Top fundies reveal their picks for the year

Fund managers love an investor letter. Plenty grew up reading Warren Buffett, and now pen their own. Here are the pick of the FY23 investor letters to hit our inbox in the past fortnight.

Updated Jul 23, 2023 – 12.37pm,first published at 11.04am

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It is that time of year for fund managers: boast about winners, seek forgiveness for sins, and try to keep the faith for another trip around the sun.

Investor letters are flying around the market like confetti, revealing performance for the past financial year, a view on the market, and a few stock tips for clients to think about for their personal accounts.

The letters range from one-page June updates, quickly tossed or ignored most months, to a few page quarterlies or lengthy annual or semi-annual musings. The Warren Buffett acolytes tend to have the longest letters, and the firms that skip the asset consultants and go directly to wealthy families and endowment funds for support.

Caledonia co-chief investment officers Mike Messara and Will Vicars say the era of “free money” is over. David Rowe

The hottest letter on Sydney’s George Street is out of Caledonia (Private) Investments, whose big and concentrated bets can cause wild swings in performance. It has upped investor communication after a horrible 2021 and 2022, now publishing a twice-a-year “valuation handbook” with cash flow forecasts for its five core holdings to remind clients it is thinking long term.

The ex-Caledonia brigade now running their own boutiques and targeting the same sorts of clients put a similar amount of thought into their own investor letters.

Rob Luciano’s letters at VGI Partners, for example, were lengthy, although he’s now out of action. Marcus Hughes at LHC Capital is keeping the flame alive, along with a pair of former Luciano deputies: Doug Tynan, now running Sydney-based GCQ Funds, and Robert Poiner, who started Edgeworth Capital in New York, named after Edgeworth the explorer who led the first successful expedition to reach the South Pole. Tynan and Poiner had 10-plus page letters out last week.

We also keep an eye on Australian equities investor Auscap Asset Management, whose missives are normally rich in Australian Bureau of Statistics data and economics, reflecting author Tim Carleton’s approach.

Melbourne-based L1 Capital’s quarterly is good for markets-based charts (the Freightos Baltic Index, for example, which has fallen off a cliff) and its focus on valuations in the US and Australia.

While everyone reads the performance number, the letters are as much about the stock picks. And sometimes in small caps land, a manager can unearth an original idea – Sydney’s 1851 Capital, for example, likes the look of electrical goods distributor IPD Group, which is completely under the radar.

Small caps are worth watching this year, having come off a tough 18 months and due to rebound at some point. There are early signs it is starting to play out. Among the small-cap managers, the letter from Melbourne’s OC Funds, whose flagship fund did 16.5 per cent in FY23 to lead its cohort, had ample stock picks, including an interesting new idea.

The letters quickly make their way around the small but highly competitive funds management industry, where everyone knows each other and they live and die by their performance.

Most managers recorded decent returns in FY23, boosted along by roaring markets. The S&P/ASX 200 accumulation index was up 14.8 per cent in the year to June 30, the small caps accumulation index gained 8.5 per cent, while the MSCI World gained 18.9 per cent in Australian dollar terms.

Here’s our picks:

OC Funds

Performance: Plus 16.5 per cent in FY23 (OC Premium Small Companies Fund); 11.1 per cent a year over three years.

View of the market/investing: Despite all the doom and gloom in the media, the small-cap space bucked inflationary pressures and rising interest rates to finish the financial year comfortably in positive territory.

Key picks: Cettire, Temple and Webster, and Telix Pharmaceuticals. Top five holdings were APM Human Services, AUB Group, Kelsian, Mineral Resources, and Seven Group.

Cettire: A recent addition to the portfolio. A strong emphasis on technology sits at the heart of the company and underpins its operations. Founder and major shareholder Dean Mintz has a background in computer engineering and spent three years developing Cettire’s back-end technology. The result is a business that is highly automated and has attractive unit economics. The opportunity for Cettire is still nascent, despite its rapid growth. It has less than 1 per cent share of the global online luxury market and is less than one-tenth the size of Nasdaq-listed Farfetch, a competitor. Watch for further direct brand partnership announcements.