in optimism among small business owners. Main Street also became more certain about future business conditions following the election, breaking a nearly three-year streak of record high uncertainty. Owners are particularly hopeful for tax and regulation policies that favor strong economic growth as well as relief from inflationary pressures. In addition, small business owners are eager to expand their operations.”

*At writing the December data for the NFIB Small Business Optimism Index was released, showing another gain, and the highest reading since late 2018. Interestingly, the net percent of owners expecting the economy to improve rose to a net 52%, the highest since the fourth quarter of 1983!

We are hearing this from the coal face from our portfolio companies too. Optimism is up. Hiring and capex intentions have increased. We’ll be keeping a keen eye on how this translates to company guidance for revenues and profits this year that will be provided at full-year 2024 results in late January and February.

This optimism needs to be tempered with the more recent news that potentially little further rate cut relief is ahead in the U.S., which may limit further valuation increases.

But here too we may have a silver lining.

U.S. rates may not come down much from here, simply because the U.S. economy is in such strong health. And that bodes well for small cap earnings too – especially if we see a friendly Trump 2.0 policy mix for domestically orientated U.S. small-cap businesses.

We are excited about the new year ahead having returned from a brief break and raring to go. The investment team is in a great place, and we can’t wait to get stuck into reporting season for our portfolio companies that starts later this month. We think we own some great businesses that should pleasantly surprise the market and help build on 2024’s investment returns.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

11 Dec, 2024 Letter To Investors - November

20 Feb, 2025 Letter To Investors - January 2025

11 Dec, 2024

Letter To Investors - November

Letter to Investors • 14 mins read

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Why we Trust this Pilot to take off

November didn’t disappoint share market investors. A Trump-led rally shot the S&P500 (U.S. large caps) up +5.7% and the Russell 2000 (U.S. small caps) up +10.8% — the best monthly return for each index this year.

That was nothing compared to Bitcoin, which exploded +38.5%. Trump is seen as a ‘BFF’ (Best Friend Forever) to the crypto market.

Aussie large-caps followed the U.S. up, adding +3.2%, though Aussie small caps lagged somewhat, rising +1.3%.

The big monthly return in U.S. small caps captured the headlines though, as the market has started to price in the potential benefits of Trump’s proposed tax cuts, as well as his more protectionist policy agenda. Both should disproportionately benefit smaller and more domestically orientated U.S. businesses.

We have been delighted at the recent surge in small-caps and in this month’s Letter to Investors we lift the lid to see just what’s driving the recovery. So far, it’s largely been a story of improving valuations. But could an earnings recovery kick in and help propel small-cap share prices even higher?

We also take a close look at Trustpilot, a stock that is bringing credibility and trust to internet reviews. We watched the company for some time before buying in October this year. As you’ll see, the company and its share price have huge upside potential and it’s a stock we’re particularly excited about.

U.S. large cap Santa rally is set to continue

It’s been a banner year so far for the heavyweight U.S. share market with returns year-to-date the strongest in at least 25 years.

Source: Piper Sandler. Data to 26 November 2024.

About 17% of the 27% rise in the S&P500 this year to the end of November – or in other words a little more than half – has been expanding valuations (price to earnings ratio) as macro risks have been priced out.

The market has more comfort that U.S. inflation is under control, no recession is imminent, and election uncertainty has now been resolved.

Seasonally, we are also in the best two-month stretch for the U.S. share market (November and December), and there seems to be little that could get in the way of the Santa rally into year end.

Historically, PE re-rating is usually the precursor to a market rally as the market is forward looking despite declining or anaemic profit growth. So, the question on everyone’s mind is – will history repeat as it has done many times before?

November 2024 Ophir Fund Performance

Before diving into this month’s Letter, we’ve provided a detailed monthly update for each of the Ophir Funds below.

The Ophir Opportunities Fund returned +4.2% net of fees in November, outperforming its benchmark which returned +1.3%, and has delivered investors +23.1% p.a. post fees since inception (August 2012).

🡣 Ophir Opportunities Fund Factsheet

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned +7.5% net of fees in November, outperforming its benchmark which returned +3.5%, and has delivered investors +14.3% p.a. post fees since inception (August 2015). ASX:OPH provided a total return of +9.6% for the month.

🡣 Ophir High Conviction Fund Factsheet

The Ophir Global Opportunities Fund returned +11.9% net of fees in November, outperforming its benchmark which returned +6.8%, and has delivered investors +17.8% p.a. post fees since inception (October 2018).

🡣 Ophir Global Opportunities Fund Factsheet

The Ophir Global High Conviction Fund (Class A) returned +12.6% net of fees in November, outperforming its benchmark which returned +6.8%, and has delivered investors +13.7% p.a. post fees since inception (September 2020).

🡣 Ophir Global High Conviction (Class A) Fund Factsheet

The Ophir Global High Conviction Fund (Class B) returned +11.5% net of fees in November, outperforming its benchmark which returned +6.8%, and has delivered investors +29.1% p.a. post fees since inception (June 2023).

🡣 Ophir Global High Conviction (Class B) Fund Factsheet

A ray of light in small-cap earnings?

While U.S. large caps have seen earnings rise 10% this year (+17% valuation increase = the 27% S&P500 return), it’s been tougher in U.S. small-cap land where earnings (earnings per share or EPS in the chart below) have gone slightly backwards. Small businesses there have been suffering through more recession-like conditions.

The +16% return in the S&P600 index this year (another U.S. small cap index along with the Russell 2000) has been all driven by expanding valuations that still remain very cheap at around 19x forward earnings versus U.S. large caps at around 26x forward earnings.

Valuation increase drives all the return for U.S. small caps this year

Source: Piper Sandler at as 26 November 2024.

Valuation increases, though, are not a sustainable way to generate investment returns and do have an upper limit. Ultimately, earnings per share (EPS) growth is needed to drive the market higher over the long term.

As seen in the chart above, declines in annual earnings for U.S. small caps (S&P600) have been relatively rare. Yet it looks like both 2023 and 2024 will see U.S. small-cap earnings decline in aggregate.

The last time a decline occurred two years in a row was during the GFC in 2008 and 2009, though earnings fell much more back then, before surging strongly in 2010.

This gives some more hope that we may be nearing the end of the lengthy earnings falls or stagnation for U.S. small caps we have seen recently.

Our Funds’ portfolio companies are generating superior earnings growth

Certainly, the share market appears willing to give the new Trump administration – combined with the dialling back in monetary policy restriction from the U.S. Fed – the benefit of the doubt at present that better times are ahead for small-cap earnings.

We maintain a keen eye on small-cap earnings revisions and a handful of other key leading indicators for small-caps’ earnings to see if this is playing out.

Anecdotally, we are seeing an increasing number of our portfolio companies in the U.S. appearing more confident in their end markets given the current political and monetary policy setup. We’ll be watching closely whether this translates into increases in company guidance at their fourth-quarter results due in late January and throughout February early next year.

If it transpires, we will likely become even more positive on cyclically orientated businesses, and those that are leveraged more to the economic cycle.

Regardless, given the huge opportunity set at our disposal in our Global Funds at Ophir, and despite the slower broader backdrop for U.S. small-cap earnings this year, we still have not had trouble keeping average earnings growth in these Funds from our portfolio companies in the +20-25% range.

Trustpilot: Good things come to those who wait

“Trust is like the air we breathe – when it’s present, nobody really notices; when it’s absent, everybody notices.” Warren Buffett

Trustpilot (LON: TRST) is a London-listed, Danish-founded consumer business operating a review website, which hosts reviews of businesses worldwide. Around 1 million new reviews are posted each month.

Reviews are written by any consumer with a Trustpilot account who has had a recent buying or service experience, as long as they follow the Guidelines for Reviewers, and don’t have a conflict of interest with the business they’re reviewing.

Consumers who’ve had an experience with a business can create a Trustpilot account and write an unsolicited review (“organic reviews”). Businesses can also ask their customers to leave a review by invitation. There should be no bias in the way customers are invited to review, with no offer of payment or incentive.

What sets Trustpilot apart is their commitment to transparency and neutrality. They ensure the platform is a trusted space where customers feel heard, and businesses can demonstrate their integrity.

A commissioned study conducted by Forrester Consulting on behalf of Trustpilot found that organisations deploying Trustpilot achieved a remarkable 401% return on investment over three years. These organisations experienced significant benefits, including improved customer acquisition and operational efficiencies.

Additionally, Trustpilot helped increase web traffic by 25% in the first year, 30% in the second, and 35% by the third year. These metrics underscore Trustpilot’s pivotal role in enhancing business performance through trust and transparency.

Trustpilot’s business model has strong network effects. As more consumers use Trustpilot to review more businesses, more domains and businesses are added to the platform. More businesses claim their profiles, and over time become customers.

As the flywheel keeps spinning – this drives organic growth, strengthens the brand and market position, while simultaneously and creating high barriers to entry.

Trust follows the adage of “goes up the escalator and down the elevator” demonstrating barriers/ time to build adequate consumer reviews yet easy loss of confidence in website if reviews aren’t honest. If the business can overcome this dynamic, then it should build adequate moat to monetise model as difficult for competitors to replicate.

Lofty initial expectations came back towards earth

We first met Trustpilot management during the 2021 IPO process. Despite evidence of good early momentum across the business, we passed on valuation grounds. At the 265p IPO price we were being asked to pay too much for potential success in the U.S. where there was limited penetration at the time.

Patience pays off

Source: Ophir, Bloomberg. Data to 30 November 2024.

This was a good decision because Trustpilot’s share price declined materially after peaking towards the end of 2021 and tracked broadly sideways from mid-2022 and much of 2023 due to macro factors.

Stock-specific factors also impacted the share price. The initial roll-out in the U.S. was ‘scatter-gun’ and lacked focus. That was a key element holding us back from buying the stock.

Yet because of its unique business model and significant market opportunity, we continued to follow the company.

But during 2023 we noticed Trustpilot’s approach to the U.S. became much more focused. The company homed in on a few core verticals (e.g. financial services, education).

This improved growth and more specifically net revenue retention (another way to describe customer retention). That was the evidence we needed to see before re-engaging with the company.

So in early 2024, we met with management in their U.S. headquarters in Denver. We were impressed with the ongoing execution in the UK, as well as the momentum that was building in other jurisdictions globally, including the U.S.

We subsequently caught up with the company on a handful of occasions over the next few months, after which we invested in the company. Our patience and valuation discipline allowed us to see the company execute for several years and, ultimately, we initiated our position below the IPO price.

We see big upside for the company and its share price for several reasons:

The UK and other markets remain underpenetrated

The UK is Trustpilot’s most penetrated region. However, with 1H24 bookings of US$47m in a serviceable addressable market (SAM) of ~US$1.7 billion this equates to only ~5% penetration.

Source: Ophir. Company Financials.

This provides a meaningful growth runway; while also providing a reasonable blueprint for what the terminal/mature economics of the business may look like for the group.

Trustpilot continues to show strong network effects

Since 2018 UK bookings have grown at a ~20% compound annual growth rate (CAGR), while sales and marketing dollars have remained broadly stable, based off our internal estimates for the UK division. This demonstrates the strong network effects when consumer awareness hits a tipping point.

Source: Ophir. Company Financials.

The company is still seriously undervalued

Our comparative analysis shows that businesses with a similar growth and margin profile to Trustpilot’s UK business trade on 8-9x annual recurring revenue (ARR).

This results in a UK valuation of ~US$1 billon and implies we are paying ~US$500 million (or 3x ARR) for Europe & the Rest of the World (RoW) and North America, which combined are 10x the SAM of the UK.

Data shows strong momentum globally

We think near-term momentum will show acceleration in the U.S. and EU/Row based off our data tracking, calls with regional experts and tracking of onboarded and paying companies.

For key markets and verticals, we closely monitor Google search visibility, the quality and volumes of reviews as well as engagement and conversion. We also track corporates who are signed up and paying them.

Our data tracking shows Trustpilot’s robust performance in established markets such as the UK. It also demonstrates the critical U.S. market is accelerating alongside Germany, France and Italy, which are core to the Europe/RoW segment.

Source: Ophir, Google Trends.

Trustpilot’s U.S. position continues to strengthen

When compared to competitors in the U.S., such as Stamped, Yotpo, Bazaarvoice and Birdeye, Trustpilot has demonstrated more consistent performance and a positive trajectory. This suggests a strengthening of its position in the U.S. market. The strong interest levels against a backdrop of competitor volatility suggests Trustpilot is on the path to becoming the pre-eminent platform in the trust and review ecosystem.

Source: Ophir, Google Trends.

A significant runway for growth

Given their large markets, significant upside to penetration, high long-term margins and limited competition due to high barriers to entry, as well as strong network effects, we see significant upside for Trustpilot.

As management continues to execute, the market will get more comfortable with the long-term growth opportunity in North America, Europe and the Rest of the World.

This is a great example of how being patient and waiting for a better entry point can pay off. By applying our GARP (growth at a reasonable price) investment philosophy at the time of the IPO, we were effectively given a free look at how the business executed for the following 3 years.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

11 Dec, 2024 What’s caused the recent outperformance in our Global Funds?

16 Jan, 2025 Letter To Investors - December

18 Nov, 2024

Letter To Investors - October

Letter to Investors • 14 mins read

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🡣 Download PDF

No one else wanted to look here, but we found a bargain

After a hot streak of five months, the global share market took a breather in October. The MSCI World Index (in USD) fell -2.0%; the S&P500 got off a little lighter, down -0.9%. It was a surge in the U.S. 10-year Treasury bond yield, which rocketed up +0.5% in the month to 4.3%, that weighed on share market valuations across the world.

Not only did long-term interest rates in the U.S. move sharply higher over the month, but so too did expectations for short-term rates. Only four 0.25% Fed cuts are now expected this cycle (at writing), down from eight 0.25% expected at the start of October.

Why such a sharp move higher in short and long-term interest rates in the U.S.? In short there are two key reasons:

U.S. economic data has continued to surprise on the upside. The unemployment rate has dropped back to 4.1%; inflation has continued to moderate back towards the Fed’s 2% target; and real GDP growth is running above trend at just a shade under 3%.
In October polls showed momentum was swinging towards Donald Trump and a Republican win in the November U.S. election (which, unless you’ve been hiding under a rock has subsequently been proven right with a big win earlier this month). Trump’s policy platform of tariffs, reduced immigration and tax cuts are all inflationary, so markets started pricing in higher rates. The day after the election, November 6, when it was clear Trump had won, the U.S. 10-year jumped 0.16%. Most of this rise came from higher inflation expectations (10-year breakeven inflation expectations).

A natural hedge

For Australians invested in unhedged global shares (such as those in Ophir Global Funds), October’s pullback in global share markets, and more specifically the U.S. share market, was totally offset by a big fall in the Aussie Dollar versus the U.S. Dollar.

The benchmark for our Global Funds, the MSCI World SMID Cap Index posted a negative total return of -2.6% in October. But when converted to $AUD, it rose +3.1%.

Being unhedged for your global shares is usually a positive for Australian investors during declining markets. When global shares fall, the Australian Dollar often (though not always) also falls.

October 2024 Ophir Fund Performance

Before we jump into the Letter in more detail, we have included below a summary of the performance of the Ophir Funds during October. Please click on the factsheets below if you would like a more detailed summary of the performance of the relevant fund.

The Ophir Opportunities Fund returned +5.1% net of fees in October, outperforming its benchmark which returned +0.8%, and has delivered investors +22.9% p.a. post fees since inception (August 2012).

🡣 Ophir Opportunities Fund Factsheet

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned +3.7% net of fees in October, outperforming its benchmark which returned -0.8%, and has delivered investors +13.6% p.a. post fees since inception (August 2015). ASX:OPH provided a total return of +0.0% for the month.

🡣 Ophir High Conviction Fund Factsheet

The Ophir Global Opportunities Fund returned +3.4% net of fees in October, outperforming its benchmark which returned 3.1%, and has delivered investors +15.9% p.a. post fees since inception (October 2018).

🡣 Ophir Global Opportunities Fund Factsheet

The Ophir Global High Conviction Fund (Class A) returned +3.3% net of fees in October, outperforming its benchmark which returned +3.1%, and has delivered investors +10.7% p.a. post fees since inception (September 2020).

🡣 Ophir Global High Conviction (Class A) Fund Factsheet

The Ophir Global High Conviction Fund (Class B) returned +3.2% net of fees in October, outperforming its benchmark which returned +3.1%, and has delivered investors +21.3% p.a. post fees since inception (June 2023).

🡣 Ophir Global High Conviction (Class B) Fund Factsheet

Two charts you should know about

Before we get into our stock in focus for the month, we wanted to highlight two quick charts we think you should know:

1. Ophir Global Funds: A strong year driven by stock picking

The Ophir Global Opportunities Fund and the Ophir Global High Conviction Fund had a tough late 2021 and early 2022 when interest rates ripped higher and small-cap growth valuations got torched. But over the last year their performance has surged. While their benchmark, the MSCI World SMID Cap Index NR (AUD), was up about 26% in the last 12 months to the end of October, both Funds were up about 46%. That’s about 20% outperformance!

So what drove that outperformance?

Source: Ophir & Bloomberg. Data as of 31 October 2024.

In the chart above we show how $100 invested a year ago into the Ophir Global High Conviction Fund has grown versus the same investment into our official benchmark. We’ve also included different size (mid, SMID, small, micro) and style (growth & value) indices.

It’s clear that the last year’s outperformance was not due to size factors – as you can see mid, SMID and small caps all performed similarly and were lagged by microcaps. Growth and Value styles of investing also provided very similar results.

So Ophir’s small-cap growth company bias didn’t generate the outperformance.

What was it then?

It was good old-fashioned stock picking.

All the top contributors to performance beat the markets expectations on their earnings results and raised guidance for future results. That’s exactly what our investment process targets and that – rather than size or style – is the most sustainable form of outperformance for our funds.

2. The valuation ‘catch up’ still hasn’t happened

Some investors might have been wondering if the Ophir Global Funds’ strong performance over the last year was because small-cap valuations simply caught up with the stocks that have led this bull market since 2022 – ie. large caps and the Magnificent 7?

Source: Ophir and Bloomberg. Data to 31 October 2024.

But as you can see in the chart above, both small (gold line) and large (grey line) caps have both benefited from valuations (here price to earnings ratios) increasing. Yet the gap (shaded area) has not closed.

So, it’s still highly likely there is a period ahead in the next five years where small caps will catch up and outperform large caps due to their much cheaper starting valuations.

On a relative basis, small caps are the cheapest they have been in a quarter century and to us they represent a once in a generation relative opportunity to large caps. This year’s strong performance in the Ophir Global Funds has not changed that.

Stride: The company no fundie wanted to see

In January 2021 vaccines were rolling out, people were starting to travel again; and the share market had flipped back from ‘stay at home’ stocks to the ‘re-opening trade’. That was when we attended the Needham Growth Conference in New York and found one of our best stocks of the last few years.

The Needham Conference is one of the biggest small-cap investment conferences. Fund managers were lining up to meet the management of companies primed to capitalise on the tidal wave of services spending as consumers emerged from hibernation.

So, what did we do?

We asked the conference organisers: “What are the companies at the conference with the least requested number of meetings by fundies?”

The company that no one wanted to see was Stride (NYSE:LRN). Stride provides online education solutions to kindergarten through Year 12 students in the U.S. and their solutions are used in the classroom. But originally and still, they are used by students homeschooled for various reasons including bullying, parental preferences; even for child actors.

When we were all going to ‘work from home’ during COVID, students were going to ‘learn from home’. Stride’s share price rocketed from around US$20 to over US$50 between March and August 2020 as demand, and expectations of demand, for their products and services ballooned.

But by January 2021, the time of the Needham Conference, the balloon had popped. As students returned to school, investors thought there’d be no durable increase in demand, so Stride’s share price returned to US$20. In any case, fundies had turned their attention elsewhere.

What we found when we decided to dance with the ‘wallflower’ Stride

Stride was the proverbial ‘wallflower’ at the prom. But we decided to dance with Stride and we found:

A company structurally benefitting from increasing adoption of virtual schooling more generally (despite schools having been reopened), which could lead to sustained growth in a market in which Stride was a leader.
Defensive revenue growth of 8-10% revenue, underpinned by state government budgets that fund the 70 schools across 35 US states in which Stride had solutions.
This was flowing through at high incremental profit margins, driving what we expected would be 20%+ earnings growth.
A depressed EV/EBITDA (Enterprise Value to Earnings Before Interest Tax Depreciation and Amortisation) valuation multiple of just 5x.

Of course, we never just take what the company says at face value, so we got to work. We checked data around individual school’s login traffic; called enrolment centres for intel, including the number of open enrolment applications; spoke to public and private school peers around market share changes; and spoke with school district budget allocators to ensure funding was rock solid.

We initially bought Stride later in January 2021 between US$22-25. And we have held ever since, building our conviction and knowledge around the business.

And boy has it delivered. From financial year 2020 through to 2024 it has:

Doubled revenue from US$1.04 billion to US$2.04 billion
Improved EBITDA margins from 11% to over 18%, and
10x’ed profit from US$24.5 million to US$240 million (12 months to Sept 2024)

Fuzzy Panda tests our conviction

But then last month our conviction was really tested.

Fuzzy Panda (FP) – no not a Sesame Street character, but a well-known short-selling organisation – released a report on the 16^th October dubbing Stride “the last COVID over earner”.

The stock tanked over -9% on the day, but Stride was down -24% if you include the falls leading up to the report, when FP was clearly putting on their short position.

FP was essentially claiming that Stride was a big beneficiary of the US$190 billion in Federal emergency relief funding program for U.S. schools during COVID. The funding was ending in September 2024 and FP warned Stride’s profits were about to “fall off a COVID cliff”.

Australian investors in ASX listed companies probably aren’t that used to “short reports” as they’re not that prevalent domestically. However, they are big business in the U.S. and par for the course if you’ve been investing there long enough. The playbook is simple.

Take a short position, put out a scary short report questioning the company’s profits, many investors shoot first dumping the stock (regardless of the merits of the short report), the shorter closes the short by buying back the stock at the now lower price, pocketing a tidy profit. Sometimes there is merit to the short report, sometimes it’s just hot air.

Over the last three years we have owned the stock we have spoken with Stride’s management on multiple occasions each quarter. We have found them diligent, trustworthy and conservative.

But we also did more work.

We already knew from the publicly available individual school budgets that the federal COVID funding was used to offset funding from the states during COVID. But we also went through the corresponding publicly available state budgets in detail that showed the states were increasing their education spend to offset the federal grant funding that was ceasing. So, this gave us comfort there was no big looming funding shortfall from state schools for Stride’s offering. This gave us the conviction to hold through the short report.

When Stride reported its September quarter results aftermarket on the 22^nd of October, it blew the market’s expectations away. both at a revenue and profit level.

The next trading day the stock popped around +40%!

Source: Ophir & Bloomberg. Data as of 31 October 2024.

The future of Stride

So where to next for Stride?

Even though they are the largest online education provider in the U.S. by enrolment, they are still very underpenetrated across schools. They can also fuel growth by entering or expanding into education verticals including:

Experiential learning: Through extended, augmented and virtual reality modes; AI voice and chat learning software; and games and simulation teaching solutions.
Learning support: Building out their tutoring business which we think could add 30-40%+ to today’s earnings over the medium to longer term, given their existing relationships with students and teachers.
Workforce and talent development and acquisition: Providing certifications to the increasing number of U.S. high school leavers who are shunning four-year college degrees and opting instead to directly enter jobs. Stride already owns a business called Tallo, which connects students from Stride-powered schools to opportunities (the Tallo app has 1.7million users already!).

A long career ahead

Today, Stride is still growing earnings at 20%+. That’s two to three times the market’s growth. Yet it operates in a defensive end market with a large share of its revenues underpinned by state government education budgets. It’s a great all-weather stock.

But its valuation is lower than the market. Stride trades on a still cheap 13x price to earnings ratio. Most of the share price move since we have owned has actually been driven by earnings growth and not valuation expansion. We think it could still be a 20x P/E business.

So while it’s been a great performer for our Funds, we still think there is a long ‘career’ ahead for Stride.

…the hard work pays off

It would have been easy to crack during the Fuzzy Panda short drama and sell Stride.

The only way to know whether to ‘keep the faith’ or to ‘fold’ is to put in the work and back yourself. It won’t always work out on your side, but if you go the extra mile, it will more often than not.

We are proud of the team and the work they have done which allowed us to keep our conviction in Stride.

We’re also glad we took that meeting that no one else wanted back in 2021!

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

18 Nov, 2024 How will Trump’s epic win affect the share market?

11 Dec, 2024 What’s caused the recent outperformance in our Global Funds?

17 Oct, 2024

Letter To Investors - September

Letter to Investors • 16 mins read

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NextDC – where Nvidia’s chips live

September.

For some it’s their favourite song – a funky and joyful classic by Earth Wind and Fire, released back in 1978.

“Do you remember
The 21st night of September?
Love was changin’ the minds of pretenders
…
As we danced in the night, remember
How the stars stole the night away, oh, yea”

But for share market investors, September has historically been the worst-performing month of the year. If you were going to leave your brokerage account alone for a month to “dance in the night”, September was the one to take off.

As we show below, on average over the last quarter century, the global share market (MSCI World Index) has fallen -1.5% in September. No other month comes close to being as bad, with a -0.3% fall the next worst.

September – the worst month of the year (MSCI World Index)

Source: Ophir, Bloomberg.

It’s not been because the market always falls in September, though – only 12 of the last 25 Septembers have lost money.

It’s because September has had some of the biggest stinkers for shares. 2022 (recession worries on higher rates/inflation), 2008 (peak GFC fears) and 2002 (Dot.com bubble bursting) all clocked up falls of around -10% or more.

It came as a welcome relief, though, that this September didn’t fall prey to history, with gains extending for the fifth month in a row.

In fact, to the end of September, the S&P 500 had its strongest first nine months of the calendar year since 1997! (Can I hear Earth Wind and Fire singing?)

During September in total return terms the S&P 500 rose +2.1%, while the Nasdaq gained +2.8% and the ASX 200 was up +3.2%.

September 2024 Ophir Fund Performance

Before we jump into the Letter in more detail, we have included below a summary of the performance of the Ophir Funds during September. Please click on the factsheets below if you would like a more detailed summary of the performance of the relevant fund.

The Ophir Opportunities Fund returned +4.6% net of fees in September, underperforming its benchmark which returned +5.1%, and has delivered investors +22.5% p.a. post fees since inception (August 2012).

🡣 Ophir Opportunities Fund Factsheet

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned +2.6% net of fees in September, underperforming its benchmark which returned +4.1%, and has delivered investors +13.2% p.a. post fees since inception (August 2015). ASX:OPH provided a total return of +2.3% for the month.

🡣 Ophir High Conviction Fund Factsheet

The Ophir Global Opportunities returned +0.8% net of fees in September, outperforming its benchmark which returned -0.1%, and has delivered investors +15.5% p.a. post fees since inception (October 2018).

🡣 Ophir Global Opportunities Fund Factsheet

The Ophir Global High Conviction Fund returned +0.1% net of fees in September, outperforming its benchmark which returned -0.1%, and has delivered investors +10.1% p.a. post fees since inception (September 2020).

🡣 Ophir Global High Conviction Fund Factsheet

Un-inversion concern

September’s share market gains occurred despite the yield curve in the United States ‘un-inverting’ during the month. Historically, that’s been an ominous sign for the US economy and corporate earnings.

The un-inversion happened as the Fed kicked off its interest-rate-cutting cycle with an outsized 0.5% cut in its short-term interest rate, the Fed Funds Rate.

As we show in the bottom panel of the chart below, the yield curve ‘inverts’ – that is short-term interest rates (in this case two-year Treasury yields) rise above long-term interest rates (in this case 10-year Treasury yields) – with the purple line going negative when the Federal Reserve is raising short term rates to cool the economy and lower inflation. This is what happened in 2022.

Source: Ophir, Bloomberg.

Historically, when the yield curve un-inverts (green circles) it’s because the market expects the Federal Reserve to cut interest rates as the inflation fight is done – the market now starts worrying about the other side of the Fed’s mandate: maintaining full employment.

That is where we are today, as witnessed by the Fed’s 0.5% cut in September.

Naturally, some are worried that when the un-inversion happens, as seen in the middle chart above, that historically it has meant the Fed is too late and the labour market softens too much. The unemployment rate goes up (yellow line rises) and a recession (grey bars) and its attendant economic and earnings contraction ensues.

During the recession, the fall in corporate earnings typically sees the share market fall, as shown in the top chart by the drawdown (peak to trough fall) in the S&P500 index. Sometimes these falls are more mild (less than 20%), and sometimes they are very severe (greater than 30%).

Is history repeating?

But, pleasingly, the latest data in the US shows the labour market, while cooling, is holding up ok, at least for now. That’s reduced the probability of a recession in the US. In fact, the US unemployment rate, at writing, has just dropped back to 4.1% from 4.3% a couple of months ago.

What, despite higher interest rates, is providing support and helping avoid mass layoffs?

The US economy so far is being kept afloat by several things: continued jobs growth in non-cyclical areas like healthcare, education and the government sector; solid (though not spectacular) company revenues and household income growth; big government spending; and not-too-tight-for-not-too-long monetary policy.

But all eyes, including ours, will remain on the employment picture to see if the softening seen over the last year or so morphs into something more sinister.

China rockets

The other big news in September was the People’s Bank of China (PBoC) finally coming to the party with some meaningful stimulus. Calls have been loud for some time for big stimulus with China mired in slowing growth, a property sector overhang, rock bottom consumer confidence and deflation.

In the last week of September, the PBoC announced a stimulus program that included an interest rate cut, a reserve requirement ratio cut for banks, lowered mortgage downpayments, and support programs for the property and share market.

The Chinese share market loved it!

The MSCI China Index was up over 21% (!) over the last five trading days of September and the rally continued into early October*. Commodities that China voraciously consumes also rocketed on the news, as seen in the chart below of exchange traded funds (ETFs) that follow commodity miners.

*Though just at writing in the second week of October the Chinese share market has given back some of its September gains as the announcement of government fiscal stimulus has come up short of expectations.

Source: Ophir. Bloomberg.

In response, the ASX 200 Materials index in Australia rose over 12% in those same last five trading days of September.

In a relative sense this created a performance headwind for the Ophir portfolios versus their benchmarks, given we are structurally underweight the Materials sector.

(As a reminder, we prefer more industrial-type businesses that can structurally grow into big-end markets over time, rather than businesses who earnings tend to be more cyclical because of short term swings in – to us at least – largely unforecastable movements in commodity prices).

This was more of a headwind for our Australian Funds where the Materials sector makes up a greater proportion of our benchmark than our Global Funds.

The influence of Materials alone took our Ophir Opportunities Fund from outperforming its benchmark in the first three weeks of the month to underperforming by the end of the month.

As always, we are happy to wear the swings and roundabouts of relative performance due to short-term moves in commodity prices. If we get the earnings right long term in our typically industrial type businesses, investment performance will look after itself.

NextDC – from Microcap to Midcap – where Nvidia’s chips live

Ever since ChatGPT entered the public domain in November 2022, demand for anything artificial intelligence (AI) related has seen computer chip maker Nvidia skyrocket to become, at one point this year, the most valuable listed company in the world.

Naturally, Australian investors have been looking for an AI play on the ASX.

Enter NextDC, Australia’s leading listed data centre operator.

The company is not some ‘Johnny-come-lately’ here just to capitalise on the AI scene. It was founded by wildly successful Australian serial tech entrepreneur, Bevan Slattery – Australia’s answer to Elon Musk – back in May 2010.

NextDC listed on the ASX not long after in December 2010 when it IPO’d at $1 a share, giving it an $80 million market cap. IPO investors got a nice bump on day one with the stock closing at $1.52 a share! But it was definitely still in microcap territory.

Today it’s the 49^th largest stock on the ASX with a market cap of $11.2 billion and scratching on the door of the ASX Large Cap Index.

But wait a sec, what’s a data centre anyway, and doesn’t it all seem very mysterious what goes on inside these big data centre ‘boxes’ you might have seen around Australia? And how and why do they benefit from AI?

You’re about to find out.

What’s in the box?

No this is not like the movie Seven! But today’s modern data centres do resemble big boxes, or even mini-Westfield shopping centres in many ways.

Put simply, a data centre – a term born in the 1980s – is a computer room. In fact, some companies still have on-premises data centres/computer rooms where their IT infrastructure, including servers, are kept.

A data centre is the central, physical hub of an organisation’s digital operations. It’s the secure home with the power and cooling essential to operate the network of computer systems that house a business’s data. It is the beating heart of a business’s day to day operations.

Many businesses these days don’t store their IT infrastructure on premises, but rather use external providers like NextDC in what are called Colocation data centres that reduce redundancy and downtime at cheaper cost. You co-locate your IT infrastructure in NextDC’s ‘boxes’ along with that of other companies.

In this way NextDC is like Westfield, the landlord, and you are the tenant, renting space inside the box for your business’s equipment.

But what’s in the box, exactly?

There are really four main categories of ‘things’ you will find inside a NextDC data centre:

Computing infrastructure: mainly servers, rackspace, cages, and dedicated private suites (sounds like a fancy airline right)
Storage: your hard drives and solid-state drives
Network infrastructure: such as cables, switches, routers, and firewalls
Ancillary items: backup generators, ventilation and cooling equipment, fire suppression systems, and security and monitoring systems

Who uses the box?

NextDC has over 1,800 customers and they include

Enterprise customers (like Alibaba or any business that wants to move their IT infrastructure out of the office)
Telcos (like AT&T or Aussie Broadband), and importantly
So-called Cloud providers (like Google, Amazon and Microsoft), often called ‘hyperscalers’ because of their fast growth

Cloud providers deliver computing services, such as servers, databases, networking, software, storage and intelligence, via the internet. That allows them to offer faster and more flexible resources, high-performance capacity, as well as scalability.

Basically, any services that don’t require physical proximity to the IT hardware in use can be considered candidates for cloud delivery. Don’t have or want your own IT infrastructure? You can use Amazon Web Services, Microsoft Azure or Google Cloud.

But those cloud providers have IT hardware too … and they need to store it somewhere. NextDC provides the data centres for cloud providers to store their hardware. (They even have names for data centres where only cloud providers are in there – they are imaginatively called Cloud Data Centres.)

Which leads us to NextDC’s marketing tagline: “Where the Cloud lives”. Sorry to crush the dreams of those of you who thought it was all happening in satellites in the sky. At least they can get a private suite for their gear at NextDC!

AI turbocharges demand

But perhaps more appropriately for why AI investors have been attracted to NextDC is that it’s also where Nvidia’s chip live. Those servers and racks and cages are stuffed with silicone chips. And AI tools like Generative AI models such as ChatGPT are some of the most chip hungry software applications out there.

The impact of A.I. on data centre demand is not just about increasing capacity, which is clearly does through increased hardware and data storage needs. A.I. workloads often require special hardware called graphic and tensor processing units (GPU/TPUs) which consume more power and generate more heat than traditional servers. Specialised cooling and power distribution systems have had to be designed, along with new network infrastructure to support the low latency (read speed critical) needs of A.I. applications.

Westfield needs more land

A.I. needs are only adding to existing demand of enterprises moving to the cloud and by some estimates is increasing that demand by four to five fold!

Hyperscalers are therefore battling it out to secure the supply (tenancies) of new data centres. They have the hottest product in town, cloud services, and they need somewhere to sell their goods from.

Australia, so far, is behind the US in terms of AI deployment but it’s running hard to catch up.

This is seeing NextDC increasingly move from providing colocation services for businesses’ private IT infrastructure, to hyperscalers.

Like any good landlord, when your building is full, NextDC is searching for more land.

Today, NextDC operates in all the major Australian cities (sorry Hobart) and also some regional areas too, with New Zealand and parts of southern Asia in the works. Sydney has the most, with four operational and another four in the pipeline or under evaluation.

NextDC Data Center locations

Source: NextDC company website

The next AirTrunk?

Historically it’s taken three years to fill a NextDC data centre with tenants. Today it still takes three years, but the size of the data centres is now roughly three times that of the old ones.

The landscape is also changing.

Many of NextDC’s big competitors aren’t publicly listed, but instead are in private hands. Most public data centre providers have been taken over and taken private. The amount of capital they need to grow is well suited to ownership by big global pension funds that are accumulating inflows.

This represents an opportunity for NextDC.

Deals are happening. Australian competitor, AirTrunk, was recently taken over by a big global pension fund at 20x contracted EBITDA giving an AUD$24 billion valuation.

Takeover or not, the opportunity remains ripe for NextDC. It currently sits in an oligopoly in Australia competing against AirTrunk and CDC (partially owned by New Zealand based and listed company Infratil).

Asia looks to be the next big regional growth leg, with Google eyeing that region and looking for data centre partners.

NextDC is also prioritising so-called Edge Data Centre investments. They’re the next stage in data centre development, where smaller centres are strategically located physically close to the edge of a network, and the populations they serve, to provide low-latency high-performance computing for latency sensitive applications like virtual reality, financial systems, gaming or the Internet-of-things (IoT).

This 14-year-old company might still be in its teenage years, but like most teenagers, it still has a lot of growth ahead.

A big winner for Ophir

We first bought into NextDC in the Ophir Opportunities Fund on the 28th of November 2013 at $2.01 when it was a $415 million market-cap company.

As the company grew, we then bought it in our Ophir High Conviction Fund on the 18^th of April 2016 at $2.80 when it was a $700 million market-cap company.

We have held NextDC ever since and it now trades at over $17 with a market capitalisation of around $11.2 billion at writing.

Source: Ophir. Bloomberg.

It has been one of our longest-held positions in our Australian Funds, and we have gotten to know the company very well over our more than decade of ownership.

Of course, like most great growth stories, it’s not been all smooth sailing. The bottom chat shows the drawdowns (peak to trough falls) of its share price since IPO. (20%, 30% and even 40% falls have been seen over the journey and some of them quite regularly.)

Doing the work and staying the course has certainly paid off, though, with the share price rising at a 22.0% per annum clip since we first purchased in 2013.

NextDC is and remains a classic Ophir stock. A fast growing business, growing into a big end market, with long term company and industry tailwinds. And A.I. is only just starting to put a big gust behind that tailwind.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

17 Oct, 2024 Should investors be joining the gold rush?

18 Nov, 2024 How will Trump’s epic win affect the share market?

18 Sep, 2024

Letter To Investors - August

Letter to Investors • 14 mins read

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Thinking Rate Cuts, Fast and Slow (+ a portfolio addition surprise)

You’ve probably heard of Daniel Kahneman – the recently deceased psychologist who won the Nobel Prize in Economics in 2002 for his groundbreaking work on behavioural economies.

Kahneman summed up much of his life’s work in his wonderful 2012 book, “Thinking, Fast and Slow”. (For those who haven’t, it’s a must read.)

Kahneman divided our brains and our thought processes into two characters:

System 1: Fast, automatic, intuitive and often subconscious, but prone to biases and errors.

System 2: Slow, deliberate, analytical, effortful and conscious. Our ‘slow’ brain is often used for complex decisions and calculations that require logical reasoning.

Things can, of course, go wrong in both brains. But it is System 1 that is most prone to cognitive biases like overconfidence, anchoring, framing effects and loss aversion.

Kahneman taught us that we are not the perfectly rational beings that economics once assumed. Yes, quick rules of thumb can help us get through life easier and quicker, but they can also get us into trouble.

What does this have to do with investing?

Well, plenty. If you fall prey to these biases in investing, you can lose serious money. (Way before Kahneman, even Warren Buffett’s teacher Ben Graham knew this when he said: “The investor’s chief problem, and even his worst enemy, is likely to be himself.”)

But the ‘fast’ versus ‘slow’ dichotomy has major relevance to investing today.

After being on hold since July last year, the US Federal Reserve is almost certainly going to start its rate-cutting cycle this month. You’d remember that global share markets sold off when talk of Fed rate hikes began back in 2021; and they sold off again then when the Fed actually raised rates in 2022. So does that mean that when the Fed starts to cut rates, it will be good for shares?

Well not so fast.

August 2024 Ophir Fund Performance

Before we jump into the Letter in more detail, we have included below a summary of the performance of the Ophir Funds during July. Please click on the factsheets if you would like a more detailed summary of the performance of the relevant fund.

The Ophir Opportunities Fund returned +1.9% net of fees in August, outperforming its benchmark which returned -2.0%, and has delivered investors +22.3% p.a. post fees since inception (August 2012).

🡣 Ophir Opportunities Fund Factsheet

The Ophir High Conviction Fund (ASX:OPH) investment portfolio returned +0.9% net of fees in August, outperforming its benchmark which returned +0.0%, and has delivered investors +13.1% p.a. post fees since inception (August 2015). ASX:OPH provided a total return of +2.3% for the month.

🡣 Ophir High Conviction Fund Factsheet

The Ophir Global Opportunities returned -0.4% net of fees in August, outperforming its benchmark which returned -2.1%, and has delivered investors +15.6% p.a. post fees since inception (October 2018).

🡣 Ophir Global Opportunities Fund Factsheet

Be careful what you wish for

Just as fast ‘System 1’ thinking can sometimes get you into trouble, fast rate cuts by the Fed can also be a worry.

ND Research broke up the last 17 Fed rate-cutting cycles dating back to the 1950s into ‘fast’, ‘slow’ and ‘non-cycles’. (Fast cycles are those with at least five cuts in a year; slow is fewer than five cuts; and non-cycles are those with just one cut.)

As you can see in the chart below of the cycles, slow rate cut cycles (in blue) are the best for the share market (here the S&P500 index). Fast rate cut cycles (in orange) are the worst. (Non-cycles – in green – while technically the lowest performer, aren’t really rate cutting cycles at all with only one cut registered in 1967 and 1968 in a sideways moving market).

1954-8/30/2024. The chart and table shows S&P 500 Index performance around the start of Fed easing cycles. Y-axis is indexed to 100 at start of first rate cut. An index number is a figure reflecting price or quantity compared with a base value. The base value always has an index number of 100. The index number is then expressed as 100 times the ratio to the base value. A fast cycle (orange line) is one in which the Fed cuts rates at least five times a year. A slow cycle (blue line) has less than five cuts within a year while a non-cycle (green line) is case with just one cut. Black line represents all first cuts. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Past performance is no guarantee of future results.

Why?

As we saw in the 2001 Dot.com bust-related recession, and the 2007-2009 Great Financial Crisis, when the Fed acts aggressively via ‘emergency’ rate cuts, it is usually responding to a recession or financial crisis characterised by falling corporate earnings. Investors become risk averse and slash the valuations they place on those now-reduced earnings.

Our friends at Charles Schwab have taken this data a step further and looked at the maximum drawdown (that is peak to trough fall) in the 6 and 12 months after the Fed’s first cut.

Again, it’s clear that fast cycles tend to see bigger sell offs. (It also looks like fast cutting cycles have become more common in more recent decades.)

Source: Charles Schwab

So, what is the market expecting today?

Fixed income markets have priced in between nine and ten 0.25% rate cuts over the next year, with at least one 0.25% cut priced at each of the next six Federal Reserve meetings. If that eventuates, it will put this cycle in the ‘fast’ cutting camp.

At writing, however, equity markets don’t seem nearly as worried about a fast rate-cutting cycle as fixed-income markets – as witnessed by many major share market indices trading near all-time highs.

That might be because, while a sharp rate-cutting cycle is expected, it will only take the Federal Funds Rate back to a ‘normal’ level of around 2.75-3%. At those levels, rates won’t fall into the ‘stimulatory’ (below 2.5%) or ‘ultra-low’ levels near 0% that you might expect if a recession was forecast.

The positive news

The bottom line: share market investors should hope for a slow rate-cutting cycle because that means economic growth and corporate earnings are likely holding up well, providing support to share prices.

If fast rate cuts are on the cards, just like our errors in System 1 thinking, things are more likely to go awry in the near term in share markets.

There is positive news, however: on a 12-month horizon, both slow and fast cutting cycles have, on average, seen positive S&P500 returns.

For the rest of this month’s Letter to Investors, we wanted to give you some insight into a company that has been recently added to our Global Funds but that has been around literally for ages.

You’ve probably read one of their books!

Time to hit the books

It’s 1807. Thomas Jefferson was the US President. It’s the year Robert E Lee, the Confederate General during the American Civil War, was born. The Napoleonic Wars were raging. And it’s the year Charles Wiley opened a tiny print shop in Manhattan.

When Charles died in 1826, his son John took over the business. Like any good son, he put his name on the business as if he were the founder(!). It became John Wiley. Eventually, when his kids joined the business, the company adopted its current name: John Wiley and Sons – though today many just call it Wiley (NYSE: WLY).

Wiley is now one of the world’s largest publishers, with products ranging from academic journals and articles, to textbooks and professional assessments.

If you went to university, chances are you read a book with ‘Wiley’ on the cover.

At its heart, Wiley enables the creation of new knowledge at the frontier of thinking in such diverse areas as science, medicine, technology, engineering, business, economics and finance.

The business is broken up into two key segments:

1. Research

Wiley has one of the world’s leading portfolios of journals and operates the Wiley Online Library. It is the home to some of the most prestigious academic journals in the world, including the Journal of Finance.

Source: AppAdvice – The Journal of Finance

2. Learning

Learning includes academic publishing and courseware for higher education students, as well as books and assessments for professionals. The content is increasingly valued for GenAI models, a topic we’ll touch on later. Learning also includes books such as the well-known ‘For Dummies’ series – books that probably provide investment advice a little more accessible to the average punter than the wonky Journal of Finance!

Source: for Dummies – A Wiley Brand

Wiley’s competitive advantage lies in a number of things:

its massive content library which includes circa 2,000 journals and over 40 million published articles;
its relationships with some of the brightest minds in the world as authors;
its incumbent category leadership; and
its brand and reputation that has spanned centuries.

Ok, but why does Ophir own it, you ask?

Doesn’t Ophir only invest in new up-and-coming, fast-growing companies?

4 reasons why we own Wiley

We invest in companies that we believe are growing faster than the market thinks; and we don’t overpay for that growth. Sometimes that is a new business; and sometimes, as in the case of Wiley, that can be an old business that for whatever reason is experiencing new, accelerating growth.

Essentially, there are four key reasons why we like Wiley today:

1. It’s easier to find bargains where no one is looking

Despite Wiley being around $A3.5 billion in market cap and generating over $A2.5 billion in revenue, only one broker analyst covers the stock: the previously-unknown-to-us CJS Securities. If Wiley was listed in Australia, its market cap would put it in the ASX mid-cap universe, for which the median number of broker analysts for a company is 13!

Talk about under researched.

It’s easier to find $100 bills still lying around on the street when you are the only one walking down it.

Our investment process is all about getting an edge on a company over the market. The fewer the analysts ‘doing the work’, the more likely we’ll be able to get an edge and find a company outperforming the market’s consensus. Just one broker, CJS Securities, is in effect the ‘market consensus’ for Wiley.

2. Earnings acceleration through digitisation

We expect the business to grow earnings 15-20% pa over the next few years. Revenue has been accelerating after research submissions for journals rebounded post COVID and because Wiley has been digitising its back catalogue of journals/articles over the last few years. Revenue from its digitised back catalogue is dropping through to its bottom line at higher incremental gross profit margins (over 80%). A cost-cutting program, including divesting three non-core business, now just complete, is also helping its bottom line.

3. Competitor IPO shows Wiley’s valuation is attractive

Over in Europe, their big German competitor, Springer Nature, has just announced its imminent IPO and listing on the Frankfurth Stock Exchange. We have met the company multiple times and one of our team very recently travelled to the UK to meet them as part of the pre-IPO “testing the waters” and to gain more intel as a part of our Wiley holding. We think it’s likely Springer’s team of Tier 1 bulge bracket Investment Banks (JP Morgan, Morgan Stanley and Deutsche Bank) will seek a valuation multiple of around 20x 2025 earnings. Wiley, which is growing at a similar rate, is trading on a much cheaper 13x 2025 earnings. We think its likely that the Springer Nature listing will bring significant interest to the space, and Wiley, given its similar growth and business model, but much cheaper valuation.

4. Free optionality: GenAI

You might not think a company that has been around for over 200 years would be at the forefront of artificial intelligence (AI). But Wiley just closed its second licencing agreement with a business customer so they can utilise its content to train their Generative AI (GenAI) models. Most this initial interest is relates to book content in the Learning Division. We can also see this broadening out in the future to the Research division’s academic journal and article content.

So far, Wiley’s GenAI agreements have been for back catalogue content three years or older. But, again, this could become a more recurring revenue source if Wiley provides access to its latest content on an ongoing basis. With around 40 million published articles, Wiley is sitting pretty as a prime source of information to train these models now, and into the future.

For investors in Wiley, this is a completely unpriced and free option. We have seen Shutterstock and Getty Images, whom we have spoken to, recently cash in on the opportunity to use their catalogue of images for training GenAI models. Reddit, the social media forum, also recently signed a deal with Google to use content for its AI training models. Its March IPO has been a success.

All up, Wiley ticks the three key investment selection criteria for us:

Earnings beating expectations.
Margin of safety through a cheap valuation.
Free or cheap growth optionality in the future.

Source: Ophir

So, though Wiley’s been around a while, this is definitely a case of an old company that has some new tricks.

While the small cap market overall waits for its catalyst to start outperforming large caps again, we remain focussed on finding businesses like Wiley that have their own unique catalysts to drive growth and fund performance today. No matter the broader interest rate or macroeconomic backdrop.

As always, thank you for entrusting your capital with us.

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & Senior Portfolio Managers

Ophir Asset Management

18 Sep, 2024 Is your fund manager skilful or just lucky?

17 Oct, 2024 Should investors be joining the gold rush?

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