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Microequities firm profit down, segment in flux

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Sydney boutique fund manager Microequities Asset Management (MAM) saw its profit and funds under management dive in financial year 2019, with the company citing challenging conditions for the small-cap space.

Recurring revenue for the company dropped by 8.2 per cent from the prior year to $6.4 million, while operating profit from recurring revenue fell by 12.8 per cent to $3.3 million. 

The company’s underlying profit after tax was $3 million, near half (45.1 per cent) of what it made in the prior year, while statutory profit after tax was $2.5 million, down 51.4 per cent.

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Funds under management with the group sunk by 21.3 per cent from the prior year, down to $340.1 million.

Performance fee income for MAM plummeted by 72.6 per cent to $960,403, as other revenue for the group plunged by 90.1 per cent to $69,555.

MAM noted a growing market share of passive index funds making observers question the viability of active fund managers. 

MAM chief executive and chief investment officer Carlos Gil said the company had counted 14 of its competitors in the microcap and small-cap space closing their doors over the past year.

He added the closures were due to a “combination of industry super funds insourcing asset class capability, fund managers being subscale, prolonged poor investment performance and continued growth of index investing.”

“The forced selling of these exiting fund managers as well as the reduced number of competitors in our asset class has exacerbated pricing dislocation and market inefficiency,” Mr Gil wrote in his letter to shareholders.

“Pricing inefficiency may have affected our FY19 investment performance but, as value-based investors, we are not going to complain one iota about industry conditions that have only accentuated pricing inefficiency and obfuscated price discovery. The seeds of our future have been truly planted on highly fertile soil.”

MAM said many of its investee companies lie within microcap and small-cap asset classes facing highly depressed market valuations, which “were at or near GFC levels.” Meanwhile speculative and fast-growing businesses were reported to have seen “extremely inflated valuations.”

“The consequent dichotomy of these two valuation extremes has led to short-term marked-market underperformance of our domestic investment funds, with a consequent negative effect on our funds under management and business,” Mr Gil said.

“We know from many decades of investing that the current value bifurcation is not only completely irrational but, more importantly, totally unsustainable and these extreme valuation imbalances will inevitably correct. The present underperformance is simply laying the foundation for future periods of strong outperformance.”

In FY19, MAM launched its Value Income Fund for retail investors, which it reported will become available on a number of investment platforms in FY2020.

The board declared a 1 cent per share fully franked dividend. 

Speaking on the fund manager’s future, Mr Gil commented: “The increase in index funds has exacerbated the very conditions that make value investors get up feeling excited about the asset class each morning, namely: indiscriminate capital allocation accentuating severe pricing inefficiency.”

“Our job and task for FY20 is to articulate the tremendous investment opportunity we see ahead of us to those investors that are not cognisant of it, and to point them toward our undervalued investment funds.”

 

Microequities firm profit down, segment in flux
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

Sarah has a dual bachelor's degree in science and journalism from the University of Queensland.

You can contact her on [email protected].

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