Ellerston Australian Small
Companies Fund
PERFORMANCE REPORT March 2015
The Ellerston Australian Small Companies Fund employs an active research driven investment
approach to identify a portfolio of 30 - 50* small company securities which aims to deliver returns
superior to the S&P/ASX Small Ordinaries Accumulation Index over time.
Ellerston Australian Small Companies Fund Performance
Return %
Net^
Benchmark
Net Alpha
Gross
1 Month
0.13%
-1.94%
2.06%
0.60%
3 Months
9.99%
7.30%
2.69%
10.65%
FYTD
10.03%
4.67%
5.36%
11.69%
1 Year
10.71%
2.30%
8.41%
13.24%
Since Inception
p.a.
10.38%
3.70%
6.68%
12.53%
Ellerston Australian Small Companies Fund Top Holdings
Top 5 Stock holdings as at
31 March 2015
Sector
%
Industrials
4.26%
Information Technology
3.75%
Industrials
3.57%
Mantra Group Limited
Consumer Discretionary
3.56%
Slater and Gordon
Consumer Discretionary
3.52%
Austal Limited
Next DC Limited
Transfield Services Limited
^ The net return figure is calculated after fees & expenses. The gross return is calculated before fees & expenses. Past performance is not a reliable indication of future performance.
The benchmark is the ASX Small Ordinaries Accumulation Index. The Fund commenced on 10 October 2013.
*This is the typical number of stocks in the portfolio. The Information Memorandum does allow for 20 - 50 stocks.
Ellerston Capital Limited
ABN 34 110 397 674
AFSL 283 000
Level 11
179 Elizabeth Street
Sydney NSW 2000
Tel: 02 9021 7797
Fax: 02 9261 0528
[email protected]
www.ellerstoncapital.com
APIR Code: ECL0015AU
Commentary
For the quarter ending 31 March 2015, the Ellerston Australian Small Companies Fund outperformed the ASX
Small Ordinaries Accumulation Index rising 10.7% compared to a 7.3% gain for the Index. During the quarter the
Small Industrials Accumulation Index gained 7.5% whilst the Small Resources Accumulation Index increased
6.3%. The large gain in the Australian market was a surprise to us given the weakness in the Australian dollar
which has historically been coincident with weak equities, especially small caps. The Fund’s outperformance
was largely driven by stock specific benefits discussed below.
The top contributors to positive relative performance were Bellamy’s (BAL), Next DC (NXT), and Metals X (MLX).
Bellamy’s reported very strong earnings for the half year and ungraded prospectus guidance. The key constraint
to growth in the short term is supply of product rather than demand, indicating an opportunity to accelerate
further. The company’s revised guidance looks conservative to us and whilst the valuation looks high, further
upgrades are likely to be supportive. Next DC rallied after reporting very strong half year results showing an
acceleration in sales growth and reaching EBITDA breakeven sooner than expected. We have been increasing
our weighting in the company over the past 6 months as we are attracted to both the industry thematic of
increased outsourced IT and cloud as well as the strong operating leverage and subsequent earnings growth
which we expect over the coming years. It remains one of our largest holdings. Metals X continued its strong
share price performance on the back of a rebound in the gold price and the market starting to factor in the upside
from its highly accretive acquisitions last year. Metals X spent a small fraction of its market cap to become a mid
tier Australian gold company as well as one of the few listed Tin producers globally. During the quarter it
released its feasibility study for its Meekatharra gold project which surprised the market with its robust
economics.
The largest detractors during the quarter were Transfield Services (TSE), Aquarius Platinum (AQP) and Coffey
(COF). Transfield’s share price declined after announcing that the board had rejected the bid from Ferrovial and
half year results which failed to excite the market due to losses in North America and onerous contracts. Whilst
disappointing that a deal was not consummated we believe that the board was right to reject the low bid given
the early stage of the turnaround and the upside that still exists. Whilst industry conditions remain difficult, as
losses abate from contracts rolling off we believe the stock will continue to rerate off a low base. Aquarius
Platinum continued its decline due to weak PGM prices and an announcement by the Zimbabwean government
that it would impose a 15% export levy on unrefined PGM exports in order to encourage mining companies to
build domestic refineries. Aquarius is working with the government and other mining companies to look at
building local refining capacity, subject to solving ongoing certainty around mining lease tenure and ownership.
Coffey fell after reporting subdued results and continued tough conditions in their Geosciences division though
their international aid business continues to do well. We continue to see compelling value in the business as the
company’s valuation effectively gives no value to Geosciences. That said, it remains a key driver of earnings and
it is hard to see this division improving materially in the short term. We would not be surprised to see the
company broken up at some point as management have continued to accumulate stock.
Outlook and Fund Positioning
The strength of the domestic market can, in our opinion, be explained by two main factors. Firstly, low and falling
domestic interest rates are forcing investors into higher yielding assets such as high yielding dividend
companies. Secondly, foreign flows also see the Australian market as attractive due to its relative
underperformance and relatively high dividend yield. We note that Australia represents a high weighting in global
equity dividend indices and appears to be attracting large flows. This is in the face of a still slowing domestic
economy and high valuation relative to history, though cheap relative to bond yields. We have no way of knowing
how much longer this will continue but expect market dislocation when it does. We are continuing to focus on
relatively under owned companies whose growth potential is yet to be priced in. This is becoming harder.
About the Ellerston Australian Small Companies Fund
The Fund employs an active, research-driven investment approach which seeks
to identify a portfolio of smaller company securities with the aim of delivering
superior returns to the Benchmark over time.
The Fund will invest in companies that are believed to have the potential to deliver significant upside
over the medium term and where there is a reasonable margin of safety to mitigate the downside risk.
We will actively manage the positions of the Fund.
Investments will generally be made in companies that have a sound business franchise with an
attractive earnings profile, that operate in growth industries and trade at a discount to valuation.
Fund Facts
Strategy Funds Under Management
$817 million
Total number of Stocks
46
Application Price
$1.1152
Redemption Price
$1.1096
Inception Date
10 October 2013
Disclaimer
Returns are unaudited estimates and before fees and expenses and assume distributions have been reinvested. Past performance is not indicative of future
performance. This letter does not constitute an offer of any Units in the Fund. This letter does not take into account your investment objectives, financial situation
or particular needs. Before making an investment decision about the Fund, persons should read the information memorandum which can be obtained from
Ellerston Capital and obtain advice from an appropriate financial adviser. This material has been prepared based on information believed to be accurate at the
time of publication. Assumptions and estimates may have been made which may prove not to be accurate. Ellerston Capital undertakes no responsibility to
correct any such inaccuracy. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information. Stock opinions and
views expressed in this document are Ellerston Capital’s and are not necessarily the views or opinions of the market. To the full extent permitted by law, none of
Ellerston Capital, or any member of the Ellerston Capital Limited Group of companies makes any warranty as to the accuracy or completeness of the information
in this document and disclaims all liability that may arise due to any information contained in this document being inaccurate, unreliable or incomplete