Affluence Small Company Fund, Fund Updates

Affluence Small Company Fund Opens

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We are delighted to announce that the Affluence Small Company Fund is now open to Eligible Investors. The Information Memorandum (IM) for the Fund is available here.

We will be accepting applications for the first time this month. The cut-off date for initial applications is 24 April. We will continue to accept applications and withdrawals every month after that. More information on the Fund is below, or you can visit the Fund Page to find out more.

Investment Strategy

The Fund provides access to a portfolio of fund managers who primarily invest in ASX Small Companies through unlisted managed funds. In addition, the portfolio currently includes around a 15% allocation to the Affluence LIC Fund. The Fund is also likely to have a small exposure to managers that invest in other ASX listed securities and global companies.

We are targeting total investment returns greater than the ASX Small Ordinaries Index after all fees and costs, over rolling five year periods. This includes a minimum distribution yield of 5% per annum, paid quarterly. The first distribution, for the June 2019 quarter, is expected to be paid in July.

Why Smaller Companies?

The investment case for Small Companies is strong. They have historically delivered some of the highest returns of any asset class. The market capitalisation of Small Companies ranges from less than $20 million to $1 billion plus, and there are over 2,000 listed on ASX. There is limited research available, which can make it easier for talented specialist investment managers to find bargains not yet discovered by the wider investment community.

Importantly, investing in Small Companies can provide the ability to win in two ways. There is more opportunity for smaller companies to be able to grow their earnings faster than their larger counterparts. Also, as they grow earnings and start to get noticed by a bigger crowd of investors, price/earnings multiples can also expand.

Investing in Small Companies is not without risk. They can be more volatile and fall more in severe market downturns than other types of investments. We use several strategies to attempt to manage this volatility, but if you are considering an investment, you should take into account the potential for greater ups and downs than usual.

Why invest with many different managers?

An important part of our long-term strategy for the Fund is the active rotation over time of the Small Company managers we invest with. Small Company funds run by new managers can produce their best returns in the early years. We seek to have a portion of the portfolio invested in early-stage managers that have an appropriate track record. If their performance is good, it leads to them eventually being discovered by the investment community. They then become swamped with money. In time, this usually reduces their ability to outperform, or they close their fund to new investors. At this point, we can look to reallocate some or all those funds to the next up and coming manager.

Many of these “new managers” have been investing as a team for a long time, but have formed a new business by moving from a larger fund manager, where they were employees, to a boutique structure where the investment team can own a share of the funds management business themselves.

How long has the Fund been going?

As with all our funds, we started the Affluence Small Company Fund with our own money almost three years ago. The performance of the Fund to date has been a little disappointing. Despite that (in fact partly because of it, as we explain below), we are very excited by the potential of the strategy moving forward.

The portfolio currently holds investments in five unlisted funds, in addition to the Affluence LIC Fund and a small amount of cash. As we receive funds from new investors, we intend to expand the number of investments in the portfolio to increase diversification and thus reduce exposure to individual managers. We have already identified several new managers we believe to be outstanding. Not all of the managers we are looking to add to the portfolio have a value bias; however, overall, we expect the portfolio to continue to have a distinct value focus.

Why open the Fund now?

The performance of the Fund was relatively strong up to 31 December 2017, but the Fund experienced a difficult 2018. Overall, 2018 was a tough year for almost everyone as the ASX Emerging Markets Index fell almost 20%, providing a much better entry point for investors in small companies. In addition to the poor market environment, the Fund suffered in particular for three reasons:

  • Investment concentration – The portfolio was not as diversified as we would have liked due to the small size of the Fund initially, and a couple of managers had a very difficult year. We have continued to maintain our investments and our faith with those managers. They have delivered impressive long term results, and we believe they will continue to do so, notwithstanding a rough period.
  • Value style bias – At the end of 2017, growth investment strategies had well and truly outperformed value strategies. As a result, we positioned the portfolio with a significant value bias to capture the better pricing on offer. However, as 2018 progressed, the difference between the two styles continued to diverge. Right now, the difference between growth and value is by some measures as large as it has ever been. We believe this represents an outstanding opportunity, as historically, value investing has outperformed growth over the long term.
  • Resources – The Fund has an investment in a natural resources fund. This manager has achieved returns of around 18% per annum over the long term. This fund holds a portfolio of small and mid-cap resource companies, which was a very tough sector be in last year. The fund fell 36% in 2018, after producing returns of +50% in 2016 and +74% in 2017. This type of volatility is not unexpected; however, unfortunately, it occurred at the same time as value managers struggled.

There is some upside to this recent poor performance for the Small Companies Fund. We believe the current portfolio contains exciting potential moving forward.

Want to know more?

We held off opening the Affluence Small Company Fund for quite some time. We wanted to wait until we felt conditions were appropriate. It feels like now is the right time. Not only do we see pockets of extraordinary value in some areas, but we are confident that all the managers we have or plan to invest with, have the potential to outperform substantially over the long term.

More detail about the Affluence Small Company Fund is available on the Fund Page. If you’d like to invest in the Fund, the easiest way is to click the Invest Now link on the top right of our website. This provides a link to the online application facility provided by our investment registrar, Boardroom. Alternatively, you can complete the appropriate Application Form from the IM. If you are an existing investor with us, please quote your existing investment number when you apply. This will make the application process much easier for you.

Of course, if you have any questions regarding the Fund or would like any more information, please send us an email, or give us a call.

Take care and all the best with your investing.

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