Acorn Capital Investment Fund (ASX:ACQ) Portfolio Manager Robert Bruce discusses how to manage investments in the current environment.
Rachael Jones: Hello. I'm Rachael Jones for the Finance News Network. Joining me from Acorn Capital Investment Fund (ASX:ACQ) is Portfolio Manager Robert Bruce. Robert, welcome back to FNN.
Robert Bruce: Thanks Rachael, pleasure to be here.
Rachael Jones: Now, a lot is happening in the world right now and there are so many unknowns as we exit 2020. As an investment manager, how do you rank and balance investment opportunities in light of the uncertainty that we are operating in right now?
Robert Bruce: Well, Rachael, Acorn Capital has an experienced investment team of ten specialists looking across the whole industry spectrum and not just the usual suspects in IT and fintech. Through our bottom-up research, we believe that we're uncovering companies that are undervalued. And so, yes, there is a value element to our investing. But it's not your traditional price-to-book multiples, where they're cheap for a reason, because the industry's sun’s set or the return on capital is really low. Rather, we're considering factors like the size and the growth of the addressable market, the potential market share, and the competitive nature -- all influence the profit structure and the ability to generate operating leverage, and very importantly, future operating cash flow. The other really important aspect in measuring emerging companies is considering the qualitative factors in our ranking. The younger the company, the more important these qualitative factors are, such as competitive advantage, management quality and the ability to execute on a go to market strategy.
Rachael Jones: And congratulations on the CleanSpace (ASX:CSX) IPO. What a fantastic outcome for the company and for ACQ's investors. Can you discuss what attracted to Acorn CleanSpace originally, and how involved Acorn was in the business from the time of investment to the listing date?
Robert Bruce: We discovered CleanSpace back in 2015 at a $15 million valuation. We were attracted to the innovative product development and patented products, and the system technology they had developed. Their team was experienced, and the founders and lead engineers were formerly of ResMed (ASX:RMD), and they'd spent several years developing the product and launching in the market, which reduced several risks associated with early stage companies that we saw. The business model was attractive, with firstly a product with significant IP and previous investment, enabling it to generate strong margins and return. And then secondly, the razor blade business model, where customers purchase the initial respirator, but are then required to continue to purchase filters and other accessories, leading to attractive recurring annuity revenue. The addressable market for this company was large and it was global, and they had an existing European regulatory approval and were moving into the North American market.
ACQ's initial investment provided the additional capital needed to complete the NIOSH approval in the USA and working capital to expand its global distribution. The incumbent market players were established, but they were resting on their laurels in our view, and not innovating the products that have been in market for over 20 years.
We've continued to support the business through its growth journey, meeting regularly with management and the board and providing additional growth capital when required. CleanSpace is really now benefiting from strong demand and protection of frontline healthcare workers that is really a company-making event in our view. It had a strong IPO last week, valuing at $340 million and rising strongly. So clearly the market also sees some similar positive attributes in CleanSpace.
Rachael Jones: And what are the attributes and risks investors should consider when looking at an investment in ACQ?
Robert Bruce: ACQ invests in microcaps, which by their nature are growth companies and are typically opening new markets, disrupting incumbents, and can be capital-hungry. These are the companies that we believe will be significant contributors to the future growth of the Australian economy. We believe that investors should consider ACQ as part of their broader portfolio investment structure, being 5 to 10 per cent of the allocated amount, such as alternative investments.
Emerging companies can be volatile, and to manage that risk for investors, we've selected a portfolio based on the ranking from our industry portfolio managers, who have all focused on their sectors for a number of years. We typically invest in 70 to 80 companies, which allows both high conviction, with the top 10 typically being 30 to 35 per cent of the portfolio, but also, importantly, allowing a tail of emerging companies, where we can monitor and increase our holding as they develop and pass key milestones and de-risk.
The pre-tax NTA is $1.47 per share and has delivered 16 per cent return in the last year. The board has a policy of paying out 5 per cent of post-tax NTA every year. And with $23 million in dividend reserves, or 34 cents per share, the reliability of the dividend stream is well supported.
Rachael Jones: Robert Bruce, congratulations on the performance, and thanks so much for the update.
Robert Bruce: Thanks for your time, Rachael.