The month of March saw the NAC Investment Portfolio increase by +2.11%, slightly underperforming the benchmark S&P/ ASX 300 Industrials Accumulation Index (XKIAI) which increased by +4.10% but outperforming its smaller counterpart the S&P/ASX Small Ordinaries Accumulation Index which increased by +0.79%. This brings portfolio performance since inception to +15.68% p.a. outperforming the benchmark index which has returned +7.47% p.a. over the same period. March was a significantly quieter month for the investment portfolio with no announcements or significant news flow after a highly eventful February. From a contribution perspective the two major positive contributors to performance were Over The Wire Holdings (ASX: OTW) and Eureka Group Holdings (ASX: EGH) following no specific news but arguably stronger than expected 1H FY21 results. The only major detractor to performance was Experience Co. (ASX: EXP), again on no specific news flow, although concerns around the short Brisbane lockdown directly before Easter (following a COVID-19 outbreak) didn’t help.
One of the businesses which we did not address in our February update was Eureka Group Holdings (ASX: EGH), which has been one of the best performing NAC investments with a total return (including dividends) of +180% in 24 months. Clearly the market has re-rated EGH from what we have said for some time were undervalued levels based on basic metrics such as a FCF yield and asset capitalisation rates. Even after this re-rating we firmly believe that the future for EGH has never been more promising, and hence we expect EGH to remain a core part of the NAC portfolio going forward. The asset class in which EGH operates remains one of the last real-estate sub-classes that has not been institutionalised. This provides EGH with a significant first mover advantage from an industry consolidation perspective to acquire and build new assets, and a potential opportunity to implement a scalable strategy such as the funds management model employed by large real-estate players such as Dexus and Charter Hall, to generate scale in an efficient manner. If EGH can execute on such a model then in our view the runway for future growth could last for at least another 5-7 years.
Over the 3rd quarter of FY21 the price volatility of the market increased significantly. This volatility was caused by the sharp rotation away from so-called growth stocks and into more value orientated stocks. This rotation was driven by the recent increases we have seen in government bond yields as global growth expectations increase. As we have repeatedly said, we do not purport to be macro experts and as such the macro backdrop does not drive our long-term investment decisions. However, changes in the macro backdrop can, from time to time, throw up some excellent investment opportunities due to short-term pricing movements. As a result of these movements, we have recently seen a small number of opportunities arise including businesses that we have owned previously and sold for valuation reasons. Interestingly, some of these businesses could be considered growth-style investments which as many of our investors know tend not to feature prominently across our LICs. Even so, we believe that there are a number of growth-type companies that have a clear business moat and operate in industries with clear positive structural trends that will assist them in driving earnings growth not just over the next 2-3 years, but potentially for 7+ years. As we have seen with investments such as Objective Corporation (ASX: OCL), they can be very fruitful investments over the longer term.
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