The Longwave Small Companies Fund increased by 6.5% during May 2025, outperforming the 5.8% increase in the S&P/ASX Small Ordinaries Accumulation Index benchmark by 0.8% over the month (after fees).
Monthly Report
FUND PERFORMANCE TO 31 MAY 2025
1Return net of 0.89% p.a. management fee. 2. S&P/ASX Small Ordinaries Accumulation Index. 3. Inception date: 31 Oct, 2019. a Strategy inception date: 1 Feb, 2019. Past performance is not a reliable indicator of future performance, p.a performance is annualised.
Investor days & conferences - the shadow reporting season
As investment time horizons continue to shrink in Australia, May has become a proxy quarterly reporting season in a market that still (thankfully in our view) only has bi-annual reporting for listed companies. Conferences, investor strategy days and trading updates all talking to the March quarter results, FY2025 guidance and the impact of tariffs for the brave. While it is a good opportunity to check in on how companies are performing, we must remember our time horizon is 3-5 years or longer, and hence the news in one quarter being better or worse may be interesting but in most cases is not hugely valuable or relevant to our investment thesis.
In our view it is always valuable to learn more about how industries and the businesses within them work, change, adapt, win or lose. And investor days do provide that.
The Longwave investor day checklist
Having attended a few of these in our time, including several in the past couple of months, we have put together a quick checklist to help investors understand what we believe a good investor day looks like.
- Do management have a strategy in the context of their industry (structure and trends) that makes sense? This does require the investor to have their own view of the industry against which to contrast both how management view it, and the likely success of the strategy they are proposing.
- Are management clear on operational goals over the strategy time horizon (most often three years), how they will achieve them and who is specifically responsible for this? This has to be more than a wish list of what they would like to happen. They need to be clear what, who and over what time frame.
- Are the operational goals linked to financial outcomes in the business – sales growth, gross margins, operating cost efficiency, capex, working capital, debt constraints, new investments (P&L or balance sheet) to name a few? Are these financial outcomes clearly communicated to investors against which management are happy to be measured and rewarded? This can often get sidestepped for various reasons (competitive sensitivity is normally the excuse given), but the best management teams show courage in putting in writing exactly what they believe their strategy will deliver financially. Again, investors should be assessing this in the context of their own view on the industry, the specific company and its competitive advantages to determine how realistic any numbers provided may be, and where the greatest risk is to achievement.
- Do we believe this management team and the executives nominated to deliver the operational and financial goals can execute and deliver? The hard work begins once the strategy day ends, and execution in competitive markets can be a lot harder than building a convincing slide deck.
Some other context worth considering.
Communication strategy. Companies often communicate with many stakeholders through their investor day presentation. Investors and sell side analysts of course, but also employees, customers, suppliers, competitors and regulators. The messaging and content are drawn both bottom up (employees on the front line), top down (from the board of directors), from the executives presenting and unfortunately in (too) many cases from management consultants.
Management Consultants are the original ChatGPT. Students who use ChatGPT to complete their schoolwork and expect to pass the final exam are like management teams and boards who outsource their commercial insight to consultants and hope to win in the real world. It is obvious those management teams whose insight comes from their own experience, successes, failures and experiments and those renting it from a consultant to fill out slides in a deck.
Alignment and incentives. Incentives drive outcomes. We all know this, and Charlie Munger made it famous. The corollary should be “do not underestimate the number of people who seek excessive remuneration with a complete absence of measurement”. Marty Whitman from Third Avenue Value Funds wrote about this decades ago (Value Investing: A Balanced Approach, 1999), calling executive compensation the last great arbitrage. Arbitrage drives outcomes. The number of $20 million houses owned by executives of companies who failed to perform for their shareholders suggests this arbitrage has yet to be competed away and shows few signs of doing so.
Small cap investor days since February
In our small company universe, investor strategy days were held for Myer, Light & Wonder, Alliance Aviation Services, Aussie Broadband Ltd, HMC Capital Ltd, Healius Ltd and Webjet Group Ltd. Without going into detail, there were good and bad here (not necessarily reflected in immediate share price moves). In some cases, the insights we gained are more valuable to us about how these companies compare to others in the same sector we have interest in, as much as the company who was presenting. Given these presentations are very long, it is also instructive what is not said – what perhaps are either blind spots for management or specific competitive advantages their peers possess and pursue which these companies do not. We have made a few changes to the portfolio based on what we learned in May.
Portfolio Positioning And Performance 1
Markets continued the strong performance seen from the mid April lows. Small Caps (+5.8%) outpaced large caps (+4.2%) and Microcaps (+3.0%) during the month. There were several trading updates in May, alongside conference presentations and investor / strategy days. We made portfolio changes post month-end on some of the new information and updated analysis during the month.
Energy (+11.7%) was the best performing sector – albeit this was all uranium stocks on a ~10% increase in the Uranium price, Technology (+9.2%) and Materials (+8.6%) which was Gold and Copper stocks up sharply, with Coronado (-43%) and NuFarm (-38%) trading like they are distressed (as they very likely are). Healthcare (-1.1%) was the worst performing sector as the Mayne Pharma buyer looks to back out of their deal being the biggest news. Consumer Discretionary (+2.9%) and Real Estate (+3.8%) round out the bottom three.
The top three performing sectors in the portfolio were also Energy, Technology and Materials. In energy, for the portfolio (which holds no Uranium) it was Karoon (+15.6%) and Beach (+14.5%) driving returns. In Technology, non-benchmark name Objective Corp (+22.9%) helped the most, and not owning Catapult Group (+43.0%) was the most costly. We benefited from Gold and Copper holdings in Materials and had no holding in Coronado or NuFarm. The bottom three sector for the portfolio were Healthcare (Australian Clinical Labs and Clinuvel the laggards), Real Estate and Financials – where a meaningful holding in Netwealth (large contributor) was mostly offset by a much smaller position in OFX.
One stark feature of the small cap market performance in May was the huge dispersion between growth and value styles over the month, with growth funds up 10-12% against value funds up 2-4% (the index finished May up 5.8%). Value continues to have a rough time, as the “valuations don’t matter” market is in full force. As we have written about multiple times, our strategy is able to perform in growth or value markets, it is the speculative markets and bubbles (which we saw in 2021 and 2024) which are more problematic.
1Illustrative only and not a recommendation to buy or sell any particular security.
TOP 10 HOLDINGS
FUND AND BENCHMARK SECTOR WEIGHT (%)
STOCK ATTRIBUTION (ALPHABETICAL)
1The portfolio allocation ranges provided are indicative only. The Fund will be rebalanced within a reasonable period of time should the exposure move outside these ranges.
2The Fund may also hold unlisted securities.
2The Fund may also hold unlisted securities.
INVESTMENT OBJECTIVE
The Fund aims to outperform the S&P/ASX Small Ordinaries Accumulation Index over the long term (after fees).
The Fund aims to provide long-term capital growth through investment in a diversified portfolio of high-quality Australasian small companies (outside S&P/ASX 100 Index at time of investment or expected to be within six months).
INVESTMENT STYLE
Longwave’s investment philosophy is underpinned by the belief that the stocks of high-quality small companies outperform the benchmark over time, and as such, an active approach to investing in high-quality stocks provides value to investors who might otherwise have invested passively. Longwave believes in the value of a deep and fundamental understanding of the securities in which we invest.
Disclaimer
This communication is prepared by Longwave Capital Partners (ABN 17 629 034 902) (‘Longwave’), a corporate authorised representative (No. 1269404) of Pinnacle Investment Management Limited (ABN 66 109 659 109, AFSL 322140) (‘Pinnacle’) as the investment manager of Longwave Australian Small Companies Fund (ARSN 630 979 449) (‘the Fund’). Pinnacle Fund Services Limited ABN 29 082 494 362 AFSL 238371 (‘PFSL’) is the product issuer of the Fund. PFSL is not licensed to provide financial product advice. PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited (‘Pinnacle’) ABN 22 100 325 184. The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.
Link to the Product Disclosure Statement: WHT9368AU
Link to the Target Market Determination: WHT9368AU
For historic TMD’s please contact Pinnacle client service Phone 1300 010 311 or Email service@pinnacleinvestment.com.
This communication is for general information only. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. Past performance is for illustrative purposes only and is not indicative of future performance.
Whilst Longwave, PFSL and Pinnacle believe the information contained in this communication is reliable, no warranty is given as to its accuracy, reliability or completeness and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Longwave, PFSL and Pinnacle disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. This disclaimer extends to any entity that may distribute this communication.
Any opinions and forecasts reflect the judgment and assumptions of Longwave and its representatives on the basis of information available as at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from Longwave. Pinnacle and its associates may have interests in financial products and may receive fees from companies referred to during this communication. This may contain the trade names or trademarks of various third parties, and if so, any such use is solely for illustrative purposes only. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with, endorsement by, or association of any kind between them and Longwave.
Zenith Disclaimer:
The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (assigned Longwave Australian Small Companies Fund – February 2024) referred to in this piece is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual, including target markets of financial products, where applicable, and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at Fund Research Regulatory Guidelines.
Lonsec Disclaimer:
The Lonsec Ratings (assigned as follows: Longwave Australian Small Companies Fund – assigned October 2024) presented in this document are published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421445. The Ratings are limited to “General Advice” (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial products. Past performance information is for illustrative purposes only and is not indicative of future performance. They are not a recommendation to purchase, sell or hold Longwave Capital Partners Pty Ltd products, and you should seek independent financial advice before investing in these products. The Ratings are subject to change without notice and Lonsec assumes no obligation to update the relevant documents following publication. Lonsec receives a fee from the Fund Manager for researching the products using comprehensive and objective criteria. For further information regarding Lonsec’s Ratings methodology, please refer to Lonsec’s website at: https://www.lonsec.com.au/investment-product-ratings/