Acorn Capital Investment Fund (ASX:ACQ) small cap specialist

Funds Management

by Ortenzia Borre

Acorn Capital Investment Fund Ltd. (ASX: ACQ) Head of Research and Portfolio Manager for the Consumer Discretionary, Consumer Staples and Information Technology sectors, Robert Bruce talks about the its listed investment company, the fund’s composition and outlook for the next 6 months and longer term.

Ortenzia Borre: Hello, I'm Ortenzia Borrefor the Finance News Network. Joining me from Acorn Capital Investment Fund is portfolio manager, Robert Bruce. Robert, welcome to FNN.

Robert Bruce: Pleasure to be here. Thanks, Ortenzia.

Ortenzia Borre: First up, can you start with an introduction to the Acorn Capitol Listed Investment Company, ACQ?

Robert Bruce: Yes, Ortenzia. ACQ is an LIC, it was listed in May 2014 to provide retail investors with a unique opportunity to invest in Acorn's emerging growth strategy that would not otherwise be available to them. Acorn has successfully deployed this strategy since 2009 for institutional investors and it provides retail investors with access to innovative listed and unlisted companies in a single portfolio, with risk managed by both diversification across industries and by different stages of development.

Ortenzia Borre: Thanks Robert. Now, we recently spoke to your colleague, Paul Palombo, about the sell-off in small caps. How has this impacted the fund and how you positioned?

Robert Bruce: Yes. In the financial year to date the portfolio has declined 20.8%, outperforming the small lords by 3.1%, and does include a decline of 23.1% in the volatile month of March. What we have done is reduced consumer discretionary exposure, given the expected consumption downturn, with a re-distribution to gold, consumer staples, communications, and cash.The cash position has increased from 4% in December to 8% in March to take advantage of what we expect to see, discounted capital raisings. The selling in mid-March was indiscriminate across all sectors and we used this as an opportunity to increase portfolio exposure to gold names like RMLS, Oklo, and Red Five, with Australian gold producers being very well positioned given the IUD, the gold prices at record highs and their largest cost, fuel, is plummeting.

Ortenzia Borre:Now a question about investment style and characteristics of the fund. How do you select stocks, investment style?

Robert Bruce: Yes. Acorn Capital has an experienced investment team of 10 specialists covering the full industry spectrum, not just the usual suspects of IT and FinTech. The team scours the investment universe with idea generation coming from observing disruption and innovation across industries, constantly researching listed and private companies, and mingling these ideas with our industry experts in a collaborative team environment.Robert Bruce: The investment team follow a repeatable, disciplined approach to researching ideas, starting with a broad group of desk research ideas, and then the detailed research really commences, including a deeper dive into understanding the company, the industry it operates in. We do site visits, extensive access to management, competitors, customers, et cetera, to really determine what is the company's sustainable competitive advantage.This applies to both listed and unlisted opportunities and the businesses are modeled, risk assessed, and valued. We then rank each stock based on qualitative and quantitative factors like growth, valuation, management, quality, risk, and strategy. The ranking, conviction, and the stage of development support the construction of the portfolio.

Ortenzia Borre: And long-term performance?

Robert Bruce: Acorn's investment team are looking for growing companies with a strong management and a sustainable competitive advantage. Since inception, Acorn Capital has delivered 5.8% annualized return before fees, which surpasses the small odds at 2.7% and the emerging companies index, which has been flat. The largest listed investment company in the portfolio is TLX Pharmaceuticals, which Acorn invested back in January 2017 as a private company with a relatively small weight of 1.2%.Robert Bruce: Then as the business has achieved milestones, de-risks, and our conviction has grown, it has expanded to 7.3% weighting. This is an example of the portfolio managers understanding of the business, its stage of development, and the risk and reward it presents.

Ortenzia Borre: And other features?Robert Bruce: Well, through the knowledge gained from investing in unlisted investments when companies subsequently IPO, like Big Tin Can, KLX, Carbon Revolution, Red Bubble, TLX, and Whisper, Acorn Capital has a greater insight and understanding of the business and its drivers. There are several interesting private companies that we expect to create significant value in the future, like Clean Space, a provider of PPE in the healthcare and currently supporting the COVID-19 pandemic, Elenium with its touchless health kiosk and marketplace, providing a platform for online retailers.

Robert Bruce: The March pre-tax NTA was 93.7 cents and the post-tax NDA was 97.8 cents. The shares are currently trading at a 12% discount to the post-tax NTA and from a yield perspective ACQ has a policy of distributing 5% of pre- tax NTA to shareholders as a dividend. The interim, fully franked dividend is 3.75 cents per share, going X on the 5th of May and payable on the 25th of May, bringing the last 12 months to 7.25 cents or an 8.4% yield at yesterday's closing price of 86 cents.

Ortenzia Borre: A more general question. Small cap and unlisted equities require a different skillset in terms investing. What advantage does Acorn Capital have over others in the market and why should investors be considering investing in ACQ?

Robert Bruce: Yes. The earlier stage a company is, the more important the qualitative assessment is; such as competitive advantage, management quality, and the ability to execute on their go to market strategy rather than standard quantitative valuation measures. Through experience, the investment team believes that understanding the company stage of development is essential in assessing both the risk and opportunity it presents.

The skill provides an opportunity for significant returns provided you know the market and do the research. Acorn has a collective experience of 22 years since inception and we've been investing in private companies for the past 11 years.

Ortenzia Borre: That's the last question. What's a key message you'd like to leave investors with and how can people access the fund?

Robert Bruce: Well, I think for investors ACQ represents a lower risk option than trying to make direct investments themselves when they lack the ability to diversify or experience to cope with market volatility. The ACQ portfolio provides listed and unlisted exposure to exciting investment opportunities that we see as the innovative future and should be very rewarding to our investors. It's listed on the ISX under the symbol ACQ on platforms and investors should speak to their broker or advisor or visit ACQfund.com.edu for more information.

Ortenzia Borre: Robert Bruce, thank you so much for an introduction to the fund. We look forward to speaking to you next quarter.

Robert Bruce: A pleasure, look forward to it.


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