Calendar-year-to-date the S&P 500 Index is down 18.1% and the MSCI All Country World Index is down 17.6%. The technology-heavy Nasdaq 100 Index has outpaced these drawbacks, wiping off market cap in a 27.5% pull-back. Market participants are becoming increasingly worried about economic and interest rate risk, with negative sentiment this time throwing the baby out with the bathwater. Risk aversion around the speculative end seems warranted and due when considering fundamentals. Software as a Service (SaaS) companies have tended to trade at an average price to sales ratio of 13.6x over the last two years, before curtailing to 9.8x currently the on prospects of a withdrawal in US Federal Reserve liquidity, shock inflation data and expectations of multiple and consecutive interest rate hikes. However the loss of appetite on long-duration assets has now also broadened to include some of the previously perceived safe havens.
As highlighted last week, premiums and discounts are reactive to the market, with MFF Capital Investments (MFF) now trading at a 16.8% discount to its pre-tax Net Asset Backing. The Company, however, remains exposed to a concentrated number of advantaged global businesses in which Managing Director and Portfolio Manager Chris Mackay has cited “[have] high probabilities for continuing profitable growth well beyond current inflation, interest rate, stagflation, geopolitical, pandemic, economic and other challenges”. April volatility presented attractive purchase prices for core holdings, with modest additions in high conviction names occurring throughout the month (~4.5% of Portfolio Value). Couple this with the fact that the Company’s 20% borrowing capacity remains underutilised. Net debt as a percentage of investment assets was 8.6% at the end of April.
Expect more noise with momentum, but this provides additional margins of safety on long-term prospects for valuations attributed to businesses on the secondary market. Add to this that large tax payments continue to be incurred as a result of profitability, in turn suppressing the NTA. Long-term holders, however, will reap the benefits with corporate tax paid on profits, increasing the degree of imputation credits that inevitably pass through shareholders as fully-franked dividends.
Beneficiaries in a Market Dislocation
Global Value Fund (GVF) specialises in providing an alternative source of market outperformance over common global equity selection strategies, with similar through-the-cycle returns, but at a risk profile that is deemed to be materially lower; by identifying and capturing the value presented by arbitrage opportunities and discounted assets globally. The Manager has historically favoured closed end funds trading at a discount to their intrinsic or book value at which each individual asset could be sold for. Investor de-risking may present a larger opportunity set of adequate or extreme risk-adjusted returns. Asset discount contraction is released through a proprietary series of active and passive engagement strategies while also participating in the return on each underlying investment.
L1 Long Short Fund (LSF) implements a variable beta strategy aimed at lowering volatility relative to the broader Australian market through-the-cycle, while also exhibiting a mild value and contrarian style bias. The portfolio has performed strongly due to detailed, bottom-up stock picking, bearing fruit over reporting season, together with long exposures to resources and short positions in overvalued high P/E stocks. Add to this the fact that global equity markets are predicted to remain volatile amid geopolitical tensions, fragility in supply chains, reduction in central bank liquidity and increasing cash rates. Blending this variable beta strategy into portfolios can bring benefits of the approach which can include: reducing risk on the downside without sacrificing upside capture, shrinking the magnitude of drawdowns and the potential to enhance risk-adjusted returns.
The Indicative NTA works best with LICs that have a high percentage of investments concentrated in its Top 20, regular disclosure of its Top 20, lower turnover of investments, regular disclosure of its cash position and the absence of a performance fee. We have also included an adjusted indicative NTA and adjusted discount that removes the LIC distribution from the ex-dividend date until the receipt of the new NTA post the payment date. This report is published each Monday prior to the market open and is available on a daily basis. Intraday indicative NTAs will be available on request through your adviser.
For full details refer to the detailed report below or click here to download your copy.