• Sean Rapley

October 2020 - Luke's Fund Update

The ASX 200 was up approximately 1.0% for the month of October, and we are pleased to report Luke's Fund achieved a return of 6.3% over the same period, bringing the Fund’s current returns for FY2021 to 51.7%. We have enjoyed exceptional returns yet again this month, with the top two contributors to the performance over quarter being:

  1. AVA Risk, which contributed 40.6 % of the returns over the quarter. AVA Risk announced its maiden annual profit, reported exceptional revenue growth, cost control, and a special dividend. With the majority of its high margin IMOD contract being delivered over FY21, along with continued strong performance in the Services Division, AVA Risk’s share price continued to rally over October.

  2. Talga Resources, which contributed 9.4 % of returns of the quarter. Talga is recent addition to the portfolio, and we believe the business will benefit from competitive advantages of the unique attributes of its natural resources, its developing intellectual property, its vertically integrated business model, and its geographical location. We’ll prepare a blog on Talga Resources, following the release of the Niska Study, which will be released in November.

The top two detractors for the quarter were:

  1. Selfwealth, which contributed -15% of the returns over the quarter. Selfwealth , as expected continued to grow active traders at a rate of around 4 000 per month. However, Selfwealth report relatively soft revenue growth compared to Q4 2020, and this appeared to disappoint the market. However, the results were better than we expected, as Q1 results are traditionally weak in comparison to Q4, where there is increased trading activity due to tax loss selling. We expect Q2 may also be a little soft leading into the holiday period, then accelerate again in Q3 and Q4, as has been the case over the past 3 years.

  2. Pointerra, which contributed -14% of the returns over the quarter. As expected, Pointerra’s share price pulled back to more reasonable levels, following its Quarterly Cashflow Report. The receipts for Q1 2021 were below what seemed to be expected by the market. However, there is a substantial lag between ACV being recognised, and cashflow. We are impressed by the rapid growth in ACV, which ahead of our previous expectations.

Our gold hedge portfolio returned 5.1% for the month (vs a gold price change of 0.2%). As at the end of October, the precious metals portfolio is 13.7% of the fund portfolio.

Notable changes to the portfolio included:

1. We closed our position in EML Payments, which was a relatively small position in the portfolio. Given the bleak pandemic outlook for the Northern Hemisphere, we expect their gift card segment to continue to be a drag on results. Weighing this downside risk against it's relatively high valuation, we considered it prudent to close the position.

2. We increased our A2 Milk holdings, taking advantage of recent weakness in the share price. We remain optimistic of the opportunity A2 Milk has before it, and believe the near term weakness attributable to the Daigou supply channel disruptions as a short term setback.

3. We also increased our gold bullion holdings during the month. Our preference is to hold gold in lieu of cash for two reasons. Firstly, it will preserve purchasing power over the long term in comparison to cash/bonds, considering negative real bond yields, and secondly, it prevents 100% of capital being deployed in equities, which is the tendency of this fund manager.

We are very pleased with our year to date performance. We do not anticipate the exceptional returns earned to date can continue, but we are confident that the majority of our investments have the resilience to withstand what may well be turbulent months, (and years) ahead. All of our businesses have strong balance sheets, and the majority of our current holdings have either benefited from, or avoided negative impact, from the COVID-19 pandemic.

If you have any opinions on the companies we hold, or what like to know more, we would love to hear your feedback.

Regards,

Sean

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