February 12, 2020
Letter to Investors – January

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


In our January 2020 Letter to Investors we discuss how the coronavirus is affecting markets and how the Australian sharemarket bucked the trend to rise over the month.

Dear Fellow Investors,

Welcome to the January 2020 Ophir Letter to Investors – thank you for investing alongside us for the long term.

Month in review

Major sharemarkets started the month of January off on a solid footing, rising as a phase one US-China trade deal was signed. This was quickly reversed for most markets though in late January as news of the spread of the coronavirus originating in China shook investors. One should not overlook the human impact of the virus on those affected, including its impact on family and friends of those impacted. At the time of writing in early February, sharemarkets had partially rebounded though remained volatile, as fears eased, but were not erased, regarding the likely extent of the impact of the virus on affected companies and the global economy.

For the month of January, global shares, as measured by the MSCI All Country World Index in local currency terms, fell -1.2%, dragged down by Emerging Markets which dropped -3.3%. Emerging market returns were particularly affected by the falls in the Chinese sharemarket (-5.1%) as the coronavirus spread. All major sharemarkets fell in local currency terms with Asia ex Japan (-3.9%) and the UK (-3.4%) seeing the biggest falls.  On a sector basis globally (in USD), Energy (-9.1%) and Materials (-5.5%) fell the most as there was reduced demand concerns again stemming from the coronavirus. In a risk off month for equity markets generally it was no surprise that the defensive Utilities (+5.7%) and IT (+3.4%) sectors found the bid in the market.

The local Australian sharemarket reversed last month’s relative underperformance versus global sharemarkets this month and then some, topping the table of market gains, up 5.0% for the S&P/ASX200 on a total return basis. This was in stark contrast to the falls seen on global markets. Large caps dominated the month with the Small Ords underperforming by -1.6%, a trend that’s also been seen over the last year. Sector wise over the month for the ASX200, all 11 sectors gained. In what further highlights the disparity between the Australian and overseas sharemarkets over the month, Utilities, the best performer globally was the worst in Australia (+0.6%). The far and away leaders in Australia were the Health Care (+12.0%) and IT (+11.1%) sectors, creating a somewhat rare feat of two sectors being up in double figures during a month.

Ophir Fund Performance

The Ophir Opportunities Fund returned +4.9% for the month after fees, outperforming its benchmark by +1.5%. Since inception, the Fund has returned +26.6% per annum after fees, outperforming its benchmark by +18.5% 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* 33.4% 28.2% 26.5% 45.0% 9.2% 5.4%
Benchmark*8.1 % 11.2% 12.1% 18.8% 4.7% 3.4%
Value Add (Gross) 25.4% 17.0% 14.3% 26.1% 4.5% 2.0%
Fund Return (Net) 26.6% 23.4% 23.3% 37.7% 8.0% 4.9%
* 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 +5.5% for the month after fees, outperforming its benchmark by +1.5%. Since inception, the Fund’s investment portfolio has returned +20.7% per annum after fees, outperforming its benchmark by +8.3% per annum.  The Ophir High Conviction Fund’s ASX listing provided a total return of +9.2% 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) 25.3% 23.7% 28.9% 10.2% 6.0%
Benchmark* 12.4% 12.6% 20.5% 6.0% 4.0%
Gross Value Add 12.9% 11.2% 8.4% 4.2% 1.9%
Ophir High Conviction Fund (Net) 20.7% 21.0% 26.0% 9.2% 5.5%
ASX:OPH Listing Total Return n/a n/a 17.7% 9.2% 9.2%
* 50% S&P/ASX Small Ordinaries Accumulation Index (XSOAI), 50% S&P/ASX Midcap 50 Accumulation Index (XMDAI). Past performance is not a reliable indicator of future performance

The Ophir Global Opportunities Fund investment portfolio returned +7.3% for the month after fees, outperforming its benchmark by +4.4%. Since inception, the Fund’s investment portfolio has returned +38.5% per annum after fees, outperforming its benchmark by 31.3% 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) 49.2% 77.7% 17.0% 17.1% 8.5%
Benchmark* 7.2% 21.4% 8.2% 6.7% 3.0%
Gross Value Add 42.0% 56.4% 8.7% 10.5% 5.5%
Ophir Global Opportunities Fund (Net) 38.5% 63.4% 14.8% 14.8% 7.3%
* MSCI World SMID Index TR (Net) (AUD). Past performance is not a reliable indicator of future performance

Macroeconomic Highlights

For much of January the inflow of key economic data in the major economies generally reaffirmed the existing picture from last month that global economic growth would modestly accelerate in 2020 from its post GFC lows in 2019. This picture is built on the basis that:

  1. more stimulatory monetary policy from the major central banks is beginning to have a positive effect on global demand; and
  2. a phase one US-China trade deal as well as the UK avoiding the messiest divorce scenario with the European Union is increasing trade volumes, investment and manufacturing activity (see chart below).

Global Economic Conditions – Purchasing Managers Index

Source: RBA, Markit

Whilst very low unemployment in key economies like the US and UK continues not to provoke any substantial inflation, the status quo of sustained low interest rates are providing a supportive backdrop for sharemarkets.

The Australian economy also is likely to see growth, accelerate, albeit modestly in 2020. This will likely occur as a more supportive global backdrop, lagged effects from looser monetary policy and balance sheet support for households from higher house prices help lift economic growth. Wages and household consumption growth is still very low though affecting retail spending and especially retailers reliant on the incremental discretionary retail dollar. This is certainly part of the reason why business confidence is at a 2-year low. This should improve though from the aforementioned factors as we move through 2020.

There are key risks to this outlook however that could easily see growth not improve from its still sluggish rates globally and in Australia. Some of these risks are not new, and include a re-escalation of the US-China trade conflict and a more confrontational negotiating environment between the UK and EU, as well as a lack of the expected pick up in growth from some emerging market economies from idiosyncratic factors that have lowered recent growth.

The key new risk to the global economic outlook in the near term is the uncertainty created from the coronavirus originating out of China in early 2020. With over 40,000 confirmed cases and 900 deaths at the time of writing the human impact has eclipsed the SARS outbreak from 2003. It is still too early to be highly certain about many aspects of the virus and its likely impact on companies and economic growth, partly stemming from how accurate the reported data is to date. The virus does however appear to be much more contagious than SARS though appears to have a significantly lower fatality rate at 1-2% compared to 10% for SARS. The are some suggestions the coronavirus fatality rate may be much lower than this as milder or asymptomatic cases go unreported in China as overwhelmed hospital capacity has been reserved for the more severe cases.

China is responsible for a much larger share of economic growth now than it was in 2003 and more deeply integrated into global supply chains and as such the economic impact will almost certainly be larger than SARS. That said, China and the world at large have acted more swiftly to quarantine affected individuals to mitigate its spread. Importantly, 99% of confirmed infected cases have been restricted to mainland China and only two individuals have died outside of China resulting in a much lower fatality rate outside of the mainland.  After an initial modest sell off, concentrated mostly in Chinese equities, sharemarkets have been relatively sanguine about the impact of the virus. This perhaps stems from some evidence that the rate of growth in infected cases may be slowing, the fact that previous viral outbreaks such as SARS and MERS have only had largely temporary effects on the global economy and that warmer weather on its way from spring in China may halt its spread.

Ultimately the impact of the virus on financial markets will largely depend on the extent of its spread and how long containment measures will have to be in place. This at present is quite uncertain but based on current information is likely to involve at least a few more weeks to months of disruption. The most impacted part of the global economy is undoubtably economic growth in China but extends to exporters to and importers from China, including Australian resource exporters, tourism, travel and education providers. As we enter reporting season over the next month for the first half of financial year 2020, we expect those listed Australian companies impacted to report some initial findings but also to be hesitant to provide firm earnings guidance for the full year given the inherent uncertainty. Based on current data, we still expect most of the effects on impacted companies profitability to be temporary with some, though not all, likely to benefit from ‘catch up’ demand once the virus spread wanes.

In other market highlights that caught our eye over the month, one has been the recent underperformance of small cap stocks compared to large caps over the last year by -6.9%.  This has been across both small industrials and small resources. Expanding on a point we touched on last month, we have also seen correlations between large cap stocks increase more recently, suggesting that macro wide factors have been driving the large end of the market more recently, compared to company idiosyncratic factors. Small caps on the other hand have tended to maintain their low correlations between stocks. Why is this important? Well as a stock picker it is harder to find bargains if stocks are moving in the same direction at the same time. We believe the structurally lower correlations between small caps is one reason that makes this part of the market a more fertile pond to fish over time. But the wider ‘spread’ between higher correlations in the large cap part of the market compared to the small cap part at the moment makes small caps relative attractiveness even stronger at present (see chart below).

Average pair-wise correlation in Australian sharemarket

Source: UBS

Key Stock News

January was a month were a number of flow on effects likely from the coronavirus drove sector and stock returns. Oil (-13.1%) and iron ore (-6.2%) prices fell on reduced demand fears from China whilst gold (+4.7%) rose on safe haven flows. This saw Energy and Resource stocks in Australia in general lag whilst gold stocks outperformed. As an example, gold miners Silver Lake, Gold Road and Northern Star Resources all rose between 18-21% over the month.

Those stocks most exposed to the coronavirus saw some of the larger falls with Corporate Travel (-13.1%), Flight Centre (-10.8%), Qantas Airways (-9.8%), Webjet (-9.8%) and Sydney Airport (-3.1%) all down on the month.

Those seeing downgrades also were punished hard in the Australian market with 17 stocks that have recently downgraded during the month seeing an average on day fall of 16.5%, highlighting that post an extended run for the sharemarket, companies who disappoint will be dealt with harshly.

In the ASX200, the Healthcare sector had a big month as CSL (13.2%) and Resmed (14.4%) and Ansell (10.4%) all had big months, attracting demand from investors for defensive growth companies.

In key stock news for the Australian equity Ophir Funds, Afterpay (ASX:APT) (31.7%), NextDC (ASX: NXT) (15.4%), and Resmed (ASX:RMD) (14.4%) were three of the strongest performers.

Afterpay rose from around $30 to near $39 by month end in January, moving past the $10bil market cap level. During the month the Buy Now, Pay Later operator disclosed that it has been granted a California finance lender’s licence by the Department of Business and Oversight in the US in November last year to facilitate future potential expansion after a licence application for competitor Sezzle was recently denied.

NextDC registered a strong month rising past its highs of 2019 and pushing past the $7.50 level by month end. NextDC is Australia’s largest independent data centre operator and collects about 90% of its revenue from leasing out its centres. We are attracted to its structural growth tailwind of enterprises moving more and more data to the cloud increasing demand for its centres over time.

Resmed benefitted from the sectoral updraft that Healthcare stocks received over the quarter as it ground higher over the month. Some of these gains were given back on the first trading day of February as the stock dropped from $25 to $23.90 on second quarter results that slightly disappointed the market. At writing it has since recovered this drop and is trading around all time highs.

In terms of detractors for the month, Webjet (ASX:WEB) (-9.8%), Cooper Energy (ASX:COE) (-6.6%) and Freedom Foods (ASX:FNP) (-5.3%) all bucked the trend of the Australian market and fell. Each suffered from concerns over coronavirus or bushfire impacts. Webjet’s relating to travel bookings, Cooper Energy relating to falls in energy prices and Freedom Foods relating to concerns of increased dairy costs post bushfires.

We see each of these impacts being short term and not materially impacting our investment thesis for these companies. That said we are keeping a watchful eye on how the market is impounding current information about the impact of the virus on these businesses to determine whether we believe they may be oversold due to irrational fears and warrant further buying, or whether sufficient uncertainty exists that warrants a wait and see approach.

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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