The Flagship Investments Limited’s (FSI) portfolio closes out Calendar Year 2021 as it began- performing strongly, topping tables and delivering positive returns for shareholders. It achieves this through a disciplined investment process that produces a high conviction portfolio of quality-growth oriented companies.

The manager, EC Pohl & Co commenced 2021 managing $68.0 million in the portfolio and closed the year out managing nearly $93.5 million. This increase comes through a rise in the value of investments held and funds received through the issue of the Convertible Notes which trade on the ASX under the code FSIGA.

Fsi Holdings

Table 1: Source Flagship Investments Ltd

Flagship for diversification

An article recently published on the FSI website explored the diversification benefit of investing in FSI as the underlying holdings were differentiated from other LICs, this article can be read here.

It also shows how many LIC’s hold similar sector weightings to one another, while FSI weightings are unique, demonstrating that the outperformance was generated by superior stock selection. The table below is from the 2021 FSI Annual report which lists all of the holdings in the portfolio as at 30 June 2021.

Table 2: Source Bell Potter

Beating the competitors

Our final table is produced by Bell Potter LIC research and is dated 10 December.

Flagship Investments Ltd performance closes out 2021 as the best amongst peer Large & Medium Cap investing LICs for 3 years pa, 5 years pa and 10 years pa. This is for both its NTA performance and Share price performance.

While we cannot predict how 2022 will fare and we must always acknowledge that past performance is no guarantee of future success, it is clear that the disciplined investment process of the manager identifies and constructs a portfolio of quality growth companies.

We thank our shareholders for their continued support in 2021 and look forward to continuing to grow shareholder wealth through 2022.

Dr Manny Pohl AM, Managing Director of Flagship Investments Limited (ASX: FSI) and CIO and founder of ECP is interviewed by the senior analyst at Pulse Markets about the current market and FSI.

Conversation points

  • Introduction to Flagship and ECP
  • Why has Flagship been one of the top-performing Funds in Australia? @ 2:30s
  • Why do you have a bias towards Growth companies? @ 3:45
  • 12 months ago you wrote an article that was very positive about forwarding earnings particularly in quality growth companies – how do you see the market looking ahead? @ 5:45
  • Flagship has been delivering top returns for over 20 years, what is the secret to its success, and can it continue? @ 7:30
  • The disciplined process to investing @ 8:30
  • How can fund managers keep rejuvenating their own skills? @ 9:15
  • How were you the best-performing fund manager during the GFC? @ 10:15
  • How are you managing inflation risk? @ 11:15
    What would worry you more than inflation? @ 12:20
  • How can people invest in Flagship? @ 14:05

Watch the interview on Youtube here or click the image above.

Important Note: This interview is provided for information purposes only. It should not be construed as financial advice or an investment recommendation. Past performance is no guarantee of future performance. Consult a professional financial expert before making any investment decision.

The financial year has drawn to a close, and it is remarkable to consider the current position against the outlook from 12 months ago. Thinking back to July 2020 we had witnessed an unprecedented market decline and hopeful recovery against the backdrop of a worldwide pandemic. The future prospects of the economy, at home and abroad, relied heavily on the development and rollout of vaccines and the ongoing coordinated stimulus from government and federal banks. Health officials were nervous, businesses were defensive, consumers were cautious, we braced ourselves for an unknown future.

Keep Calm and Continue On

And what happened? The world kept turning, particularly in Australia, which lived up to its title of “The lucky country”. With comparably minor interruptions from intermittent lockdowns (my sympathies to the Victorians), the Australian business environment has been positive. Job keeper and job seeker packages have helped maintain employment and targeted stimulus in housing and infrastructure have assisted key areas of the economy. The delivery of the budget in October 2020 highlighted the government’s commitment to stimulate the economy and monetary policy remains favourable for spending and growth.

In the US we witnessed the end of the Trump administration. It was always going to be a dramatic affair, but I don’t think anyone expected the civil unrest that occurred. In spite of this the Dow Jones Industrial Index was up by 39% over the past twelve months Of particular interest was the activist nature of retail investors in the US against companies that had been targeted by short-sellers. In addition, during the last 18 months, the number of individuals getting involved in the financial markets has increased dramatically however the mob-like behaviours of the WallStreetBets crowd have been a truly unique phenomenon.

ASX All Ordinaries Movement FY 2021. Click to expand.

Throughout Europe, the control of COVID has been problematic with continued outbreaks occurring. Particularly in the first half of the financial year, the pandemic wreaked havoc on local economies while leaders of the EU and UK progressed with the Brexit deal. In the third quarter, like in much of the world, there was optimism surrounding vaccine progress and economic recovery with forecasts suggesting that the UK and Eurozone economies are on track to reach pre-pandemic levels by mid-2022.

In the Australian securities market, the ASX All Ordinaries increased by 26% over the financial year as vaccine-related news generated optimism, the Reserve Bank of Australia lowered the official interest rate to 0.1% and Biden won the US presidential election.

Twelve months ago, we forecast a substantial increase in the earnings for our portfolio companies which did occur and is in part the cause of our out-performance as compared to the market and of which we are incredibly pleased. This year’s annual performance of 40.7% adds to the since inception performance of 13.5% which is 9.0 percentage points higher than the ASX All Ordinaries over the same period of time.

Even though we are now coming off a much higher base, we expect the earnings of our portfolio companies to increase by approximately 12.5% per annum over the next five years. This provides some reassurance as we begin the new financial year where valuations (PE multiples) are stretched and which we expect are likely to contract by around 5.5% over the next five years from current levels. While it is almost certain that there will be further COVID outbreaks in the months ahead despite the vaccine program, the past year has shown how resourceful and resilient quality growth companies can be and this provides us with the confidence to face the new year and to make the most of the opportunities ahead of us and the ongoing volatility in the financial markets will provide us with welcome opportunities to deploy our capital.

Shareholders of Flagship Investments Limited (ASX: FSI) would be aware of Flagship’s long-term performance record.

LIC Specialist Bell Potter released their 2020 report into LICs noting the Share Price performance of LICs within their research universe. Their tables identify that Flagship Investments outperformed all peer Large and Medium cap focussed LICs overtime periods 1 year, 3 years, and 5 years- validating the investment philosophy of the portfolio manager EC Pohl & Co and the skills of the investment team.

Flagship’s 3 Year and 5 Year returns of 17.9%pa and 15.7% pa are more than double the average return of peer Large, Medium, and Small-cap investing LICs.

Source: Bell Potter LIC Report February 24 2021.

Understanding The Drivers Of Flagship’s Investment Performance

Flagship has delivered a strong performance to shareholders since it first listed in December of 2000. Bell Potter LIC/ ETF Specialist Hayden Nicholson recently interviewed Dr Manny Pohl AM to discuss the Company, its investment team, and the processes that have generated this consistent outperformance.

The interview can be viewed at the link below and for your convenience, we provide timestamps to the conversation:

  • Origins of Flagships in the ‘90s, the conundrum for new fund managers and investment approach @ 0:00​
  • Investment Style and the value of forensic research in bottom-up stock picking (including the training of buy-sell vs sell-side researchers) @ 3:00​
  • Investment Process: top quartile performance over 20+ years @ 4:20​
  • How the FSI portfolio differs from ETFs, passive and also active managers @ 5:00​
  • Not building portfolios that generate low tracking error- delivering outperformance to investors instead @ 6:30​
  • Being in the index does not mean you are a good investment @ 7:15​
  • What we want from the management team of companies we invest in @ 7:45​
  • The importance of strong balance sheets when markets have a crisis: growing economic footprints @ 8:40​
  • Origins of the “Zero management fee”. Motivated to make money for investors @ 10:00​
  • Capital management in LICs and in FSI @ 12:20​
  • Building a stable a loyal register- having the right shareholders @ 15:30​
  • Never undertaking strategies that disadvantage your shareholders @ 16:00​
  • Role of Dividends. FSI approach to creation, payment & Special dividends @ 17:30​
  • 12m month market outlook: FSI focus is always on the stocks in the portfolio. Cash in economy + Replenished balanced sheets + technological acceleration @ 20:00​
  • FSI portfolio companies are strong- the real question is: What will the multiplier be, what are the P multiples? @ 24:00​
  • Risk-adjusted IRR avoids falling for value traps @ 25:00​
  • Two recent positions in the portfolio: Nuix and Serko @27:20

Access the full report by contacting the author:
Hayden Nicholson, ETF/LIC Specialist:
Bell Potter Securities Ltd: Level 29, 101 Collins Street, Melbourne:

The 2020 calendar year is coming to a close and it will be impossible to write about the year without mentioning COVID-19 and the impact that it has had across the globe. Internationally the virus continues to spread and cause concern for health authorities while in Australia the measures taken appear to have controlled infection. This has allowed boarders to open and for the majority of Australians life has returned to a version of normal.

At the height of the pandemic in Australia, businesses needed to adapt to survive – gin distilleries became hand sanitiser producers, event staging manufacturers built flat-pack office desks and nearly every service organisation implemented a work from home program. Five years’ worth of technology adoption occurred in weeks as businesses worked out new ways of connecting staff and customers. We created a channel for #DadJokes on Slack and attended board meetings with our pets. However, something was missing: the face-to-face interaction, mentoring, and interaction that occurs within the office environment. For business leaders, these items became the next challenge for those who needed to engage with their teams and provide purpose and a sense of community when normal social interactions were not possible. Luckily for many people, there was also time to slow down, to spend time in the family unit, and to reflect on what really matters.

At Flagship Investments Limited, 2020 has been business as usual in many ways. Our Managers’ investment team have focused on the disciplined application of their investment process. A process that is based on the belief that the economics of a business drives long-term investment returns, this means that despite turmoil at a macro level it is the business itself that was assessed for viability and ongoing investment (see our commentary written in March 2020).

In accordance with the investment process the market fluctuations during the year provided opportunistic buying and positive valuations in realising investment gains. As a result, in the period from the end of December 2019 to the end of November 2020 our Net Tangible Assets increased by 15.2%, or 19.0% when factoring in dividends of 8.5 cents per share that were paid through the period, compared to the ASX All Ordinaries which declined by 0.9% over the same period.

Given the current global environment, we are exceptionally proud of the performance over the last twelve months and even more proud that this continues to build on our out-performance since inception where the portfolio has delivered 13.3% compared to the ASX All Ordinaries which increased by 4.2%. This long-term performance which translates to share price growth as well as dividends is the reward to our loyal Shareholders who continue to support the Company and we endeavour to continue this reward through a reliable dividend and capital appreciation into 2021 and beyond.

2020 has been an unprecedented year, we sincerely hope 2021 provides a more stable environment for communities at home and abroad. Happy holidays and best wishes to all, Merry Christmas.

During the month we read with interest the NTA Report* which is produced by Bell Potter’s LIC/ LIT researcher Hayden Nicholson. Flagship Investments Limited (Flagship) is identified as a strong performer as per Table 1 noting LICs that invest in Large and Medium Australian companies, with Flagship’s comparative NTA and Share Price performance well above that of its peer group.

Table 1: Source Bell Potter

If we look into the Calendar Year 2020 Share Price Performance across those LICs and LITs covered by Bell Potter (Chart 1) we can see a positive share price return by Flagship which is highlighted in Red. In addition we can see that despite the market recovering quite strongly post-Covid19, and nearing its previous highs, many share price returns of LICs have not recovered well in 2020. Indeed many of the LICs which have generated positive share price return are international and thematic LICs.

Chart 1: Source Bell Potter

Looking deeper, and using 5 year performance (Chart 2) to see who have been strong performers over a longer time frame and using NTA not Share Price so as to identify the true driver of return we see 5 outliers that have each generated a return in excess of 10%p.a. In addition to Flagship these are ACQ (Acorn – which invests in Microcap and unlisted companies), RYD (Ryder invests in Medium and Small caps), MIR (Mirrabooka invests in Small Caps) and OZG (OzGrowth – small cap/ unlisted companies with a focus on WA based resource companies).

We can also see that most LICs have underperformed the return of the market (XAOAI – All Ordinaries Accumulated Index). Indeed Cash or Bonds may have been a better investment than most of these LICs, and would certainly have delivered less volatility along the way.

Chart 2: Source Bell Potter


Bell Potter LIC/ LIT researcher Hayden Nicholson produces some exceptional research and regularly pulls apart LIC sector data to see if there are any observable trends or themes. One he measures is Discount to NTA. It should be noted that discounts are not a measure of the LICs NTA or Share Price performance but can identify trends and potential share price opportunities. Chart 3 identifies that collectively, discounts are clearly deeper in LICs with a smaller investment portfolio – by upward of 15% to their larger sized LIC counterparts. We can ask whether this discount penalty is deserved and is it based on performance.

Chart 3: Source Bell Potter

While a comprehensive answer would require a full LIC by LIC analysis, Bell Potter research provides enough information to suggest a basic answer- looking at the evidence of Chart 4 it would appear that in some instances at least, there is a significant disconnect between performance and discount, which could be based on nothing more than a prejudice against smaller sized LICs.

In Chart 4 below, we again highlight those top 5 performers to see whether the market respected their top NTA performance. While past performance is no guarantee of future performance it is nonetheless a strong indicator of management competence and ability.

What is clear and perhaps counter-intuitive is that of the LICs covered by this research, the ones which generated the best 5 year NTA performance are also those amongst those with the deepest discounts.

Chart 4: Source Bell Potter

It would appear that the market has detached itself from reality (“efficiency”) and does not look beyond portfolio size to actual performance.

At least in the instance of these smaller sized top-performing LICs this is an unfound prejudice preventing sufficient investors from paying a more realistic price to acquire future performance. And remember, they are still obtaining this at a discount, and with yield-expansion through Dividends paid on NTA.

Many LICs, such as Flagship are active in regards to promotion and awareness of their Investment Objective and Investment Performance. Flagship Investments does not rest on the laurels of strong portfolio and share price performance to extract maximum value for shareholders.

Like with Flagship’s investment portfolio performance and the direction of the lines in Bell Potter’s Chart 3, the direction of Flagship share price may be a process of “little by little… by day” until it finds a more suitable point that recognises its portfolio performance.

Nicholas Hayden holds the opinion that strong performing LICs should eventually be recognised by the market, irrespective of their size. He said:

“The LIC sector is virtually unrecognisable from 10 years ago and in another 10 may also be again. There are significantly more LICs, investors and investment strategies continuing to emerge. The sector is also primed with newfound opportunities following external shocks, wind-ups and market inefficiencies. In time these funds will be acknowledged for the utility and expertise they provide, with discounts on good performers continuing to narrow up. With many index hugging funds performing as expected, perhaps active managers need to be highlighted outside of discounts and portfolio size”

Time will prove when researchers are proven right in this. As all investors know, at the end of the day the only thing that matters is performance.

*Important notes to these charts: The author of this article has edited the original document through the use of the colour Red and has changed some chart numbers to assist with readability.

*Bell Potter Securities document disclaimer:

IMPORTANT DISCLAIMER – THIS MAY AFFECT YOUR LEGAL RIGHTS: Because this document has been prepared without consideration of any specific clients investment objectives, financial situation or needs, a Bell Potter Securities Limited investment adviser should be consulted before any investment decision is made. While this document is based on the information from sources which are considered reliable, Bell Potter Securities Limited, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Bell Potter Securities Limited does not accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities. Disclosure of Interest: Bell Potter Securities Limited receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. Bell Potter Securities and its associates may hold shares in the companies recommended. Bell Potter Securities Limited ABN 25 006 390 772 AFS Licence No. 243480. Data taken from 19 October Bell Potter NTA research document.

As stage one restrictions are lifted in Australia and we feel there is light at the end of the tunnel it is interesting to observe the reactions and actions taken by the investment community over the last 3 months. Trend data suggested that retail investors had become substantially more active across the securities market. This included increased trading frequency and the number of different securities traded per day, while the duration for holding securities decreased. This activity prompted ASIC to release a public warning about the risks involved.

But, investing in the stock market doesn’t have to be risky. Knowledge and experience are strong factors to mitigate the risk. We take a moment with our Manager, Manny (EC Pohl & Co), and ask – what does a long term investment manager do when there is so much volatility in the markets and uncertainty across the globe?

Has COVID-19 impacted the investment philosophy? Did the process change at all over the last 2-3 months?
As companies and countries responded to meet the health concerns of the community we conducted a thorough assessment of our investee company’s prospects in the current climate. Our investment portfolio comprises high-quality, low capital-intensive growth companies that have a sustainable competitive advantage. During the current challenge, we made sure that the competitive advantage was still relevant, that the company had sufficient capital to survive the downturn and maintained our discipline to the process.

Essentially saying that we made sure our investments still met our investment criteria, but our criteria did not change. We don’t know how long the current situation will last, but our investee companies are still in a position to provide excellent investment returns over our 3-5 year investment horizon. We are a long term manager so the fact that there is some short-term volatility does not impact the way we assess our investments.

We’ve heard that Warren Buffett is currently sitting on a large portion of cash – have you made a similar move?
Generally, our cash levels are maintained in accordance with our investment mandate, for example, with Flagship Investments Ltd the guideline target is 5% with a maximum cash holding of 20%. Some clients are very strict in holding to the limit, which means that as investment values change, we respond appropriately adjusting the portfolio in-line with the mandate. Other clients are more flexible with the limits, which means we can manage the portfolio in accordance with the internal rates of return (IRR). This means that when the IRR decreases we start to hold more cash, which did occur from December 2019 to Feb 2020.

Given that the market has broadly decreased from the highs in February, our IRR has increased significantly and many of our high-conviction investments are cheaper than at any time in recent history. This has presented a unique buying opportunity which is implemented in accordance with our model portfolio construction.

Understanding that we are not out of the woods yet are there any learnings/observations to date from the COVID-19 experience?
We have witnessed an incredibly unique global event which has had wide-ranging impacts on all elements of society. People are thinking about health and wellbeing as a priority, our communities, our businesses, the way we work, the way we interact, the things we value have all been disrupted in some way. And, we’re seeing individuals, communities, companies and all levels of government doing the best they can to work through this period balancing short term and long term priorities. We are incredibly grateful for the hard work of all members of society in doing their part. For our part, as the Manager of Flagship Investments Ltd and as custodians of shareholder wealth we have focused on doing our best during this challenging time and producing the best portfolio returns possible.

We have remained focused on the business fundamentals, diligently implementing our proven investment process and supporting our business partners as best we can.

News about the coronavirus (COVID-19) has been as prevalent as the virus itself, the overwhelm of information (and in some cases misinformation) has had an impact throughout the country and particularly in financial markets across the globe.

At Flagship Investments Limited (FSI) we are not qualified to assess the humanitarian impact of the virus, nor can we say how long the whole situation will last. We thank the medical and scientific community for their efforts in trying to solve the problem and caring for those impacted. We also acknowledge those leaders in the world who are providing rational, clear guidance to maintain the safety of the population.

FSI through the dedication of our Manager maintains diligent observation of events and the impacts on underlying revenue, cashflows, net assets, supply chains, etc of our investee companies. Some of this analysis comes from the public updates released to the market as well as comparison data points from private businesses who operate globally and can provide comments on a number of aspects of their ongoing operations. They continue to monitor the situation as it progresses and do not believe that drastic measures are required.

FSI maintains our philosophy to be a long-term investor and that our investments over a three to five-year period will provide superior performance. With a long-term view on the current situation, one can gain valuable context of the daily movements in the market. For example, during the SARS outbreak between February 2003 and July 2003 the ASX All Ordinaries only dropped 5.35% to 2778.4 during February and by December 2003 was at 3306.0 (+19.0%). During the GFC, September 2008 to June 2009 the All Ords moved from 5209.2 to 3937.8 (-24.4%) and by December 2009 it was 4882.7 (+24.0%). We don’t know how long the current situation will last but we can be confident that with a three to five-year horizon our performance will continue to provide Shareholder value.

On this note, we highlight that our Chairman, Dominic McGann, and Managing Director, Manny Pohl, have increased their holdings in the Company and we congratulate our Shareholders who are also taking a similar long-term view and maintaining their ownership in the Company. By avoiding the noise of the crowd and staying calm and rational the value of our Company is preserved.

Perspective comes from distance and we are looking towards the future when this period will be a blip on the charts of history.

Scott Barrett
Company Secretary

Before we begin to wind down for the year, I thought I would take the opportunity to provide some thoughts on the politics at play in the world, the continued development of our business, the performance of our portfolio, its attribution and insights into two of our recent investments.

Looking back, a new world order began to emerge over the past year. China came out from behind its Social Economic Zones to establish and challenge the “five eyes” nations of the West (Australia, USA, Britain, Canada, New Zealand) infiltrating and asserting some ownership not only across the South China seas but also in the greater Polynesian Pacific nations. Its Premier, Mr Xi, is entrenched as Premier for Life, China reverting to the governance structure of the emperors who ruled for so many thousands of years and which, until the Industrial Revolution in Britain, gave the Chinese people at large a much higher living standard than the West. As to the “Morrison Miracle”, he very smartly played a variation on the Trump election campaign, reaching out to good middle to working-class families who wanted jobs and security, who were fed up with being duded by the bureaucracy, bullied by the banks and facing soaring energy bills in a lucky country blessed with an abundant supply of cheap energy. The result was that Queensland’s blue-collar workers, many of them miners, turned almost completely against Labor, consistent with the rest of the western world where traditional belief structures and lines of authority are being questioned.

Falling global growth, the Brexit debacle and an escalating trade war between the US and China has been the dominant story on the front-pages in 2019. After President Trump and Premier Xi agreed in December 2018 to a ninety-day truce, the gloves were off in May when the US increased the duty on $200bn of imports by 25% and China retaliated by increasing the duty on $60bn worth of US goods. A truce of sorts was declared at the G-20 meeting in June, but it was merely a temporary cessation of hostilities. The good news is that the two sides have agreed to keep talking. Nevertheless, Australia, like the rest of the world, is expected to face headwinds from a slowing economy, fallout from the ongoing trade war between the US and China and escalating tensions between the US and Iran.

Global central banks, including our own, are perplexed by stubbornly low inflation and are increasingly frustrated with a lack of political action to stimulate flagging economies. In response, they are reaching for the only lever they have and cutting interest rates, with the Reserve Bank of Australia cutting the cash rate by 25 basis points in October to a new record low of 0.75%. The RBA cited concerns about the slowing economy, stagnant wages and low inflation.

After solid growth in 2017 and early 2018, the International Monetary Fund forecasts global economic growth to slow to 3.0% in 2019, its lowest level since 2008. While Australia continued its world-beating 28 year run of economic growth, strains are beginning to appear with our economy currently growing at an annual rate of 1.7%, the slowest in almost a decade.

Market Retrospective

Turning to the stock market, one could be forgiven for thinking that the world was not burning but rather booming. After financial markets slammed on the brakes in 2018 resulting in a decline of 3.5% in the All Ordinaries Accumulation Index, the index has climbed by approximately 25% at the time of writing this note. Not since 2009 when the index increased by 39.6% has the index increased by more than 20% in any one year. Within this positive environment, I am proud to share that the Morningstar survey of Australian investment managers confirms our strategies have continued to perform extremely well. The Ex50 strategy now has a six-year track record of delivering portfolio outperformance (alpha) of 7.7% per annum as compared to the benchmark. Our All Cap strategy has delivered 4.5% alpha, that is a compound return of 12.8% per annum since its inception in 1998 versus the All Ordinaries Accumulation Index performance of 8.8% per annum. Our track record places us in the top quartile of Australian Small-Cap managers over 1, 3 and 5 years and our All Cap strategy has us ranked in the top quartile of Australian managers over 1, 3, 5 and 10 years.

While the majority of the stocks in the portfolio contributed to the outperformance of the portfolio over the market, a handful of names performed extremely well which included Magellan, Afterpay and Megaport. The biggest detractors from returns over the year included Costa, Hub24 and Corporate Travel Management. At an aggregate level, all of our alpha was generated through stock selection, as opposed to sector selection and this is consistent with our style as a bottom-up, benchmark unaware, high conviction manager.

From an organisational perspective, we’ve increased our funds under management to almost $2billion and added additional support and back-office staff to ensure that we are able to deliver on all of our promises to our clients. When we founded the business, we carefully articulated our brand promise and created the necessary performance measures needed to track that promise to customers. I’m happy to say that we’ve delivered on these promises to our investors generating typically over fifteen detailed written investment reports and conducting over three hundred investment meetings over a twelve-month period.

As a custodian of other people’s money, we owe it to those who’ve invested alongside us to allocate their capital to opportunities that we believe in because we’ve done the work.

Looking externally from the portfolio there have been a number of IPOs this year. Most of the IPOs we found interesting, have been well bid and have had phenomenal share price performance as the demand for stock has far exceeded supply. It is great to see the capital markets opening up and there does seem to be a pipeline well into the new year. However, as a long-term investor with a strict investment process, we preclude ourselves from getting too caught up in the hype around most of these primary issues, even if it means leaving some short-term upside on the table in the meantime and focusing on the relative strengths of the business. The last two IPOs which we participated in were Carbon Revolution and Fineos.

Carbon Revolution (CBR)

CBR is an advanced manufacturing company that develops single-piece (Monoblock) carbon fibre wheels for OEMs. The investment hypothesis for CBR centres around the company’s ability to continue to maintain its market leadership as an OEM supplier within the carbon-fibre automotive wheel industry. We expect the company will continue to build OEM relationships, develop more programs and increase its annual production of wheels. CBR is expected to manufacture and sell 75,000 wheels by FY22, with their first mega line production facility to be in place by then, adding an additional 80,000-wheel production capacity. We expect that by FY24 the company should be selling over 100,000 wheels p.a. with the expectation that the companies’ facilities will have capacity for up to another 400,000 wheels within the next five years.

CBR’s Sustainable Competitive Advantage (SCA) is driven by innovation, technological, organisational, and reputational resources. The company’s organisational positioning, innovative practices, including their patents, high-quality and engaged workforce, and market leader status, all are valuable, rare, hard to copy and are non-substitutable. We expect these resources combined will deliver sustained growth for many years and the firm should be able to extract large sustained profits through time.

Fineos (FCL)

FCL was an IPO that was added to the portfolio during August. FCL sells software for core systems (policy administration, billing, absence and claims management) to enterprise-grade insurers in the Life, Accident & Health (LAH) vertical in a market with an increasing need for its product and limited competitive alternatives.

Our due diligence concluded that FCL is a clear product leader with no close competitor, 1% penetrated in a $10bn+ revenue opportunity, a point of which has been reached with a limited salesforce given most of the available capital has been spent on R&D, which currently comprises 50% of the FCL headcount. It has a technology, innovation and organisational SCA which allows it to exploit its core competency of product differentiation, depth and R&D leadership.

With product development largely completed, Fineos is entering the sales harvesting phase of its lifecycle with a large runway for revenue & margin expansion. We expect the current pipeline will continue to grow substantially and their $100 million revenue to double within our five-year time horizon. Finally, the business is founder-led, supported by a senior executive team that has been together for twenty years in pursuit of its long-term vision.

Sleep Well rather than Eat Well

Investment management is more than merely generating alpha in excess of a benchmark. While that is a core part of our mandate, there are other very important qualitative issues that are central to what we do. For example, we recognise that capital allocation is a vehicle through which to drive change. We have the opportunity to demand specific standards of corporate governance, decide whether specific social and ethical issues are acceptable and, if they are not, we vote with our feet.

For us, the integrity and credibility of any management team is a founding principle to our investment process. We need to trust that management have the best interests for all stakeholders and we have faith that they will make sound strategic decisions and have strong experience and capabilities in their chosen field. As custodians of our client’s capital, we have an obligation to ensure that we are doing whatever we can to preserve capital and grow it over time. We allocate capital to investments which we believe are sustainable in the long-term, and finding trustworthy, values-based management that aligns with our core values and beliefs will ensure above-average economic portfolio returns.

In cases where we feel we can add something to the conversation, we engage with the company. We have spent the better part of 18 months engaging with one particular company in our portfolio which has been transitioning from private to public life. We are pleased to announce that due to our efforts, we have managed to improve the disclosure around remuneration and the corporate governance practices of the company which should hold it in good stead in the next growth phase of its lifecycle.

Coming back to the portfolio, we do feel that the markets are relatively fully valued and do not see a major improvement in the P/E ratings of the companies from current levels. However, the short-term financial metrics for the companies in the portfolio, including organic sales growth, earnings and dividend growth, should provide the impetus for an improvement in valuations or at least be supportive of the current valuations in the future. Looking forward to next year we estimate the IRR for the portfolio to be around 12%, which is composed of roughly 15% growth in earnings and income and a 3% P/E compression. As such we have set our sights on finding a few more companies to replace those whose expected returns are declining.

As we start the new year there are some positives to consider. We have three years before the disruption of a federal election, low-interest rates will be the norm for a while and the hunt for yield in a low-interest rate world should support local shares.

In signing off, I’d like to firstly thank all clients for trusting us with the management of their savings, a task which we believe to be a privilege, and on behalf of all the staff at ECP, I wish you a very happy Christmas and may 2020 bring good health and happiness to you and your families.


Kind regards,

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