Ask A Fund Manager
The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Cyan Investment Management portfolio manager Dean Fergie tips 2 ASX shares flying under the radar in very niche sectors.
Investment style
The Motley Fool: How would you describe your fund to a potential client?
Dean Fergie: It's the sort of fund that if an investor had the time and expertise to trawl over the smaller stocks in the ASX with the best potential and the lowest risk, our portfolio is a collection of those businesses. We avoid certain sectors that we think are quite high risk — like resources and biotechnology — but we aim to, as much as possible, find the next big stocks. The ones that have got potential, but that are not really at the early stage as such.
Everyone's got one or two stocks in their portfolio that they really like because they know really well, or someone's given to them cheap and they end up being really great performers. We like to think we've got 20 of those in our portfolio because it's what we do, spend time.
And we've got the contacts and the expertise and the privilege of having a lot of information in our hands to be able to compare a lot of different businesses and select what we think are the best.
MF: Mining is self-explanatory, but with biotech, do you avoid them because they're so binary?
DF: Yeah, absolutely. Not in all cases, but in a lot of cases, it's either the drug is successful or not, or it's approved or it's not.
The path to market and to being commercial is very, very long. The further out your potential earnings' horizon, the more the risk areas in current valuation. And, a lot of these, especially these life sciences businesses, they're all 10 year-plus horizons and to look at this distance and say, "Look, are they worth $100 million, $2 billion or $0?" is really difficult.
And the other aspect, for us, is just the level of understanding. I'm not a scientist, I've got no expert in oncology or stem cell research or anything, so I think investors that don't have a background in that kind of industry and think they can make wise investment decisions are probably kidding themselves.
MF: What are your two biggest holdings?
DF: One is called RAIZ Invest Ltd (ASX: RZI). That's incredibly easy to understand. It's basically a micro investing platform. It allows retail investors to save by rounding up in their spending. It allows them to make their own deposits into small investment accounts. It's all online via an app. It's all automated.
They can easily select [from] 3 or 4 different portfolios, some of which are ESG investments. There's one that's got a small amount of Bitcoin, some that are conservative, all at a very, very cheap rate. The costs start at $3.50 a month.
So that's something [for] people that maybe don't want to invest in their own stocks, but know that they want to start investing, it's a really simple, straightforward, value-for-money proposition. And quite rightly, it's gaining a lot of traction in the marketplace. That's one we really like.
MF: Last month in a memo to clients, you sounded frustrated that Raiz shares should really be 2 or 3 times its current price.
DF: I did say that. I said you could potentially have a price target of about $4, given their parent company is listing in the US at that kind of valuation.
That I wouldn't say [is] a 'pie in the sky' valuation — it's not at all. Arguably, you could say that Raiz has got more potential because it's operating in smaller markets with a lot more potential.
The other one that we've invested in, and it's probably been our most successful investment over the past 2 or 3 years, is a company called Alcidion Group Ltd (ASX: ALC). That's a little bit harder to quantify because they provide software to hospitals — patient tracking, nurse paging and clinical decision-making software.
They're sort of replacing all the [manual work] when you go to hospital and people are just writing on boards to say "I've given them this medicine and I'll come back," and someone else reads it. That's all managed on an IT platform, which makes mistakes within hospitals much rarer. You can see exactly how patients are being managed, the outcomes and all that sort of stuff.
It's actually become commercially proven. This year, they're going to do something like $28 million in revenue. They're in reference sites, both here in Australia and the UK. So it's a really kind of exciting role, that of new technology. It isn't widely adopted in a very slow-moving industry.
We look at something like that and, say, the path that's been forged by businesses like Pro Medicus Limited (ASX: PME), which is medical imaging software. These businesses attract massive multiples by the time they commercialise and are looking at global rollouts. So in theory, steep customer bases, strong return revenue streams, and really, really good options for revenue and earnings growth into the near future.
Hottest ASX shares
MF: What are the 2 best stock buys right now?
DF: One is a Melbourne-based game developer called Playside Studios Ltd (ASX: PLY). There've been a number of game developers that have met with varying levels of success. One's called Mighty Kingdom Ltd (ASX: MKL) that's floated that has really, really struggled. Another one that got delisted, but has jumped on the Bitcoin bandwagon is Animoca Brands Corporation Limited.
The thing with game developers, you can obviously make your own content or you can do it as work for hire. Playside has got a really, really good blend of building games for the other big studios. So that revenue is more defined, a lot lower risk, but what they're also doing is developing their own IP in games and working towards having that one big winner down the track — be it console, mobile or PC.
It's almost like running a movie studio. If you've got enough content, you're going to get that one big hit that really builds the company. But Playside, importantly, has reasonable match revenue, a moderate amount of profitability and the upside in a marketplace that is booming at the moment.
MF: Did you buy-in during the initial public offer (IPO) last year or afterwards?
DF: At the IPO. We actually were in pre-IPO and then got another allocation at the IPO, and I think even bought a few more shares on-market.
The other one I'd go to, which is again a different sort of industry, is Maggie Beer Holdings Ltd (ASX: MBH). Everyone knows the Maggie Beer name.
They're building out that kind of high-end food business. But most excitingly, a couple of months ago, they bought an online business called The Hamper Emporium. And we think they got that at an absolute steal compared to what other online businesses are doing, such as Adore Beauty Group Ltd (ASX: ABY), Temple & Webster Group Ltd (ASX: TPW), Kogan.com Ltd (ASX: KGN). They paid about a third of the multiple. I actually don't know how they got it so cheaply, but they did.
Obviously, online is huge at the moment… We think as entertainment is kind of subsiding a bit — you're not thanking your customers anymore by taking them to the footy or the Grand Prix or the Olympics — that this hamper kind of gifting is going to continue to boom.
We [also] like the existing Maggie Beer business, because it's clearly an excellent brand name. As people spend more time at home, and looking at obviously buying fancy food and doing more cooking and entertaining and things like that. And with this online business, you're kind of seeing the best of both worlds.
MF: If the market closed tomorrow for 5 years, which stock would you want to hold?
DF: I'd probably say our two biggest holdings [Raiz and Alcidion], just because I honestly think I could close my eyes and open them in 5 years and be highly confident they're going to be much, much bigger businesses than they are now. Highly confident.
Something like PlaySide could be anything. We own shares in Big River Industries Ltd (ASX: BRI), which is a timber supplier and booming at the moment, but in 5 years could be anything. Might be a disaster, but it might be going well.
MF: Your conviction is reflected in your fund positioning.
DF: That's right. The thing is, also, when you're operating in the small to mid-cap space, if you've got a big holding in a company, you sort of are committing to it for a period of time.
I can't just wake up tomorrow and go, "I've changed my mind on Alcidion and I'm going to sell them." I might be able to do that over the space of a month or more, but I won't be able to do [instantly] without some price impact.
The stocks that I've got most confidence in, I've just got a smaller weighting in. But that's the beauty of investing in the stock market is that you can make incremental changes to investment holding as you see the risks and the returns potential for those businesses. It's not like a car or a house that you've either got to be all-in or all-out. You can fine-tune your investments and I think that's important.
Looking back
MF: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.
DF: I do plenty of things every year that I regret. I do.
You can't go through life as an investor [without regrets] because every time you buy or sell a share, at any point in time you're making a right or wrong decision, for sure.
The ones that hurt… We were in Afterpay Ltd (ASX: APT) really early and we sold out at $35. We thought that was a really smart move at the time.
MF: Do you remember how much you bought in at?
DF: Well, we bought it at the IPO when it was $1.
MF: Oh, really? So you got a 35-bagger.
DF: Yeah, so I mean that was great, but could have been 100-bagger. That probably hurts a fair bit.
We thought we were really, really smart there for a while. I mean, we just didn't realise how much it would take off.
But I think so many investors missed an amazing opportunity last year, in hindsight. At the time, I didn't know anyone that was saying, "Oh, now you got to pile in to buy some JB Hi-Fi Ltd (ASX: JBH)", or Kogan, or any of those. It just wasn't happening.
In terms of individual investments, there's been a lot of stuff that I've been in. We owned shares in Lovisa Holdings Ltd (ASX: LOV), bought at $2 or $3, and sold out at $4 before it started really expanding because we weren't confident enough that they could expand offshore.
We owned shares in Victory Offices Ltd (ASX: VOL) that got hit with COVID. I mean everyone's probably got a COVID sob story, but again, I regret doing the investment. But we also sold out at 50 cents and it's now 20, so that was a good result.
We owned shares in Blue Sky Alternative Investments Limited (ASX: BLA) that ran really strong, we made a lot of money, and then gave half of it back in a short period of time. But we sold out before the stock went to zero. Probably on balance, I don't regret that because we made money from it, but I probably wish I'd seen the writing on the wall a little bit sooner.
MF: It's a salient point you made earlier, that it's unrealistic for investors to expect a 100% strike rate. Because even the professionals go into it knowing that some you're going to lose.
DF: I say the thing with long-only investing is that it's an asymmetrical outcome. You can't lose more than 100%, but you can make much more than 100%.
So you don't even have to get 50% of your calls right. You just got to make sure that the ones you get wrong, you don't double down on and keep throwing good money after bad. And the ones that go well, you let those profits run.
Graeme and I do everything unanimously at Cyan, but one thing that is completely non-negotiable is we do not throw good money after bad. We don't prop up businesses that aren't going well because we think the price has got too cheap, or lost opportunity. We will let other people do that. We never follow any business that's going down. We never keep topping up.
That's probably one of the smartest things we do. It's an emotionally difficult thing to do, because it's like, "Oh, I'm going to prove the market's got this wrong," but it's just silly.
So we cut our losses, let our profits run, and I think that's why we've managed to generate some pretty good returns over the long term.
