Coffee Microcaps July 2022 Newsletter
Hi Everyone
Welcome to this month’s edition of the Coffee Microcaps newsletter. It’s pretty late, but that is because I have been busy compiling the performance review for the bulk of the microcap funds and LICs in Australia as we are at the end of Q4 FY22. As it is also the end of FY22, many newsletters, factsheets etc., were out late owing to the extra work of finalising year-end distributions from all these managed funds. The performance figures used below are those reported by the funds and the LICs in these newsletters and factsheets. If some data is missing, it’s because the funds don’t report it.
June 2022 saw one of the worst months for ASX microcaps. The small-cap and large-cap end town weren’t spared either, to be fair. It did, however, culminate in FY22 being one of the worst years for Australian investors of all hues for quite a while.
To underscore just how bad it was for Australian microcap investors, just look at the table below I compiled of the five worst months for the S&P/ASX Microcap Emerging Companies Index Total Return. While not as bad as March 2020 or multiple months in 2008, June 2022 was still up there. The index has been running since Jan 2004, so it is number 3 out of 222 months which is a decent sample size of returns.
On a positive note, July 2022 looks much better, with only the last trading day to come. It looks like we will recover some of the losses and get FY23 off to a good start with the S&P/ASX Emerging Companies Index Total Return up 13.18% for the month of July as of the close of business on Thursday, the 28th of July.
Microcap Fund Manager Review Q4 FY22
As noted above, the big pullback in June also compounded into a miserable quarter and turned the index negative on a 1-year basis. While on a relative basis, small and large cap equities faired better, these sections of the Australian equity markets also suffered significant falls by their own standards.
International microcap markets fared slightly better, just for some context, but it was a pyrrhic victory over the Australian market when you zoom out and look at some of the longer returns over 1 and 3 years versus the Australian market.
Australian active microcap fund managers, at least on a relative basis, managed to outperform generally over the month and the quarter, but on longer timeframes, they have struggled to outperform the index. This is unusual compared to their performance history over the last few years that I have been tracking these numbers, as most fund managers have outperformed the index over longer timeframes. Let us see how they bounce back in Q1 FY23.
As has been the case for the last few years, microcap LICs tend to underperform their managed fund cousins and the index more broadly as a cohort. Given the closed-end nature of the LIC vehicles won would expect the opposite, but the evidence continues to dispute the theory.
Coffee Microcaps Zoom Webinar Events
For anyone who doesn’t know, I regularly host presentations from ASX Microcap companies via Zoom Webinar. These events normally happen on Thursday morning from 9 am - 10 am Sydney time, with two companies presenting.
I would like to thank DMX Asset Management for sponsoring all the Coffee Microcaps Virtual events.
The ASX Microcap companies that present generally have the following 4 criteria.
•Under AUD$300m in market capitalisation
•In revenue and approaching cashflow breakeven or already profitable
•Outside the resources and biotech sectors
•"Industrial Microcaps” In other words, microcap technology, financial services, consumer goods, industrial products or services business, healthcare, stocks etc.
I have created a separate email list for invites to these Zoom events so that I am not spamming all of my subscribers. If you would like to be added to the events list, please email me at mark@coffeemicrocaps.com, and I will get you added. I would love for you to join us for these events. These events are free to attend.
Coffee Microcaps YouTube Channel
All the Zoom events get recorded and uploaded to the Coffee Microcaps YouTube Channel. As well as the ASX microcap company presentations, I do interviews with leading ASX Microcap Fund Managers on some of their top picks. Occasionally, we have presentations or interviews with some international microcap investors. So if you can’t join the Zoom webinars due to work, kids, life, or whatever, you can subscribe to the Coffee Microcaps YouTube channel and just hit the bell for notifications of when new content gets added.
I added a stack of new content recently to the channel. You can click on any of the links below to watch these presentations.
Also, if you look in the description section of each video on YouTube, it has the relevant chapters, so you can jump to the start of a specific company presentation if that’s what you are after in a particular video.
Microcap Fund Manager Interview Series 10th of June
Peter Johns from The Westferry Fund, where we discussed
Sequoia Financial Group Limited (ASX: SEQ)
Ashley Services Group Limited (ASX: ASH)
Coffee Microcaps Morning Meeting 23rd of June
AVA Risk Group Limited (ASX: AVA)
Rocketboots Limited (ASX: ROC)
Kelly Partners Group Holdings Limited (ASX: KPG)
Clime Investment Management Limited (ASX: CIW)
Coffee Microcaps Morning Meeting 30th of June
Selfwealth Limited (ASX: SWF)
Book Recommendation
As part of this newsletter, I also want to highlight some good content worth sharing with my subscribers. Hopefully, the content will be something subscribers will also enjoy and get some value from.
This month I wanted to give a shout-out to a book which is over ten years old but which I just read called The Small-Cap Advantage: How Top Endowments and Foundations Turn Small Stocks into Big Returns by Brian Bares, who is a well-known microcap and small investor from the US and founder of Bares Capital Management. Brian mainly runs highly concentrated (6-10 stocks) in microcap and small-cap strategies and has a stellar track record. In the book, he talks about the many advantages of looking for good investments down the smaller end of the market. Brian is a super smart guy, and the book is packed with many great charts and data points, albeit from a USA standpoint. He also provides some great insights and experiences from his own investing journey.
I would also recommend this guest lecture which Brian did a few years back at a local Texas University where he is based. Brian talks about his investing process and also gives some really great answers to student questions.
Thanks for subscribing
Mark