Roger Walling - ICE Fund Quarterly Update

ICE Fund – Quarterly Update

26th Jan 2024

December 2023 Quarter

What were the key drivers of the ICE Fund performance during the December quarter of 2023?

The ICE Fund had an excellent quarter, gaining 5.5% net, and rounding out the year gaining 15.5% for the past 12 months.

We are a benchmark unaware fund, but for context, we highlight that for the year the S&P/ASX Small Industrials Index returned 11.4% pa, and the S&P/ASX Small Ordinaries 7.6% pa.

The contributors across the fund were broad. It’s pleasing to see some good share price returns, but equally, it’s pleasing to see the business progress of the franchises in which we invest.

For example, Temple and Webster reported very strong sales growth coming out of COVID. Their revenue growth is now in the 20% range. They’re Australia’s #1 online retailer for furniture and homewares, and they continue to gain market share in what’s arguably quite a tough retail market.

Catapult are the world-leading software and performance software business. They’re growing sales strongly and adding customers.

Corporate Travel are continuing to gain share in the corporate travel segment as customers return to travel as that element normalises after the pandemic.

Finally, James Hardy continues to gain share in the American market of homes and building products.

Four companies we highlighted there, but again, there was very broad performance across the portfolio.

How is the portfolio positioned?

 The last two years have actually seen the large-cap segment of the market materially outperform the small cap segment of the market. Where we sit today, we see a significant relative opportunity in the positioning of the large versus the small and obviously the opportunity in that small segment of the market.

The portfolio is positioned as always in business franchises. ICE seeks companies with assets that are difficult to replicate, with sticky customers that are well-managed by the business, and where we see good solid returns for our investors in terms of the price we pay for those assets.

Some examples of those business franchises include:

GUD – an automotive parts supplier, very sticky customers, very solid demand.

GQG is an international fund manager that’s got stellar performance and is attracting decent inflows through its business and continues to grow.

PC Insurance, again, is a very well-positioned business in the insurance market, a key provider of services in that SME market, understanding and explaining insurance to a broad range of customers.

And finally, Carsales, one of our long-term holdings within the fund, has fantastic market share, dominates the eyeballs for vehicle sales in Australia, and has three very fast-growing international businesses. So, those are four examples of how the portfolio is positioned.

Has this position changed during the quarter?

We have made some changes to the fund in the context of the philosophy of the ICE fund, which is completely unchanged. And the process we apply is, of course, unchanged as well. We’re seeking those companies with assets that are difficult to replicate and with sticky customers.

Two changes of note – one is the IPD Group. They’re a leading provider of electrical equipment, a distributor across Australia, an owner-driven and founded business. They provide a lot of equipment which is going to drive the energy transition for the changing energy demands of the country. We added a position in this company as part of a capital raise.

We also added a position in Sigma Healthcare. Sigma is a pharmaceutical distributor providing necessary medicines to pharmacists and other businesses across Australia. During the December month, they announced the merger with the Chemist Warehouse Group. We now have a leading pharmaceutical distribution capability, combined with Australia’s leading pharmaceutical retailer and some really strong IP within that Chemist Warehouse group. This position performed strongly already within the quarter.

We increased our holding in Macquarie Telecom, a data centre provider, very much in demand services. Macquarie specialises in the provision of security and special services to governments as well – a very hard-to-replace asset.

We added to GQG, an international fund manager, which again is getting very solid inflows and backed by solid performance.

We exited Bapcore. We think that Bapcore was failing our sticky customer test in terms of revenue and the expectations we had for that business.

We also took some profits in Temple and Webster, as we discussed, and James Hardy.

Why should investors consider ICE Fund now?

ICE focuses on small and mid-cap industrial franchises. We’ve observed in the last two years that the small cap segment of the market has materially underperformed the large cap segment of the market. On that basis, we see a relative opportunity versus large caps.

Most critically in terms of the stocks within the fund, we have positive disposition about the earnings power of the franchise stocks within the fund. We’ve continued to observe our franchise investments gaining share and execute on their business models.

We see a solid outlook for double-digit earnings growth expectations for the fund on a look forward basis.

So those elements combined with what we see as an attractive entry price and Internal Rate of Return for stocks within the fund is why we excited about the year ahead.


The text has been edited for clarity.

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