Ranger Fund 

The Ranger Fund was up for the quarter but lagged most major equity markets, except for Australia, which suffered from continued bad news from its banks. Most markets continued to benefit from low interest rates, monetary support and hints of fiscal stimulus. The theme of this quarter is broadly similar to the theme for the year, Ranger solidly up but well short of a rampant New Zealand equity market. 

Afterpay, Redbubble and Swick were the largest performance detractors for the quarter, while Macmahon and Kogan were positive contributors.  Afterpay and Redbubble are early stage businesses, which makes the share price volatile and sensitive to news. Redbubble demonstrated this in December when it released a trading statement with slower growth than the market expected, resulting in a dramatic 40% price drop.  We take a considered approach to trading statements, anyone who has run a business will tell you how hard it is to predict demand over a short period. Investors often get spooked and basic fight or flight instincts cloud rational judgement. In the past we have often used these times as opportunities to buy more shares at discount prices. 

While we often buy on negative trading statements, this wasn’t the case for Vista Group. Vista Group has continued to struggle to monetize its Movio division which, in our opinion, was a large part of the valuation upside for this business. While Movio is still likely to find a profitable business model, it is looking more likely as a platform than a data provider. This along with a transition of the core business to SaaS makes the outlook less certain and as a result we have exited. 

We also exited Napier Port as its price reached our target and Wellcom, which was taken over and delisted. If all our investments could be like Wellcom we would be very happy. An exceptionally well run and innovative business in a supportive industry. The management team was aligned, experienced and conservative and never tried to court the market and pump the share price. We wish them well. 

We added Retail Food Group, Sezzle and MoneyMe to the portfolio over the quarter. Sezzle and MoneyMe are currently small positions and opportunistic toeholds. Retail Food Group is a more sizeable investment and right in our sweet spot as a value candidate.  

Retail Food Group is a food franchisor of well-known Australian brands such as Donut King. It was once a market darling but, in our opinion, acquired badly and was managed poorly. It ended up with a large and complex head office with a focus on short-term profit growth and poor attention to long-term health of its franchisees. Deterioration in operations and high debt resulted in board & management changes and severe financial distress. The new management team are experienced in turnarounds and have an excellent record and reputation. The recent recapitalisation of the company, which we participated in, and attention to the core business, which is profitable and highly cash generative, in our opinion, should result in substantial upside. 

5 Oceans Fund 

The 5 Oceans Fund had a modest positive last quarter in 2019 but lagged slightly its Cash + 3% objective over this period. Overall 2019 was a very solid year with the fund nearly 4% ahead of its objective for the full year.  

Locally, over the quarter both the Ranger and Trans-Tasman Funds contributed positively with Trans-Tasman helped by a strong NZ market. Globally, both Acadian and Schroder delivered positive contributions when you include the currency hedging, we had in place. Schroders though was the standout up nearly 8% (in AUD) even before the positive impact of hedging.  

Bonds were also material contributors as yields generally compressed with all managers and the direct bond holdings positive over the quarter. T. Rowe Price had a poor 2019 though it was pleasing to see them post a strong December which hopefully bodes well for 2020. 

The Kohinoor tail-risk strategies, as one would expect, muted the overall returns given strong markets and generally benign volatility. However, we remain very comfortable holding these to ensure we are protected against market sell offs as we head into 2020. 

Trans-Tasman Fund 

The Trans-Tasman Fund was up for the quarter but lagged the New Zealand equity market. Most markets continued to benefit from low interest rates, monetary support and hints of fiscal stimulus. Australia suffered from continued bad news from its banks. The New Zealand equity market had a particularly strong quarter, and year! I don’t think many were predicting it to be up over 30% for the year. We certainly weren’t. We were therefore delighted to have outperformed the market for the year despite, in our opinion, being defensively positioned. 

Macmahon was the largest positive contributor to performance for the quarter as its price recovered from the effects of negative news in earlier months.  

Afterpay and Redbubble were the largest negative contributors. Afterpay and Redbubble are early stage businesses, which makes the share price volatile and sensitive to news. Redbubble demonstrated this in December when it released a trading statement with slower growth than the market expected, resulting in a dramatic 40% price drop.  We take a considered approach to trading statements, anyone who has run a business will tell you how hard it is to predict demand over a short period. Investors often get spooked and basic fight or flight instincts cloud rational judgement. In the past we have often used these times as opportunities to buy more shares at discount prices. 

While we often buy on negative trading statements, this wasn’t the case for Vista Group. Vista Group has continued to struggle to monetize its Movio division which, in our opinion, was a large part of the valuation upside for this business. While Movio is still likely to find a profitable business model, it is looking more likely to be as a platform than a data provider. This along with a transition of the core business to SaaS makes the outlook less certain and as a result we have moved to a neutral position versus the benchmark index. 

We exited Napier Port as its price reached our target and Wellcom, which was taken over and delisted. If all our investments could be like Wellcom we would be very happy. An exceptionally well run and innovative business in a supportive industry. The management team was aligned, experienced and conservative and never tried to court the market and pump the share price. We wish them well. 

We added Retail Food Group and MoneyMe to the portfolio over the quarter. Sezzle and MoneyMe are currently small positions and opportunistic toeholds. Retail Food Group is a more sizeable investment and right in our sweet spot as a value candidate.  

Retail Food Group is a food franchisor of well-known Australian brands such as Donut King. It was once a market darling but, in our opinion, acquired badly and was managed poorly. It ended up with a large and complex head office with a focus on short-term profit growth and poor attention to long-term health of its franchisees. Deterioration in operations and high debt resulted in board & management changes and severe financial distress. The new management team are experienced in turnarounds and have an excellent record and reputation. The recent recapitalisation of the company, which we participated in, and attention to the core business, which is profitable and highly cash generative, in our opinion, should result in substantial upside.