January 13, 2020
Letter to Investors – December

By Andrew Mitchell & Steven Ng
Co-founders and Senior Portfolio Managers


In our December 2019 letter to investors we discuss why markets have performed so well over 2019 and whether those tailwinds will continue.

Dear Fellow Investors,

Welcome to the December 2019 Ophir Letter to Investors – thank you for investing alongside us for the long term.

Month in review

Sharemarkets globally ended 2019 on a high with gains seen across the major markets (though Australia was an exception) in December despite an economic and geopolitical backdrop that could best be described as ‘mixed’. Donald Trump became only the third US President in history to be impeached, a key lead indicator of economic growth in the US was a little softer than expected and Australian GDP growth logged its slowest pace since the GFC with private sector demand falling into recession. This of course doesn’t include escalating tensions between the US and Iran over the US’s elimination of the highest-ranking Iranian military General as the new year began. In contrast there was more positive news with greater certainty for the UK and a Brexit deal after Boris Johnson’s Conservative Party election win, a “Phase One” trade deal between the US and China to be agreed in mid-January and still continued signs overall that 2020 is likely to be a better one for global economic growth, albeit only modestly, than the one we just left behind.

For the month of December, the MSCI World Developed Market Index was up 2.3% (in local currency total return terms), though substantially trailed the Emerging Markets Index which was up a robust +5.8% (in local currency terms). This order of results was reversed over the year though with developed markets (+28.4%) victorious over its emerging markets (+18.9%) counterpart. All the major sharemarkets were in the green with the US again leading the pack this month up 3.0%, closely followed by the UK (+2.8%), with Japan (+1.7%) and Europe (+1.2%) a little further behind. All sectors in developed sharemarkets participated in the month’s rally with Energy (+5.4%) reversing some of its relative sector underperformance over 2019, followed by IT (+4.2%) and Materials (+4.1%).

The local Australian sharemarket was the sole blight on an otherwise unblemished record for global sharemarkets in December with the S&P/ASX200 falling -2.2% in total return terms. Investors would still be happy over the year though with a return of 23.4% logged for 2019, the highest since 2009. The Small Ordinaries Index protected wealth better than its larger cap counterpart, only falling -0.3% for the month. Smalls cap marginally underperformed large caps over 2019, registering a still very bullish 21.4%. On a sector basis over the month for the S&P/ASX200, 9 fell and only 2 gained with the leading sector being Materials (+1.5%) as commodities gained on the month, including iron ore that was up 5.4%. Bond proxy sectors struggled the most as long maturity Australian government bond prices fell (yields rose) seeing the largest falls in Consumer Staples (-8.1%), Communication Services (-5.8%), IT (-4.6%) and REITs (-4.4%).

Ophir Fund Performance

The Ophir Opportunities Fund returned +0.5% for the month after fees, outperforming its benchmark by +0.8%. Since inception, the Fund has returned +26.1% per annum after fees, outperforming its benchmark by 18.4% per annum.


Growth of A$100,000 (after all fees) since Inception
Since Inception (p.a.) 5 Year (p.a.) 3 Year (p.a.) 1 Year 3 Month 1 Month
Ophir Opportunities Fund* 32.9% 26.9% 24.0% 50.2% 3.1% 0.9%
Benchmark* 7.7% 10.6% 10.0% 21.4% 0.8% -0.3%
Value Add (Gross) 25.3% 16.3% 14.0% 28.9% 2.3% 1.2%
Fund Return (Net) 26.1% 22.3% 21.0% 43.3% 2.3% 0.5%
* S&P/ASX Small Ordinaries Accumulation Index (XSOAI). Past performance is not a reliable indicator of future performance

The Ophir High Conviction Fund investment portfolio returned -0.3% for the month after fees, outperforming its benchmark by +0.6%. Since inception, the Fund’s investment portfolio has returned +19.7% per annum after fees, outperforming its benchmark by 8.1% per annum.  The Ophir High Conviction Fund’s ASX listing provided a total return of -0.4% for the month.


Growth of A$100,000 (after all fees) since Inception
Since Inception (p.a) 3 Year (p.a.) 1 Year 3 Month 1 Month
Ophir High Conviction Fund (Gross) 24.2% 20.5% 32.5% 2.3% 0.0%
Benchmark* 11.6% 10.6% 21.6% 1.5% -0.9%
Gross Value Add 12.5% 9.9% 10.8% 0.8% 0.8%
Ophir High Conviction Fund (Net) 19.7% 18.0% 29.3% 1.9% -0.3%
ASX:OPH Listing Total Return n/a n/a 11.2% 0.0% -0.4%
* S&P/ASX Mid-Small Accumulation Index. Past performance is not a reliable indicator of future performance

The Ophir Global Opportunities Fund investment portfolio returned -1.3% for the month after fees, underperforming its benchmark by -0.2%. Since inception, the Fund’s investment portfolio has returned +33.8% per annum after fees, outperforming its benchmark by 28.6% per annum.


Growth of A$100,000 (after all fees) since Inception
Since Inception (p.a) 1 Year  6 Month 3 Month 1 Month
Ophir Global Opportunities Fund (Gross) 43.7% 75.7% 17.1% 10.7% -1.2%
Benchmark* 5.2% 24.9% 7.4% 4.0% -1.1%
Gross Value Add 38.4% 50.8% 9.7% 6.7% -0.1%
Ophir Global Opportunities Fund (Net) 33.8% 62.7% 14.7% 9.5% -1.3%
* MSCI World SMID Index TR (Net) (AUD). Past performance is not a reliable indicator of future performance

Macroeconomic Highlights

Calendar year 2019 was one in which central banks turned on the monetary policy spigots in response to signs of slowing economic growth in the second half of 2018 and the market correction that ensued in the December 2018 quarter. This saw an about face in central bank purchases of securities, most notably from the US Federal Reserve and the European Central Bank, that turned balance sheet tapering back into expansion (see chart below).

Total Central Bank Purchases (12m Rolling in USD $tn)




Source: National Central Banks and Citi Research

As we head into 2020 there are signs that we might see a stabilisation in global growth and modest reflation, in no small part due to the monetary support indicated above, after 2019 likely saw the slowest global real GDP growth since the GFC. After yield curve inversion occurred in 2019 in the US, many believed 2020 would be a recession year for the US with flow on effects to other parts of the global economy. This no longer appears to be the base case for most economists with term premia being reinserted back into many yield curves and the probability of recession falling to 30% and 15% respectively for the US and Australia (Bloomberg consensus forecasts).

At a corporate level global earnings per share growth took a major leg down and ended almost flat for 2019 after forecasts were continually downgraded throughout the year. This came on the back of strong earnings growth in both 2017 and 2018 (see chart below). 2019 was almost the opposite of 2018 in terms of the composition of global sharemarket returns. 2018 saw strong fundamental earnings growth being more than offset by negative speculative returns from valuation decreases resulting in modest total returns; whilst 2019 saw flat earnings per share growth being boosted dramatically by valuation expansion proving the best calendar year returns in a decade.

Global EPS Growth Forecasts



Source: Citi Research, Factset Consensus Data

In fact, almost every asset class went up in 2019, from equity markets to fixed income, REIT’s and commodities in what was a banner year for investors as lower interest rates supported more risk taking and provided support to valuations (see chart below). Who would have thought the Russian sharemarket would have led the way at the start of 2019!

2019 price returns, broadest/strongest equity, fixed income, currency and commodity returns since GFC



Source: JP Morgan, price returns

Looking into 2020, given the higher starting point for valuations of sharemarkets, as well as the still subdued though stable economic growth outlook, it is likely returns for major sharemarkets, including those for Australia, will not be as strong as those seen in 2019. And whilst its impossible to accurately forecast near term sharemarket returns, most warning signs of a near term major bear market for shares are not flashing red. As an example, Citi Research track 18 major warning signs for an impending bear market for shares globally, and its checklist is currently registering a score of just 3.5. This is compared to a score of 13 and 17.5 respectively at the start of the GFC in 2007 and tech-wreck in 2000. Also supporting the case for more modest but reasonable gains ahead for sharemarkets and cyclical assets is that in historical cases where leading indicator Purchasing Manager Indices have troughed (as they appear to have recently), these assets have tended to go on rallying in the short to medium term (see chart below).

Cyclical asset up 9% since manufacturing PMIs bottom in September, marking best reflationary performance in 20 years.

Note: Multi asset portfolio (60% US Equities, 20% EM Equities, 20% US HG Credit, 20% Commodities). 1995 (after Fed mid-cycle eases), 1998 (post Asia Crisis), 2012 (post EMU Crisis), 2016 (Post EM Credit slump).

Source: JP Morgan

Key Stock News

In key stock news for the Australian equity Ophir Funds, IMF Bentham (ASX:IMF) (27.7%), Northern Star Resources (ASX:NST) (17.9%) and Cooper Energy (ASX: COE) (13.1%) all had strong months on the back of strong years where they each outperformed the market.

IMF Bentham rose strongly on the month as its Brisbane floods class action relating to Wivenhoe Dam, that it funded, was found successful in court. It has disclosed it will realise between $100-130mil from this investment. For those unfamiliar with the company, IMF is a global leader in dispute resolution finance, with expertise in civil and common law systems spanning operations in Australia, Asia, Europe the Middle East and the US.

Northern Star Resources, the Perth based gold miner, benefitted from the rise in the gold price over the month as well as the announcement of its acquisition of 50% of the Kalgoorlie Consolidated Gold Mine for US$800mil, funded through a debt and equity placement. This is a significant acquisition for NST and is expected to be earnings accretive from its first full financial year (FY2021).

Cooper Energy rose on news that construction has now been completed of the Orbost Gas Plant and the reins have been handed over to the operator (APA Group) who will begin processing gas from the COE owned Sole Gas Field in February this year.

In terms of detractors for the month, we largely avoided any major landmines such as Jumbo Interactive (ASX:JIN) (-27.3%) and Perenti Global (ASX:PRN) (-16.7%) that saw more meaningful falls on results below expectations. JIN noted increased business development, merchant and marketing costs and one-off fees from the acquisition of Gatherwell, whilst PRN downgraded guidance for FY20 by circa 15% over contact losses and increased costs.

Significant holding Afterpay (ASX:APT) (-7.3%) fell on the month on general volatility with news of its UK brand Clearpay signing online mega retailer Asos.com, offset by headlines around global competitor Klarna’s pending entry into Australia. We remain encouraged by APT’s ability to expand the market in its three geographies (Australia, US and UK) and take market share in a broadly subdued retail environment.

More generally we note that correlations between share price returns of stocks in the Australian small cap space are back around post GFC lows, indicating that macro factors are having less of an impact on performance. This is a good sign for active fundamental bottom up small cap stock pickers such as ourselves, with performance being determined more by idiosyncratic stock specific factors. These are the factors that we are seeking to understand better than the market, looking for opportunities where we believe the business is either misunderstood and/or mispriced when compared to its future prospects. Kicking off 2020 we remain as excited as ever to uncover the next company to add to our portfolios that we believe can build wealth for both ourselves, and you our fellow investors.

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

Kindest regards,

Andrew Mitchell & Steven Ng

Co-Founders & 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 and the Ophir Global 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 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 and the Ophir Global 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.


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