Fairview Equity Partners talks outperformance

Funds Management

by Jessica Amir

Fairview Equity Partners Emerging Companies Fund Executive Director and Portfolio Manager Leigh Cronin discusses the fund's outperformance, the March quarter and new stocks.

Jessica Amir:
Hello. Jessica Amir here for the Finance News Network, with Fairview Equity Partners, Emerging Companies Fund, Executive Director and Portfolio Manager, Leigh Cronin. Thanks for having us here in Melbourne Leigh.

Leigh Cronin: Thanks Jessica.

Jessica Amir: First up Leigh, March was a somewhat volatile quarter. What would say were the major influences over the past couple of months?

Leigh Cronin: The back end of calendar 2017 was very strong. In local equity markets, the ASX200 was up 8 per cent for the last six months of calendar 2017. In our universe, the small ordinaries index was up almost 19 per cent over that period, so coming off the back of that into a reporting season during February where you saw only modest earnings growth reported. Also, there was a lot of news flow around the looming trade war between the US and China, so perhaps in that context not surprising that we saw a bit of a pull back during that quarter.

The quarter's essentially dominated by the local reporting season. Half year results within the smaller company space you saw only modest growth reported. The universe has been in modest net down grow mode over that period. There's 160 companies within the small industrial's universe. For about a third of those companies you've seen analysts revise current year expectations down by more than 3 per cent. On the other side of the ledger around 20 per cent of companies have seen earnings revised upwards. On the resources space things are a little different when you look at spot commodity prices versus consensus expectations. We'd expect that part of the universe to still be in upgrade mode for some time.

Jessica Amir: Now to your Emerging Companies Fund. How has the fund performed over the past quarter? What have been the stand out stocks?

Leigh Cronin: The fund performed really well during the February reporting season, and indeed for the whole March quarter. The small ordinaries index was down 2.8 per cent over that period. Our fund on a net basis after fees was up 1.5 per cent, so a really strong out performance, and indeed that placed us in the top quartile of our peer funds. Over the 12 months to the end of March the fund is up 15.1 per cent, which is also after fees. That's above our benchmark and above the peer median. By way of comparison, it's interesting the ASX200 over that same 12 months is up less than 3 per cent.
The argument for investing in the smaller companies space and accessing companies with higher growth rates, strong stock specific stories is still really intact. Some of the stronger performers, and they came from the fairly broad range of sectors, which shows the diversified nature of the portfolio, so you add geospatial mapping business Nearmap (ASX:NEA) post a really strong result. Strong growth in its annual contract value saw positive news flow surrounding its new premium products. Also, I think the market's expectations around when that business will reach profitability in the US have been brought forward.

Australis Oil & Gas (ASX:ATS), which is a shale oil player in the US had a really strong March quarter share price performance. It posted really strong increases in its reserves in its Tuscaloosa Marine Shale Deposit. It also raised capital.

And finally, Kogan (ASX:KGN) posted a really strong set of numbers. It's actually upgraded its numbers six times since its July 2016 IPO. We've been happy holders since that time, so both its online retail business is performing really strongly, but also some of these other verticals, which are really leveraging its large customer base and distribution, such as its mobile phone reselling plan with Vodafone. It's also branching out into other areas such as, NBN and insurance.
Stocks such as Altium (ASX:ALU), IDP Education (ASX:IEL), Service Steam (ASX:SSM), Webjet (ASX:WEB), and Corporate Travel (ASX:CTD) posted really strong results.

Jessica Amir: Leigh, on the back of reporting season coming to an end what new stocks have you added?

Leigh Cronin: Yeah, it's a time where you receive a lot of new information, and you have access to a lot of companies. We followed up a number of those companies that have pricked our interest during that reporting season. Nine Entertainment (ASX:NEC) is one of those. We'd posted a strong set of numbers, and actually saw upgrades to current year expectations on the back of that, but we think that those numbers are still too conservative. It's had strong ratings improvements over the last 12 months or so, but we don't think it's fully monetised some of its recent successes. It's also got a cost containment program at the moment, which it's strongly leveraged to, and quite separate from that the net effect of losing the cricket and gaining the tennis is actually really strongly positive for earnings. We don't think the market's fully factoring that in.

Finally, it's 50 per cent investment in Stan. That's subscription TV business. That's about to turn cash flow positive and we can see some strong value creation coming out of that. Indeed, since we've invested in the stock at a recent investor conference it has upgraded this year's earning expectations, but we think the outer year forecasts have still got positive momentum behind them, so that's one stock.

Another one to call out, that's a smaller investment in the fund, but Integral Diagnostics (ASX:IDX) stock code IDX. It's a radiology business. Operations in Melbourne, Regional Victoria, WA in the Gold Coast.

Jessica Amir: Leigh Cronin, congratulations. A great set of numbers. I can't wait to see what's coming. Thanks so much.

Leigh Cronin: Thanks very much.


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