Alpha Prime Small & Mid Cap Comment - Sep 19
INTRODUCTION: A GOOD MONTH Firstly, you will notice that the Fund’s name has dropped the ‘wealth’ portion and the Fund is now called the ‘Alpha Prime Small & Mid Cap Fund’ (or ‘ASM Fund’) and its conamed manager changed to Alpha Asset Management (as opposed to AlphaWealth, the wealth management portion of the Alpha group of businesses).and its branding is now ‘Alpha Asset Management’. This process was started several months ago and has become effective from the current month. These are cosmetic changes, though, and as an investor they do not affect your investment portfolio, its underlying holdings, how we manage it or, basically, any other material detail. I am merely noting this upfront to avoid confusion. Mid-month we were positive for the quarter, though the last week of September saw us slip negative again and ended the quarter marginally down (-1.3%) against our peers that dropped -2.9% on average. The Top 40 Index collapsed -6.5% for the quarter with FTSE/JSE Small Cap Index also falling -4.1%. Hence, we are quite happy with our relative performance and do excitedly note the (too brief a) moment when the Fund was positive for the quarter-to-date. Is this the end of ASM Fund’s draw down? Will South African small cap bounce from here? We will never make a forecast like that but we remain optimistic. We hold good companies at ridiculous valuations and—either via growth/re-rating or via corporate action/delistings —we should be rewarded for this. On the latter point, two of our investments are under cautionary due to a potential delisting (at a likely large premium to their share price!) and we expect at least one or two more before the end of the year.
HOW WE HELP TO UNLOCK VALUE On several occasions in the last year, the two private equity individuals who sit on our Investment Committee have noted that the local listed small cap market (and, especially our investments in it) trade at a discount to the domestic unlisted market. Furthermore in previous notes, we have shown that our local small cap market is the cheapest equity market in the world and note that this position has not changed. Hence, our small cap market does not appear to be working efficiently and, therefore, it is appropriate to unpack some of the other tools that we have at our disposal to help unlock value and generate acceptable relative returns for our investors.
Disclaimer It is important to emphasis that none of the below tools we touch on are so-called ‘insider trading’. Insider trading is illegal and we do not insider trade. When, where and if we ever become insiders (however briefly) in a company, we will cease any trading in the stock for the duration that we are insiders.
Softer tools: Opinions & Network These are tools where we try to add value to the companies we are invested in by means other than corporate action and so-called ‘shareholder activism’. Due to our research of numerous companies across numerous sectors (and even numerous countries), we believe that we have reasonably well-informed opinions. Hence, when and where applicable in management meetings or management communication, we will highlight any opportunities or risks we see either in the macro-environment or company-specific circumstances and offer our views as to how this can be navigated. These are merely our opinions and it is ultimately up to management what to do with them. We have also offered our views as to improving company results disclosure and/or introduced management teams to investor relations firms where we think they could add value to their future market communication. If you have a good business, then value-unlock can be as simple as communicating this fact clearly and broadly to the market. Markets are not dumb but they can be lazy. Where we have seen the opportunity to do so, we have made introductions across our network either between companies/businesses and/or management teams where either deals, trade, partnerships or agreements would logically add value to all parties. Once again, we can make introductions, but it is ultimately up to management what to do with these. Almost every single investment in our portfolio we interact with through this means. Management meetings, interactions, site visits and research tend to be a two-waystreet and we hope that our management teams get as much out of our interactions as we get out of theirs.
Harder tools: Corporate Action & Activism Sometimes we believe that a corporate action may be logical. This may take the form of one of the companies we are invested in buying or selling something or itself being acquired and delisted. These days the latter is most often true. Our approach is simple here: we talk, share notes and research where applicable, offer our views and—where appropriate—introduce key parties and then walk away. It is up to the parties to take things further, not us. Once again, we can highlight potential corporate actions that we believe will unlock value, but it is ultimately up to management what to do with these opinions. There are a few shares that we hold that we believe will probably unlock their value this way. Some may do so on their own steam but others we have certainly helped to align parties towards this goal and we eagerly await the value unlocks ahead of us. Finally, a tool that we have not yet used—but that does really exist—is aggressive shareholder activism. Given that we are invested in good quality companies and that these typically come with good quality management teams, we have not yet had to use any form of aggressive voting, lobbying or other such activist techniques to unlock value. That said, some well-known shareholder activists form part of our network and we could tap into this toolset if need-be at a future date. Let’s hope that we don’t need to. All these mentioned tools (and more), though, are secondary to a company just steadily growing their earnings and cash flows (which ours on average have done) and the market efficiently rewarding them for this (which the market recently has not done). We eagerly away a more efficient future whereby normal market mechanics reward us in such a way but, in the meantime, we believe there is substantial upside still to be unlocked across the Fund’s portfolio.
IN CLOSING: QUALITY, GROWTH, VALUE & CONCENTRATION Finally, a reminder that our investment approach in the Fund has been and will remain: Quality: Above all else, we try to find good-quality, fast-growing*, listed small cap businesses. Value: We invest in the cheapest of these, though limit our investments to different industries and/or geographies to maximize diversification. Concentration: Finally, we limit the number of stocks we hold to only the very best fifteen to twenty positions. Being both fund manager and co-investor in the Fund, I remain confident in our investment methodology, our execution of this methodology and Fund’s prospects. As always, the rest is just time, patience & compounding.
3.1 The AlphaWealth Prime Small & Mid Cap Fund shall be an equity Fund.
3.2 The primary investment objective of the fund is medium to long-term capital growth, through investments predominantly in equity securities which have a market capitalisation smaller than the company with the lowest market capitalisation in the the FTSE/JSE Top 40 Index. The portfolio may also, apart from listed equity securities, invest in assets in liquid form, participatory interests in collective investment schemes and listed and unlisted financial instruments subject to prevailing legislation, as amended from time to time. At least 80% of themarket value of the portfolio must lie in shares which have a market capitalisation in the FTSE/JSE Top 40 index, or an appropriate foreign index published by an exchange. 100% of share purchases must be in this investable universe at time of purchase.