The month of May saw the NAC Investment Portfolio decrease by -8.22%, underperforming the benchmark S&P/ASX 300 Industrials Accumulation Index (XKIAI) which decreased by -3.82% and its smaller counterpart, the S&P/ASX Small Ordinaries Accumulation Index (XSOAI) also decreasing by -7.01%. This brings portfolio performance since inception to +11.53% p.a., outperforming both the benchmark index and the XSOAI which have returned +7.24% p.a. and +5.92%respectively over the same period.
May capped off what can only be described as a horrible 2HFY22 to date and again the underperformance came with little negative news flow from the core investments and one pleasingly from Gentrack (ASX: GTK) with a strong 1HFY22 result. There was just one major contributor to performance in May being Urbanise (ASX: UBN) as it bounced back from very oversold levels. This was more than offset by the two major detractors to performance, which combined resulted in >-7% for May alone. These two investments are Eureka Group (ASX: EGH) and Experience Co (ASX: EXP), neither releasing news of any significance. Clearly, investors are reducing their exposure to emerging companies (small and micro-cap businesses) and at a very high level, which can be seen by the ~-7% decline in XSOAI compared to the S&P ASX-100 Accumulation Index which fell by just by -2.19%. Based on our past experiences, this may continue for some time especially as many institutional investors seek to maintain high levels of liquidity to fund any current or potential investor redemptions together with emerging companies no longer forming part of their investment strategy due to their overall small exposure to such investments as well as the perceived high-risk nature of such investments. We can’t control such events but as an investment team we can control the type of investments that we make and position the Investment Portfolio in a manner that we consider will best maximise performance in times where significant macro events may occur. To highlight how NAOS puts this into action, set out on the following page are some key investment metrics:
Finally, GTK released a result that was in line with their previous guidance provided over six months ago. The highlight in our view was the underlying growth rate of ~24% when factoring in customers lost due to the “Supplier of Last Resort” process. Gary Miles (CEO), and his team have only had 12-18 months to implement their strategy so to see such top line traction should, in our view, give investors confidence that they can continue to successfully execute on their stated strategy. Many onlookers of GTK remain sceptical of their margin ambition but in our view, this is more than priced in and if the FY2024 goals prove correct, we believe that GTK has the potential to be >$3.50 compared to $1.52 at the end of May. As we are currently witnessing, energy markets are dynamic and what users of energy and similar utility services will require in regard to information, flexibility etc. will put greater demand on the information technology systems of many utility companies. We believe this provides GTK with a significant runway for growth not only with its 3 core markets but also in potential new geographies such as Germany and Spain.
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