Data and information as of 30 November 2018.

 

November was a milestone month for the Lakehouse Small Companies Fund as it celebrated its second anniversary. It has been a fun and eventful ride thus far, however, our team had little time to celebrate as we navigated through a burst of volatility and held 25 meetings with current and potential portfolio companies.

The Fund returned -0.3% net of fees and expenses in November compared to a -0.4% return for the benchmark. For the fiscal year, the Fund has returned a net -0.8% compared to -8.9% for the benchmark. Since inception in mid-November 2016, the Fund has returned a net 46.9% compared to 19.2% for the benchmark.

We’re pleased that the Fund is off to a good start towards its objective of long-term outperformance, particularly given that we’ve run with a conservative cash position ranging around 11% to 16% over the past year. We do not read much into early performance, though, and neither should investors who embrace our long-term, high-conviction strategy.

Companies Held: 22
Cash Allocation: 14.4%
Top 5 Portfolio Holdings: 33.2%
Net Asset Value per Unit: $1.4024
Fund Net Asset Value: $164.5 million
Benchmark: S&P/ASX Small Ordinaries Accumulation Index

 

The Fund’s most significant contributor to performance during November was Afterpay Touch (+15.4%), which we’ll discuss (again) shortly. The most significant detractor was ELMO Software (-13.8%), which drifted downwards on no new material news. The Fund’s five largest holdings as of the end of November accounted for 33.2% of the portfolio and are named in order of the Fund’s allocation: Afterpay Touch, Altium, Pro Medicus, Gentrack and Bapcor. Longtime investors should recognise each of these names as they’ve been Fund holdings for some time.

Speaking of familiar names, the Fund continues to own 19 of the 21 companies it held this time a year ago, and 1 of the 2 companies we exited was acquired. We are always on the lookout for new opportunities — our team has opened stakes in 3 new companies in the past year and has held more than 300 company meetings since the Fund launched — but we expect these details highlight that we walk the walk when it comes to investing for the long-term.

Zooming out, the Fund’s largest sector allocations as of the end of the month were to information technology (68.0% of total capital), health care (10.1%), and consumer discretionary (5.2%), which is quite different to the benchmark’s largest allocations: materials (18.0%), consumer discretionary (13.5%), and real estate (11.3%). We continue to embrace a differentiated approach with an emphasis on companies and industries known for capital-light, recurring revenue-centric business models.

Company News

It seems there’s never a dull moment with fast-growing Afterpay Touch. The company announced at its AGM that the pre-Christmas trading environment has been above expectations, which was welcome news, and that the US launch continues to gain strong momentum. On Black Friday alone, Afterpay picked up 19,000 new customers in the US, far outpacing the same day total of 8,500 in Australia and New Zealand, which in itself was a record-setter.

Afterpay has now acquired more than 450,000 users in the US in just under 7 months, which is more than it picked up in Australia in its first 7 quarters. It’s early days for Afterpay in the US market, but the early signs are very encouraging and the market opportunity remains large. We think this strong launch bodes well for the planned push into the UK, as well.

Afterpay also received clarity on the long-awaited ASIC review into ‘buy now, pay later’ businesses during the month. ASIC’s take was more or less what we expected, which is that these businesses fall outside the purview of the National Credit Act but ASIC should have intervention powers into the sector. The finer details are yet to be seen and put into place, and we fully expect regulators here and abroad to keep an eye on this disruptive business, but we view this response as broadly favourable.

The encouraging update on the US business, continued growth in Australia across multiple channels and verticals, potential in the UK, de-escalated domestic regulatory risk, and fact that the shares traded at roughly half their previous highs, provided an opportunity for the Fund to top up its stake during the month following previous profit taking. The business continues to have a wide range of outcomes but we feel comfortable with what we think is a positive skew.

Pro Medicus also delivered big news in November when it announced a 7-year, $27 million contract with US-based Partners Healthcare for its Visage imaging technology. The deal is the company’s largest to date, has room to expand, and brings on two prestigious American medical institutions, Massachusetts General Hospital and Brigham and Women’s Hospital, that are teaching hospitals for Harvard Medical School. We continue to be impressed with the company’s success at winning large, high-profile customers and look forward to what the future holds.

Less eventful but still notable is that Gentrack also reported full year results towards the end of the month. Organic revenue grew 37% and profits grew by a lesser, but still satisfactory, 17% due to continuing high levels of reinvestment. The business added 28 new customers over the year, built further traction in its SaaS offering and continued to expand into new geographies. One of the most significant takeaways was the cautious outlook around UK growth as Brexit approaches, particularly given the UK has been the growth engine in recent years. The shares sold off a bit on the release, however, such post-release volatility is normal for this business. We also will not fault a business with such sticky customers for sacrificing short-term profit for longer-term potential upside. Our long-term-focused support here is unchanged.

Looking Ahead

December is a quieter month as the industry winds down to Christmas and people take some well-deserved time off with their families. We certainly plan to get some quality time in with ours and hope you do as well.

Thanks to all our investors for your time and trust. It is still early days but we hope that the many of you who backed us from the start feel some sense of validation. To that end, we’ll note that Lakehouse and Motley Fool staff have more than $4 million invested across our funds, plus more from family and friends. We are fortunate to have such a loyal and aligned group of investors and will keep doing our best for you.

Lastly, we’re pleased to share that Kerra McDonough has joined the board of directors at Lakehouse Capital. Kerra has served our parent company, The Motley Fool, for more than 18 years and was appointed Chief Financial Officer in February. She also sits on the board of directors of The Motley Fool. Kerra stepped into both the CFO role and Lakehouse board seat left open by Ollen Douglass, who recently took on the role of Managing Partner for the newly-created and US-based Motley Fool Ventures. We thank Ollen for his service, wish him all the best with the new Foolish venture, and look forward to working more closely with Kerra.

Best Regards,

Joe Magyer, CFA
Chief Investment Officer

The Lakehouse Small Companies Fund is now accepting new investors

The Lakehouse Small Companies Fund focuses exclusively on small, fast-growing companies in Australia and New Zealand. They’re not companies that most investors would’ve typically heard of. They’re much smaller, aren’t as widely followed, and have much more potential upside.

Investing in the Fund is a big decision for investors and it’s important to make an informed choice. Potential investors should read and consider the Product Disclosure Statement (and seek professional advice) when deciding whether to acquire units in the Lakehouse Small Companies Fund.

While the PDS is the definitive guide to the Fund, we’d welcome any follow-up questions that potential investors may have about the Fund and its strategy. Please contact us at: [email protected] or 02 8294 9800.

What should potential investors expect in the application process?

In advance of filling out the application form, (and especially if applying in the name of a SMSF/ Company/ Trust etc) we strongly encourage potential investors to watch this brief 3-minute instructional video:

Potential investors, to invest in the Lakehouse Small Companies Fund, please click the button below:

Lakehouse Small Companies Fund (ARSN 615 265 864) (Fund). The responsible entity for the Fund is One Managed Investment Funds Limited (ACN 117 400 987) (AFSL 297042). The Fund is offered in Australia and New Zealand. The information included in this message has been prepared without taking account of the reader’s objectives, financial situation or needs. All of the commentary, statements of opinion and recommendations contain only general advice. Any person reading this message should, before deciding to invest in the planned Fund, read the product disclosure statement and seek professional advice.

Sole use and confidentiality: This report has been prepared by Lakehouse Capital Pty Limited (ABN 30 614 957 603, authorised representative of AFSL 400691) and by its officers, employees and agents (collectively “Lakehouse”) for the sole use of its clients as a record of the performance of their investment. The contents of this report are confidential, and the client may only disclose such contents to its officers, employees or advisers on a need to know basis, or with the prior written consent of Lakehouse.

Disclaimer: The responsible entity for the Lakehouse Small Companies Fund (ARSN 615 265 864) is One Managed Investment Funds Limited (ACN 117 400 987) (AFSL 297042) (“OMIFL”). The information contained in this document was not prepared by OMIFL but prepared by other parties. All of the commentary, statements of opinion and recommendations contain only general advice and have not taken into account your personal circumstances. This report contains general financial product advice only. Any investment in Lakehouse or OMIFL products need to be made in accordance with and after reading the Product Disclosure Statement and Additional Product Disclosure Statement dated 15 November 2016. The opinions, advice, recommendations and other information contained in this report, whether express or implied, are published or made by Lakehouse in good faith in relation to the facts known at the time of preparation. Information is current as at the date of the letter, unless otherwise noted. Past performance is not indicative of future performance.

Limitation of liability: Whilst all care has been taken in preparation of this report, to the maximum extent permitted by law, neither Lakehouse or OMIFL will be liable in any way for any loss or damage suffered by you through use or reliance on this information. Lakehouse and OMIFL’s liability for negligence, breach of contract or contravention of any law, which cannot be lawfully excluded, is limited, at Lakehouse’s option and to the maximum extent permitted by law, to resupplying this information or any part of it to you, or to paying for the resupply of this information or any part of it to you.

Disclosure: Lakehouse, its directors, employees and affiliates, may, and likely do, hold units in the Lakehouse Small Companies Fund and securities in entities that are the subject of this report. Copyright: Lakehouse owns the copyright to this publication. Its contents may be used for your own personal use, but you must not (without Lakehouse’s consent) alter, reproduce or distribute any part of this publication, transmit it to any other person or incorporate the information into any other document.

Data is current as of 30 November 2018. Lakehouse Small Companies Fund PDS | Lakehouse Small Companies Fund APDS