latest unit pricemicroequities.com.au/wp-content/uploads/2012/09/... · *high income value microcap...

MICROEQUITIES ASSET MANAGEMENT |AFSL 287526 |Suite 302, 17 Castlereagh Street, Sydney NSW 2000

Office: +61 2 9009 2900 Fax: +61 2 9475 1156 [email protected]

JANUARY 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY The concerning inflation figures emanating from Europe pose a risk that the zone could become embroiled in a bout of deflation. Deflation is a serious economic malaise with principally negative effects to an economy and its participants. The recent dramatic fall in oil prices coupled with the prolonged decline in resource prices have accentuated that risk. The ECB will launch a counter attack on deflation later this week as it begins its wide ranging sovereign bond purchasing program. That sounds good in principle but it’s important to remember that quantitative easing doesn’t actually increase demand for credit, it merely lowers the price for credit and raises alternative asset prices. Those might be sufficient to boost confidence and in the end increase the demand for credit, but the path won’t be a short one and uncertainty over the effectiveness of quantitative easing is likely to be debated for quite some time. Of course governments do have other apparatuses to combat deflation, increasing spending and salaries of public servants is an obvious one, but this is Europe where almost blind austerity has been advocated as the only pathway to economic salvation, a pathway that has probably taken the region off the pathway to recovery and on a more treacherous journey that has deflationary dangers in abundance. Microequities High Income Value Microcap Fund returned a positive +0.50% versus the All Ordinaries Accumulation Index positive +3.03% in January. During the month of January, one of the Fund’s business partnerships became the target of a friendly takeover bid. Chandler Macleod Ltd (ASX: CMG) which represented around 3% of the Fund’s assets at the time of the bid now represents 5.1% due to the 80%+ price premium. Despite the positive impact of the takeover bid, the Fund provided a flat month on month performance due to some falls in market values of other constituents. We look forward to the beginning of the reporting season this month. To view your current investment in the Fund login here

Current Forecast Grossed Up Dividend Yield of the Fund*: +8.77% *Forecast Grossed up Yield is based on internal forecasts and actual results may vary. Investors should note that Gross Dividend Yield is not a forecast distribution as distributions will depend on actual dividend income received and actual number of units on issue at the time a distribution is made.

*High Income Value Microcap Portfolio as of 31st of January 2015

3.0%

22.6%

15.0%

8.4% 19.6%

8.0%

10.6%

5.5%

2.8% 1.9%

2.6% Cash

Software & Services

Consumer Durables & Apparel

Media

Diversified Financials

Banks

Commercial Services & Supplies

Capital Goods

Consumer Services

Retailing

Food, Beverage & Tobacco

Latest Unit Price

$1.2415 Latest Fund Performance as at January 31, 2015

FUND AOAI* OP* 1 Month +0.50% +3.03% -2.53%

3 Month -0.02% +1.66% -1.67%

6 Month -1.47% +0.85% -2.32%

1 Year +4.35% +11.28% -6.92%

2 Years comp pa +10.63% +11.00% -0.38%

Inception comp pa +15.23% +12.99% +2.24%

Inception +51.21% +42.78% +8.43% (Returns are calculated after all fees and expenses and reinvestment of distributions. Inception of Fund March 1, 2012) *AOAI: All Ordinaries Accumulation Index. *OP: Out-performance. Past performance is not indicative of future performance.

Microequities Asset Management Pty Ltd is a corporate authorised representative, number462438, as appointed by Microequities Pty Ltd holder of AFSL number 287526. Application for units in the Fund is limited to investors that are Wholesale or Sophisticated investors within the meaning of Section 761G(7) and 761GA(7) of the Corporations Act 2001.

mailto:[email protected]

http://microequities.com.au/our-funds/investor-login/



FEBRUARY 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY More than seven years ago, in November 2007 in a pre-GFC world, the Australian All Ordinaries Index would reach its all-time high of 6873.2 points. During the month of February the index flirted with the 6000 point barrier, never quite surpassing it. After more than seven years, the index has yet to regain all of its previous lost ground. For us at Microequities these side-show anecdotes are exactly that, a curious diversion of little relevance to us. We do not own the All Ordinaries Index and our constituent business partnerships can hardly be called a microcosm of the benchmark index. What is of importance to us are the fundamentals of business partnerships we own or might look to own and the relative gaps between their intrinsic values and market values. It is in this last regard that market prices have their relevance. In assessing a potential partnership we do look at its respective market value and intrinsic value and only look to partner into businesses that have large gaps between those two parameters. Whilst rising market values might appease some of our unit holders, for us, anything that shrinks the formerly stated gap simply makes prospective partnerships untenable, giving us little reason to celebrate. Our job in rising markets is markedly more challenging. Our steadfast search for deep value is therefore currently more challenging but not insurmountable, for our asset class is broad and pricing inefficiencies always eventuate. Microequities High Income Value Microcap Fund returned a positive +6.21% versus the All Ordinaries Accumulation Index positive +7.00% in February. The reporting season for our High Income Value Microcap Fund business partnerships can be characterized as unsurprising. In the main our business partnerships delivered operating results and dividend payments very much within the realm of our expectations. That’s not to say that all our partnerships delivered excellent results, a few did not. But overall it was a solid reporting season with three of our business partnerships raising their dividend payments ahead of our internal forecasts. These increases in dividend payments means that the current dividend yield forecast for the Fund remains largely unchanged despite the Fund increasing its market value by over 6% in the last month. To view your current investment in the Fund login here


*High Income Value Microcap Portfolio as of 28th of February 2015

2.8% 4.9%

22.7%

14.7%

7.7% 20.3%

7.4%

6.2%

6.6%

1.4%

1.9% 2.4% 1.0%

Cash

Chandler Macleod (ASX: CMG) Software & Services

Consumer Durables & Apparel Media


Banks

Commercial Services & Supplies Capital Goods

Consumer Services

Retailing


Technology, Hardware and Equipment

Latest Unit Price

$1.3186 Latest Fund Performance as at February 28, 2015


3 Month +7.55% +12.36% -4.81%

6 Month +1.59% +7.13% -5.53%

1 Year +13.12% +13.57% -0.45%

2 Years comp pa +11.81% +11.96% -0.15%

3 Years comp pa +17.11% +15.17% +1.94%



Microequities Asset Management Pty Ltd is a corporate authorised representative, number 462438, as appointed by Microequities Ltd holder of AFSL number 287526. Application for units in the Fund is limited to investors that are Wholesale or Sophisticated investors within the meaning of Section 761G(7) and 761GA(7) of the Corporations Act 2001.




MARCH 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY The stupendous rise in residential property prices in Sydney and to a lesser extent Melbourne has reached alarming levels. It is not that the nominal percentage increase in those cities are a concern, it is rather that the recent increases place those markets at the outer realms of affordability. Further increases in property values from the current high levels are likely to lead to an eventual significant pricing correction, particularly the Sydney property market where median dwelling prices to household income ratios have breached 15 year high levels. The timing and inception of a possible correction would likely coincide with a change in the interest rate cycle which would place considerable duress on those mortgage holders that have purchased dwellings at the very limits of their affordability. The relevant consequence to investors of this property price boom is that it has augmented systemic risk in Australia given the deep interconnection of the housing market with Australia’s banking industry. Markets are by their very nature difficult to control, at their extremes, the existential forces of greed and fear accentuate irrational pricing outcomes. But the RBA should be wary, it has an estimable supervisory track record, but any further interest rate cuts will only add further fuel to a speeding car that is perilously close to speeding out of control. It may very well lose control without any further free octane from the central bank. Microequities High Income Value Microcap Fund returned a positive +1.60% versus the All Ordinaries Accumulation Index negative -0.03% in March. A large number of the businesses in the High Income Value Fund went ex-dividend during the month of March. The collected dividend income monies will be quarantined for payment of cash distribution in July. The Microequities High Income Value Fund is now just over 3 years old. During that time, the Fund has incessantly met its cash distribution payment schedule and objectives. July 2015 will mark the 7th consecutive cash distribution payment. As we look towards the future and look across our business partnerships within the Fund, we remain confident that tour businesses partnerships will continue to be a reliable source of income stream for our fellow investors. To view your current investment in the Fund login here


*High Income Value Microcap Portfolio as of 31st of March 2015

1.6% 4.6%

21.4%

13.4%

8.0%

21.5%

6.8%

5.7%

6.1%

1.9% 5.8%

2.1%

0.9% Cash

Chandler Macleod (ASX: CMG) Software & Services



Banks


Consumer Services

Retailing



Latest Unit Price

$1.3397 Latest Fund Performance as at March 31, 2015

FUND AOAI* OP* 1 Month +1.60% -0.03% +1.63%

3 Month +8.45% +10.21% -1.76%

6 Month +4.83% +13.04% -8.21%

1 Year +13.88% +13.25% +0.63%

2 Years comp pa +11.89% +13.22% -1.32%

3 Years comp pa +16.92% +14.72% +2.20%








APRIL 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY The UK, the world’s 5th largest economy is experiencing a resurging boom. You probably haven’t heard much of it, because the media has a negative news flow bias, but the strength of the recovery has set the economy as the yardstick of Europe. Its economy is growing at a pre-GFC rate of 3%, its unemployment has edged down to 5.6% (pre-GFC levels), and the conference board leading UK indicators is now sitting at record highs. In short, the second most important economy in Europe is booming. Inflation is near zero, which together with rising wages mean that household income is rising, a needed requisite for any sustainable economic growth. Certainly the buoyant economic conditions are not without their risks; property prices are rising fast (in part due to government policy) and productivity growth has stagnated. But there are credible achievements in the UK’s growth which together with improved growth conditions for the German economy will bolster the chances of the European economy slowly awakening from its stagnant economic slumber. In Australia, the positive employment data needs to be contextualised with a degree of caution due to changes in the normalising of seasonality. The ANZ job ads survey for March fell for the first time in nine months and although it is still up 9% year on year, it does throw up some doubt about the underlying strength in employment growth. Microequities High Income Value Microcap Fund returned a positive +0.57% versus the All Ordinaries Accumulation Index negative -1.47% in April. The cash assets of the Fund rose due to the proceeds received from the Chandler Macleod (ASX: CMG) scheme of arrangement. The Fund has over the last two months been acquiring an investment in a retail business. The purchased equity of this retail business now represents circa 4.1% of the assets of the High Income Fund. Additionally, the Fund has also been increasing its stake in a highly undervalued financial services firm, which also meets the high yield requisites of the High Income Fund. To view your current investment in the Fund login here


*High Income Value Microcap Portfolio as of 30th of April 2015

6.4%

20.9%

12.9%

7.8% 21.7%

6.6%

6.1%

5.7%

1.8% 7.3%

2.0% 0.7%

Cash

Software & Services



Banks


Consumer Services

Retailing



Latest Unit Price

$1.3474 Latest Fund Performance as at April 30, 2015


3 Month +8.53% +5.39% +3.14%

6 Month +8.51% +7.14% +1.37%

1 Year +15.14% +10.16% +4.99%

2 Years comp pa +11.41% +10.29% +1.11%

3 Years comp pa +16.29% +13.74% +2.55%


Inception +64.11% +50.48% +13.63% (Returns are calculated after all fees and expenses and reinvestment of distributions. Inception of Fund March 2012) *AOAI: All Ordinaries Accumulation Index. *OP: Out-performance. 2 & 3 year performance calculated as compound per annum. Past performance is not indicative of future performance.

Microequities Asset Management Pty Ltd is a corporate authorised representative, number462438, as appointed by Microequities Ltd holder of AFSL number 287526. Application for units in the Fund is limited to investors that are Wholesale or Sophisticated investors within the meaning of Section 761G(7) and 761GA(7) of the Corporations Act 2001.




MAY 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY Australia’s CAPEX numbers for the 1st quarter of 2015 depict Australia’s transition after reaching the mining investment peak of FY13. At the zenith of the super mining boom (FY13) mining CAPEX reached a record $97.6b. In that year, mining CAPEX accounted for about 60% of Australia’s total CAPEX. To put that number into historical context, prior to that peak mining CAPEX was around $30b a year, and accounted for around 25% of total CAPEX for the country. Not surprising, the large fall in the 1st quarter’s overall CAPEX is attributable to the contraction of new development expenditure in the mining industry. CAPEX in other industries (outside of mining and manufacturing) has actually been rising. Overall the outlook for aggregate CAPEX in FY16 continues to be one of decline, but the decline’s causality rests squarely on the shoulders of the mining industry. Other sectors in our services dominated economy will need to reinvest, and some remain significantly underinvested. For businesses that are not in commodity cycle related industries, new CAPEX is not a discretionary undertaking. Free markets are fiercely competitive, ever dynamic environments. Businesses that restrain their CAPEX budgets due to central government policies, aggregate demand cues or prevailing macro environments do so at their own peril. Capitalism devours businesses that merely look at the next corner and not the full road ahead. Think Telstra’s Yellow pages, Fairfax et al.

Microequities High Income Value Microcap Fund returned a positive +2.12% versus the All Ordinaries Accumulation Index positive +0.58% in May. The High Income Value Microcap Fund exited an underperforming business partnership in the IT Services industry. After a long marriage these divorces are always regretful yet necessary part of optimising the capital allocation process. Businesses that fail to engender growth are simply not good long term investments irrespective of the current dividend yield. The opportunity cost of capital is a cost that most investors fail to account for because it seems “conceptual”, it is in fact very real. An underperforming business even if not declining carries a large tangible opportunity cost for investors. To view your current investment in the Fund login here


*High Income Value Microcap Portfolio as of 31st of May 2015

7.2%

21.6%

11.0%

7.8% 22.7%

5.7%

6.0%

6.7%

1.8% 7.8%

1.8%

Cash

Software & Services

Consumer Durables & Apparel

Media


Banks

Commercial Services & Supplies

Capital Goods

Consumer Services

Retailing


Latest Unit Price

$1.3760 Latest Fund Performance as at May 31, 2015

FUND AOAI* OP* 1 Month +2.12% +0.58% +1.54%

3 Month +4.35% -0.93% +5.28%

6 Month +12.23% +11.32% +0.91%

1 Year +18.20% +10.12% +8.08%

2 Years comp pa +13.43% +13.12% +0.31%

3 Years comp pa +18.68% +16.71% +1.97%








JUNE 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY As selective long term value investors it is not our role to understand or account for mass psychology which invariably affects short term market values. Rather than trying to explain it we try and profit from the opportunistic windows irrational capital decisions abidingly provide the patient, long term investor. The significant month on month decline in the Australian equity market might be attributed to investor concern around the revolving and interminable so called “Greek debt crisis”. Back in April 2010 I wrote on our monthly update that the EU by bailing out Greece had chosen the seemingly lesser of the evils but that over time, it would likely evolve into the worse of the two evils. In 2010 the EU chose to bail out Greece as the latter agreed to a round of austerity measures. Importantly however, little structural reform was actually stipulated in the bailout package. As a result the Greek economy remains uncompetitive, its public sector inefficient and bloated and the austerity measures themselves have caused momentous social pain and an outright economic depression for the country. Let’s be clear, the “Greek debt crisis” does not and will not affect the intrinsic value of our Microcap Australian business partnerships. Greece’s GDP of around US$280m makes the economy significantly smaller than that of NSW. Unlike 2010, today, most of Greece’s sovereign debt is not held by European Banks but rather sovereign European States and the IMF. That means the likelihood of systemic risk in the event of debt default is very low. Additionally peripheral states in the EU such as Ireland, Portugal, Spain and Italy face significantly improved debt market conditions. Investors will however from time to time, be unnerved, shaken and make emotionally founded investment decisions, count on us to take a long term unemotional opportunistic perspective in such circumstances.

Microequities High Income Value Microcap Fund returned a negative -11.08% versus the All Ordinaries Accumulation Index negative -5.40% in June. The High Income Fund market value fall had only one fundamental nexus to it. One of the large weighted business partnerships posted a disappointing profit update for FY15. The rest of the fall is related to market valuation shifts with no corresponding change in the intrinsic values of our business partnerships. The constituents of the Fund are fundamentally well placed to deliver the Fund’s objectives. The Fund will pay its 7th consecutive cash distribution to investors during the month of July. Subject to final audits, we expect the cash distribution to be between 3.4c per unit and 3.7c per unit plus franking credits. To view your current investment in the Fund login here


*High Income Value Microcap Portfolio as of30th of July 2015

5.7%

21.5%

11.4%

8.2% 24.4%

5.8%

4.5%

7.2%

1.9% 7.7%

1.9%

Cash

Software & Services



Banks


Consumer Services

Retailing


Latest Unit Price

$1.2235 Latest Fund Performance as at June 30, 2015

FUND AOAI* OP* 1 Month -11.08% -5.40% -5.68%

3 Month -8.67% -6.25% -2.42%

6 Month -0.96% +3.32% -4.28%

1 Year +4.24% +5.67% -1.43%

2 Years comp pa +9.00% +11.50% -2.50%

3 Years comp pa +14.97% +14.47% +0.50%








JULY 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY The Australian equity market posted a strong positive month of +4.23% for the month of July. As many of our investors know we are not in the business of predicting market movements, nor do we make any forward looking predictions on the likely direction of equity markets. Our business partnerships are not a microcosm of the Australian equity market and nor are they a proxy for the Australian economy. We are in the business of valuing businesses and making forward looking judgments on the value and earnings evolutions of these companies. As we wrote back in June, that month’s fall provided some attractive pricing for some of our business partnerships and we took advantage of these. The long term investor must be prepared to face a multitude of pricing anomalies over their investment term. There will be extraordinary falls in the market value of businesses, sometimes absurdly exuberant market valuations, the irrationality and frailties of human decision making will always prove to be a fertile hunting ground for the rational, intrinsic valued focused long term investors. So as we witness another exceptional down and then up market movement, be sure of one thing, there will be many more to come in the future, and that’s a market forward looking statement that we are prepared to make.

Microequities High Income Value Microcap Fund returned a positive +5.45% versus the All Ordinaries Accumulation Index positive +4.23% in July. We exited one business partnership during the month, Hansen Technologies Ltd (ASX:HSN) which has been a strong contributor to the Fund’s return since inception. The management and employees of Hansen have delivered tremendous wealth creation for their shareholders and the business has expanded and entrenched itself as a market leader within some of its business verticals. Sadly we dissolve our business partnership on valuation grounds, as we deem the market value to be well in excess of its intrinsic value. The Fund has added and continued to build stakes in two new business partnerships; one business is in the IT services space, the other is in mining services. The latter represents a return to a industry that we previously did not fare to well in the High Income Fund. The new business partnership is so undervalued, that even in bleak case scenario of a 50% drop in earnings during FY16 the value would remain compelling. The company has no net debt, an order book into FY18 and gross up dividend yield in excess of 12%. The High Income Fund closed the month with a 10.4% cash position, whilst the forward looking dividend yield rose to 9.25%. We expect that figure to rise further as we deploy the cash into our two new business partnerships. To view your current investment in the Fund login here


*High Income Value Microcap Portfolio as of 31st of July.

10.4%

17.4%

10.7%

7.9% 25.4%

5.4%

4.7% 7.4%

1.4% 7.4%

1.9%

Cash

Software & Services



Banks


Consumer Services

Retailing


Latest Unit Price

$1.2355 Latest Fund Performance as at July 31, 2015

FUND AOAI* OP* 1 Month +5.45% +4.23% +1.21%

3 Month -4.25% -0.82% -3.43%

6 Month +3.92% +4.53% -0.61%

1 Year +2.39% +5.41% -3.03%

2 Years comp pa +8.27% +10.85% -2.58%

3 Years comp pa +14.86% +14.65% +0.20%








AUGUST 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY The Chinese equity market correction should be viewed skeptically as a proxy for the Chinese economy. Equity markets are terrible at predicting economic slowdowns and are actually much better at predicting upturns. Whether China posts 6% or 7% GDP growth might make great headline content for financial journalists and pundits but really is of little real consequence and rather academic at best. The market for resources including iron ore are in the midst of a cyclical downturn (resource are expected to go from boom to bust such is the nature of those markets) and will be for some time. Eventually supply will adjust, demand will improve and you will get a new resource boom. China and India are the economic stories of this century and although economic growth speeds vary through economic cycles, the thematic doesn’t change. China is transforming itself from a manufacturing led economy to a services led economy underpinning its expanding middle class base of consumers. This is an occurrence related to its economic development that should instill confidence as the weight of economic growth will begin to shift towards domestic consumption versus exports. Australia’s economic outlook remains stable, with some important sectors in the economy (tourism and education for example) expected to benefit strongly from the lower Australian Dollar. Employment outlook remains sound, while consumption has edged higher.

Microequities High Income Value Microcap Fund returned a positive +1.89% versus the All Ordinaries Accumulation Index negative -7.30% in August. In the worse month for the market since the GFC the High Income Value Microcap Fund returned a positive +1.89%. As long term investors we do not place emphasis on short term returns. In terms of the long term performance, the Fund is maintaining positive outperformance whilst delivering strong cash distributions to its unit holders and this is something we would like to emphasis. We are currently reviewing all the business partnerships in the Fund with a view to optimising the portfolio to best achieve that mandate of the fund; long term capital growth supplemented by regular cash income. In order to maintain a stable supply of regular income the Fund has a mixture of businesses with differing growth profiles. Unlike the Deep Value Microcap Fund, not all our High Income Fund business partnerships have compelling growth profiles. To view your current investment in the Fund login here


*High Income Value Microcap Portfolio as of 31

st of August.

5.8%

17.8%

11.2%

8.1% 25.3%

4.6%

4.4%

7.9%

1.0% 7.2%

1.6%

0.2%

4.9%

Cash

Software & Services



Banks


Consumer Services

Retailing

Food, Beverage & Tobacco Utilities

Latest Unit Price

$1.2588 Latest Fund Performance as at August 31, 2015


3 Month -4.47% -8.59% +4.12%

6 Month -0.31% -9.44% +9.12%

1 Year +1.27% -2.98% +4.26%

2 Years comp pa +8.05% +5.37% +2.69%

3 Years comp pa +13.95% +11.01% +2.94%







SEPTEMBER 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY The US Federal Reserve decision to maintain rates at the historical low of 0.25% is more than questionable. The accommodative monetary policy is difficult to reconcile given the blatantly obvious strength of the US economy; the unemployment rate has halved from its peak of 10% to 5.1%, GDP is running at 2.7% per annum back to its pre-GFC levels, consumer confidence is strong, house prices are rising. These are all evident qualities of a well-functioning economy. This is not the time to ponder the strength of the external environment (since when has this been a guiding directive for the Fed?) but rather to start winding back an extreme monetary policy enacted to soften an extreme economic and financial crisis. This is the time to recoil the Fed’s weapons in preparation for an eventual more challenging economic climate. It is imprudent to maintain this monetary stance, raising rates to 1% or 2% will not slow down or threaten the economic recovery of the US, that train is in motion and a Fed rate of 2% is hardly going to slow it down. As for financial markets be they debt or equity, any investors making decisions on the assumptions of the longevity of a risk free rate of circa 2.2% have done so on a seriously unrealistic forward looking framework. Time to unwind the “new-normal” and just get back to the old, plain normal.

Microequities High Income Value Microcap Fund returned a positive +0.05% versus the All Ordinaries Accumulation Index negative -2.50% in September. September saw most of our business partnerships in the High Income Value Microcap Fund pay out their accrued dividend payments. The Fund which has consistently been paying high cash distributions has now collected the bulk of its dividend income stream which will be quarantined for payment in early January. During the month the Fund recalibrated some of its weightings in business partnerships with increased weightings in the Media sector as well as in a consumer durables business. We continue to slowly build our stake in an energy utility business. To view your current investment in the Fund login here


*High Income Value Microcap Portfolio as of 30th of September.

8.3%

18.8%

11.8%

7.8% 26.3%

4.3%

3.6% 7.6%

0.9%

3.8%

1.6% 0.6%

4.5%

Cash

Software & Services



Banks


Consumer Services

Retailing


Latest Unit Price

$1.2594 Latest Fund Performance as at September 30, 2015


3 Month +7.49% -5.79% +13.28%

6 Month -1.84% -11.68% +9.84%

1 Year +2.91% -0.16% +3.06%

2 Years comp pa +5.94% +2.82% +3.12%

3 Years comp pa +14.48% +9.31% +5.17%








OCTOBER 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY The RBA should resist the temptation to further lower rates. The Australian economy is, despite commentary to the contrary, fairing rather well despite the strong slowdown in mining capital expenditure. The job market remains stable and an unemployment rate of 6.2% can be scarcely argued to be one necessitating drastic monetary measures. Australian retail sales are growing at a respectable annual growth rate of 4.6%, consumer confidence is tracking above its long term historical average and business confidence is traveling even better. The RBA’s concern over a high Australian dollar has eased as the currency has weakened. The strength of the Victorian economy and especially NSW is conclusive evidence that the services industries within our economy (finance, insurance, education, tourism, health) are now picking up from where the mining industry left off (prior to our mining boom these were the traditional growth sectors of our economy). So why all the rhetoric about a sluggish economy? Yes there are sectors and economies within Australia that are weaker than others, but industries go through many growth cycles and the Australian economy is made up of an aggregate of industries, a lot of which are traveling rather well and don’t need any further monetary stimulus from an already extremely expansionary bias. Microequities High Income Value Microcap Fund returned a positive +4.51% versus the All Ordinaries Accumulation Index positive +4.59% in October. The Fund had to unfortunately dissolve one of its business partnerships (in the retail sector) after the business’ operations deviated from the fundamental premise of the investment case. These are never easy decisions given the long term intention of our capital allocation process, but ultimately we are in the business of allocating capital in a meritocratic manner. The loss of one business partnership was offset by the addition of a new business in the diversified financials space. The sector now represents the largest weighting in the Fund with six businesses from the industry. The diversity of the businesses however are wide ranging from asset managers to non-bank financiers. The Fund has a well diversified source of income streams which are a strong component in the consistent distribution payment history of the Fund. To view your current investment in the Fund login here


*High Income Value Microcap Portfolio as of 31st of October.

6.6%

17.4%

11.7%

7.5% 30.3%

3.9%

3.2% 7.4%

0.8%

4.0%

1.7%

1.1%

4.5% Cash

Software & Services



Banks


Consumer Services

Retailing


Technology Hardware and Equipment

Latest Unit Price

$1.3162 Latest Fund Performance as at October 31, 2015


3 Month +6.53% -5.47% +12.00%

6 Month +2.00% -6.24% +8.25%

1 Year +10.68% +0.45% +10.24%

2 Years comp pa +7.13% +3.16% +3.98%

3 Years comp pa +16.59% +9.88% +6.71%






MICROEQUITIES ASSET MANAGEMENT |AFSL 287526 |Suite 302, 17 Castlereagh Street, Sydney NSW 2000 Office: +61 2 9009 2900 Fax: +61 2 9475 1156 [email protected]

NOVEMBER 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY The much commented drop in national capital expenditure figures have come as a surprise to some pundits, if they actually understood the historical evolution of the Australian economy it would have been of no surprise. FY16 CAPEX in Australia is expected to drop to around $120bn. The main causality of this sharp CAPEX fall is the readjustment from a mega CAPEX mini boom that Australia has experienced over the last five years. It should be of little surprise to anyone that Australia’s CAPEX is readjusting to this post-boom scenario as mining CAPEX normalises to pre-boom levels. We expect the drop in aggregate CAPEX to carry into FY17. There is still no clear evidence that non-mining sectors are increasing their investment though CFO’s surveyed have signaled an increasing intention to do so. The RBA should maintain interest rates on-hold latter this week as the Australian economy maintains its stable outlook. Whilst we take no comfort in the volatile monthly employment data (which were overtly positive last month) the overall labor market conditions remain robust and underpin a resurgent services sector (finance, education, health, tourism) which is more than offsetting declines in manufacturing and mining. Microequities High Income Value Microcap Fund returned -0.84% versus the All Ordinaries Accumulation Index -0.69% in November. Falls in market values across some of our business partnerships has widened the gap to intrinsic value, providing even more attractive valuation metrics for our portfolio. Overall the portfolio of business partnerships remain significantly undervalued using a marked to market valuation methodology and we are enthused with some of the compelling investing opportunities before us. One of our business partnerships UXC Ltd (ASX UXC) has become the subject of a friendly takeover offer. The business partnership represents 3.3% of the High Income Value Portfolio. To view your current investment in the Fund login here


*High Income Value Microcap Portfolio as of30

th of November.

7.8%

17.4%

12.7%

8.1% 26.8%

3.8%

3.1%

8.1%

0.8%

3.2%

2.3% 1.3%

4.7%

Cash

Software & Services

Consumer Durables &ApparelMedia


Banks

Commercial Services &SuppliesCapital Goods

Consumer Services

Retailing

Food, Beverage &TobaccoUtilities

Technology Hardwareand Equipment

Latest Unit Price

$1.3051 Latest Fund Performance as at November 30, 2015

FUND AOAI* OP* 1 Month -0.84% -0.69% -0.16%

3 Month +3.68% +1.27% +2.41%

6 Month -0.96% -7.43% +6.47%

1 Year +11.16% +3.05% +8.10%

2 Years comp pa +5.68% +3.52% +2.17%

3 Years comp pa +16.93% +9.53% +7.40%








DECEMBER 2015 FUND UPDATE by Chief Investment Officer Carlos Gil

MARKETS AND ECONOMY Australia’s December employment numbers again surprised markets positively. Whilst these monthly numbers are volatile and are prone to statistical error, the totality of employment data and indicators are congruous with a resilient labor market that is producing modest employment growth. This is consistent with the diverging industry conditions across the Australian economy. The heavy mechanized and less labor intensive resources sector is experiencing a cyclical downturn, whilst labor intensive industries such as tourism, education and retail are facing growth dynamics. Over in the US the Federal Reserve finally undertook what the economic data was requesting be done a lot earlier; raising the official cash rates from 0.25% to 0.50%. Let us be clear the cash rate still sits at an overtly generously accommodative level. The US economy is growing at slightly above the pace of economic growth it achieved during the last decade. The unemployment rate is close to the pre-GFC levels. The 10 year US treasury rate (linked to a lot of debt financing in the US) has not inched higher. The Fed has signaled it will continue to have an extremely dovish monetary stance and whilst there will be further rate rises during 2016 these will be modest and cash rates are unlikely to surpass 2%. Microequities High Income Value Microcap Fund returned -0.31% versus the All Ordinaries Accumulation Index +2.65% in December. Currently the High Income Fund has 27 business partnerships with the top 5 representing 38.5% of the Fund’s assets. The concentration is consistent with the high conviction investment principles which we uphold. The top 10 business partnerships represent 62.5% of the Fund’s assets. The Fund will make its 8th consecutive cash distribution in January of 3.27 cent cash payment in addition to a 1.32 cent franking credit. To view your current investment in the Fund login here


*High Income Value Microcap Fund Portfolio as of 31st of December.

5.9%

18.2%

13.7%

7.9% 28.2%

3.9%

3.0%

7.2%

0.8%

2.9%

2.6% 1.5%

4.2%

Cash

Software & Services



Banks


Consumer Services

Retailing


Technology Hardware and Equipment

Latest Unit Price

$1.3011 Latest Fund Performance as at December 31, 2015

FUND AOAI* OP* 1 Month -0.31% +2.65% -2.95%

3 Month +3.31% +6.62% -3.31%

6 Month +11.04% +0.45% +10.60%

1 Year +9.98% +3.78% +6.20%

2 Years comp pa +5.78% +4.40% +1.38%

3 Years comp pa +14.20% +9.26% +4.95%





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