ICE Fund update – March Quarter 2026

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Transcript:

ICE Fund performance for the quarter

Welcome to the ICE Portfolio update for March 2026. Investment markets, as we know, were focused on the threat of AI risk on companies and industries during the quarter together with war and inflation in the second part of the quarter, these impacts had a negative feed through to the small company segment of the market.

The performance numbers for the fund were depressed returning minus 16.9%, and although the fund is benchmark unaware, the closest comparator, the small industrials index returned minus 14.3%. The performance of the fund was in direct contrast to the profit growth that was recorded during the February reporting period.

In fact, the consistency of profit growth was one of the strongest we had witnessed throughout the 20-year operation of the ICE Fund. So, in many instances, we saw really strong profit growth for the ICE franchises that we are invested in and yet share prices went in the other direction.

That disconnect is of course, the opportunity that we see from here. Looking at the performance numbers, which are depressed, either the process of investing in companies where the sustainable competitive advantage is broken, or the fund is supremely well positioned for the mother of all rebounds. We’ll discuss this as we go through our update.

Key drivers of performance for the ICE Fund

In the quarter what were the key drivers of performance? Two slightly off the radar Kiwi companies were solid performers for the ICE Fund during the quarter. Firstly, Port of Tauranga profit growth of 16% for its half year results. This profit growth was driven by efficiency gains and pricing power. Why does the Port of Tauranga have pricing power? Well, it’s a strategic asset. New Zealand’s largest deepwater port and its key competitor face capacity issues. Secondly, Skellerup, a global manufacturer of niche, metal, and rubber products supplying agriculture, potable water, and a host, host of niche segments across roofing, marine, and others.

Their niche often makes them a critical supplier or component for a company, their customer, and this focus provides for pricing power again and customer stickiness. Skellerup delivered profit growth of 20% for the half year. Both of these names are classic ICE franchises, a little off the radar. A third name was GQG, the Global Fund Manager, A stock we recently added back into the fund late last year.

Their franchisees, based upon the strength of their global reach, their relationship with investors, their ratings, and deep connectivity with key asset consultants. They’ve had a dip in performance over the last year or so. They stuck to their process, and you can see their numbers coming back strongly over the last six months. Light and Wonder was a key detractor from the fund. This was despite strong profit results. The company restating future profit targets and the resolution of an IP issue with a competitor in the quarter. That has been an overhang on the business and share price. The share price has been weak on the back of concerns that AI may enable startups to compete in their segment. Quite simply due to regulatory and licensing requirements, we don’t see this happening. Hence, we’ve continued to add to this position in the fund.

The current fund positioning for the ICE Fund

How is the fund currently positioned? Well, the positive news is what we believe to be compelling valuation appeal for stocks in the fund. In many instances, as stated, we’ve seen profit growth and share prices go backwards. This does not make sense from where we sit. Throughout what was a frustrating quarter, we continued to add to our existing positions to call out a few names where we see really attractive valuations or in our language, internal rate of return. Baby Bunting is a clear category leader in the baby segment.

Since Mark Teperson started as CEO, the transformation has been super impressive. Changes to store layout, customer experience, product ranging and behind the scenes a whole lot more. We expect this management has a lot of levers to pull in terms of cost, selling margins, procurement, exclusive deals, purchasing power, and more behind the scenes, all supported in the short term by the benefit of a strong Australian dollar. Again, we have recently added to this position.

The insurance brokers, AUS Brokers and Steadfast long-term holdings in the fund. Very sticky customer base in SMEs who rely on independent advice for complex insurance needs. Again, some concerns that AI will disrupt their industry. We simply don’t believe this will happen. Complex licensing, financial regulation, and simply the need for independent advice makes the existence of insurance brokers compelling. To be really clear, we do see threats and opportunities from AI across various segments of the workforce and industry. We are absolute believers in the productivity benefits of AI, and indeed, we’re heavy users and early adopters ourselves. But as discussed, we simply don’t see the threat to insurance brokers in their core SME focused activity.

ARF, the childcare landlord, or property owner. This company has long dated leases tied heavily to CPI increases. Their assets are well positioned. They have low debt, fully hedged interest or near to, and their CEO has been buying stock recently. The assets, well, again, they’re well positioned and it would take an incredibly long time to accumulate this number of assets and hence why we’re invested in ARF.

Have we made any changes to key positions or other in the portfolio? We added to several existing holdings, particularly those names we considered to be unfairly dealt with on potential AI concerns. These included Aus Brokers, Light and Wonder as discussed, and IRIS. We have started to begin and build several new positions, which I look forward to discussing once we’ve fully completed our buying.

We did, however, purchase and participate in the recent IPO of the Koala Company. Koala designs all products in-house and sells predominantly through its own digital channels, giving the business full command over the customer experience from first click to final delivery. Its core offering centers on sitting furniture, sofas, sofa beds, and armchair complimented by mattresses and a thoughtfully curated homeware range.

The company operates across four markets, Australia, Japan, the United States, and the United Kingdom. We believe it’s a distinctive force in the direct-to-consumer retail space, offering premium designer led furniture with a clear and consistent brand identity. The company retains end-to-end control over design, brand and customer experiences.

The products are engineered for fulfillment, efficiency, simplicity of packing and assembly. A key thing which anyone who’s ever gone to IKEA will understand. The market share opportunity globally is huge.

We took profits in several of our holdings early in the quarter. Including MA Financial, SRG, global, the Port of Tauranga as discussed and ResMed.

Reasons to invest in the ICE Fund

So looking forward, what are the reasons to invest in the ICE Fund? Looking at the performance numbers, which again are depressed, either the process of investing in companies where a sustainable competitive advantage is broken, or the fund will have the mother of all rebounds. Two key reasons – we see compelling opportunity in the fund, in aggregate, and I’ve called out various key holdings and -positions we’ve added to, to give you a bottom up flavour of where we’re invested and why we see a valuation disconnect with the profit performance of stocks in the fund and the share price outcomes.

Secondly, and if you’re investing today, the fund has been going for over 20 years. And we can show times where periods like this in terms of performance have happened and the results demonstrate a strong rebound going forward. In fact, there were three previous episodes where the ICE rolling one year return was more than 9% below the small industrials.

From the low, the one-year excess return versus the small industrials moved into positive territory within 14, four and nine months for each episode respectively. And then finally, the peak in one-year, excess return following the low was 4.7, 17.6 and 8.6 respectively. So that is what we’re focused on. And again, thanks for your support and interest today.

*The text has been edited for clarity.

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Disclaimer

This fund update has been prepared by SG Hiscock & Company (SGH) to provide general information only and is not intended to take the place of professional advice. It does not take into account the investment objectives, financial situation or particular needs of any particular person.

Equity Trustees is the responsible entity for the ICE Fund. Neither SGH, Equity Trustees nor any of its related parties provide any warranty of accuracy. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product. Follow the link for the full disclaimer: https://sghiscock.com.au/podcast-disclosures-and-disclaimers/.