The Midst of Chaos - March 2023 Update
"In the midst of chaos, there is also opportunity." - Sun Tzu, The Art of War
THE MONTH | Where do you start? Amid US bank runs, swings in interest rate expectations and recession chatter, Dragonfly Fund’s NAV fell 3.65%. There was no negative company-specific news to point to as microcaps struggled in general. The “FIT” (ASX-listed Financials, Industrials and Technology micro-to-mid caps) universe we track each week in Small Talk was down 4.9% on average in March. As we observed the US bank runs, we could not help but recall the bank run in Mary Poppins that follows Dick Van Dyke’s performance of “Fidelity Fiduciary Bank”.
THE QUARTER | The quarter was one that featured generally good news for the portfolio but the mark-to-market scoreboard has given us nothing for it, with NAV down 0.56% for the March quarter. We summarise some of the positive developments later in this update.
SMALL TALK | Over the past month our weekly Small Talk updates for investors profiled expense management software company 8Common (8CO), unlisted subscription-based fintech Parpera, cybersecurity and cloud-based call centre software company Prophecy International (PRO). Clients can access Small Talk here.
OUTLOOK | This is a challenging time for investors given historically high valuation multiples for equity indices, volatility in the consensus outlook for interest rates and the economy and the slow motion adjustment to a world where capital once again needs to earn a decent return. Our “True North” remains our understanding of the opportunities, capabilities and catalysts among our investments. There is plenty of evidence of operational progress and we continue to constructively engage with investees to pursue optimal outcomes.
Applications to invest in Equitable Investors Dragonfly Fund can now be made online with Olivia123.
“10k Words” - April 2023
Funds continue to flow into equities despite recent volatility and recession fears, with Barclays noting fund flows lag performance. Performance is highly correlated with money supply, notes GLJ Research, and central bank liquidity may actually have been increasing lately according to Citi Research. The “Buy the Dip” mantra helps, as Bloomberg charts this strategy’s recent success. Despite equity markets holding up, capital raising remains suppressed relative to dealogic’s 2020 and 2021 figures. WSJ highlighted aerospace and defence technology as an area where there does appear to be strong capital flows. US banks, however, have seen deposit outflows, as charted here by Reuters. Margins have blown out on ASX-listed debt and hybrids, as per Bell Potter charts, which are largely issued by banks and financials. Bond market volatility is at historically high levels as seen from Bespoke and FT charts. Back in equities, the concentration of major indices stands out and Equitable Investors has pulled together top ten stats. The S&P 500 would have been down in March without “big tech”, eToro highlights.
S&P 500 Forward Total Returns following CNBC “Markets in Turmoil” specials | @CharlieBilello
A beginner’s guide to accounting fraud | ft.com
The end of faking it in Sillicon Vallye | NYTimes.com
Fed staff forecast a mild recession later this year | @jsblokland
Analysts lowered EPS estimates for $SPX companies for Q1 by 6.2% | @FactSet
Dragonfly Fund has the capability to "swap" shares in a company or companies for Dragonfly Fund units where Equitable Investors finds them attractive and suitable investments. If you have a stock in your bottom drawer that we might be able to do something with, please reach out. NOTE to date we have used this capability sparingly, rejecting all but a very small number of proposals, but we continue to seek favourable opportunities.
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If you are interested in learning more, please get in touch via mpretty@equitableinvestors.com.au and we will be pleased to arrange a meeting.