OC Mid-Cap Fund Update with Nga Lucas
- OC Fund Management
- 1 day ago
- 6 min read
Updated: 11 hours ago
Nga Lucas, Portfolio Manager, discusses how the OC Mid-Cap Fund has navigated a volatile market environment, including macroeconomic uncertainty, geopolitical tensions, inflation pressures and the impact of AI disruption on technology stocks. Nga also shares insights into recent portfolio positioning, selected opportunities in quality mid-cap companies, and the team’s outlook for markets over the medium to long term.
Click below to view the video.
00:00 How has the OC Mid-Cap Fund navigated through all the macroeconomic and geopolitical uncertainty?
01:04 How has the recent escalation in the Middle East impacted markets and the portfolio?
02:50 Recent volatility has potentially led to more attractive valuations – which sector/s are compelling?
04:03 What are some examples of stocks you have added to?
06:53 Thoughts on the outlook for markets in a period of potentially higher inflation and interest rates?
Video Transcript (Please note, captions are auto-generated.)
It certainly has been a challenging time in the markets for active managers. The mid-cap index has actually been up strongly, but if you look under the hood between commodities and industrial stock performance, there's been a real divergence. Commodity prices have been very strong, driving up commodity stocks, particularly gold miners.
Gold stocks have been very well bid given the central bank buying in gold, as well as the expectation of US rate hikes, whilst industrials have been a lot weaker. The OC mid-cap fund is structurally underweight commodities. Given our process of not owning single mine, single commodity stocks, given the unpredictable nature of commodity prices, as well as the risks at the mine site level, our underweight position has been the key driver of our underperformance over the last 12 months.
Yeah, the markets have certainly weakened since the start of the Iran conflict. It's been very volatile, depending on the headlines we see overnight, whether the conflict is on again or off again. Energy has been the best performing sector in the market.
We don't own any oil stocks outright, but we do own a position in Ampol. Ampol is one of two remaining refinery businesses in Australia. The spike in refining margins on the back of the Iran conflict has seen the company deliver strong cash flows in the quarter.
We think the refining margin will remain elevated for some time yet. It's also been a timely reminder of the critical nature of the fuel infrastructure assets that Ampol owns, and particularly coming at a time when they are negotiating with the Australian government on the future of those assets. We think the market still underestimates the value, the strategic value of those infrastructure assets.
And just on gold and other mining stocks, they have actually weakened over this period. The rising diesel costs, as well as the question mark over the supply of diesel, is likely going to hit the cost bases of miners, given that they are diesel-intensive users. The doom and gloom in the headlines, despite all of that, the mid-cap portfolio has actually performed quite well through this period, and we're seeing a lot of opportunities pop up in quality businesses for us to buy.
Certainly there's been a sharp sell-off in the tech sector on the back of AI disruption concerns. AI certainly is a big industry change for the technology companies, and it will lead to a significant reduction in software development costs for these businesses, and the potential for AI disruptors are there. We think this will lead to both risks as well as opportunities for technology stocks.
We think the moats in select technology businesses doesn't lie in the software, it actually lies in other areas, including the proprietary data on their platforms, the network effects, as well as regulatory hurdles, which we don't think will be easily disrupted. We've taken the opportunity in this drawdown to add or buy new positions in select technology companies, where we believe the moats will hold well through this AI disruptive period.
A couple of stocks we've topped up on include Xero and Technology One. Just starting with Xero, Xero is a cloud accounting software business servicing the SME market. They have strong and growing positions in the ANZ market, the UK, as well as the US. We think the AI disruption risk is a bit overstated, given the strength of the drawdown and the strength of the de-rate in the share price.
We think the moats in the business include the proprietary data, as well as the depth of the knowledge in the workflow for accountants and bookkeepers, as well as SMEs. They also have very strong distribution relationships with accountants and bookkeepers, which is very difficult to replicate. Increasingly, we're seeing that the AI companies, Anthropic as well as OpenAI, are choosing to partner with software businesses rather than compete against them.
Xero have partnered recently with both OpenAI and Anthropic, and this will lead to increasing AI capability within the Xero platform itself, as well as efficiency benefits in their business, being able to produce products at a faster pace. On Technology One, we've added to our position in Technology One. Technology One is an ERP software provider focused on the education as well as local government segment.
It's mission-critical software and has very high switching costs, so very difficult to rip out any ERP software in an organisation. We believe that the proprietary data that runs through the ERP platform, as well as the knowledge of the workflow and the sticky nature of the customer base, will mean it's very difficult to disrupt Technology One. Technology One themselves have actually seen an acceleration of growth in their business on the back of AI.
They're finding that customers want to buy more modules of Technology One to accelerate their AI capability within their organisation. The other thing we like about the business is the strong management team. They've been able to navigate through many technological changes and pivoted the business through different revenue models, so we view that as a great buying opportunity on the back of the drawdown in technology stocks.
We have been concerned about inflation for some time in the Australian market now, even before the Iran conflict. The market is currently pricing two more rate hikes from the RBA given the strength in the economy, as well as rising inflation fears. In this environment, we prefer to own companies that have more defensive as well as structural growth drivers, strong balance sheets, as well as strong management teams.
In times of market dislocation, it often throws up the best buying opportunities for the patient investor on a medium to long-term basis. And history shows us that you should stay invested through the cycles as the recovery cycle or recovery phase in the market often delivers the highest returns for patient investors. We think the mid-cap portfolio is really well set up to navigate through this volatility and should deliver good returns for our investors over a medium to long-term basis.
Important Information
This video is for general information purposes only and does not take into account the specific investment objectives, financial situation or particular needs of any specific viewer. As such, before acting on any information contained in this presentation, view should consider the appropriateness of the information to their needs. This may involve seeking advice from a qualified financial adviser. Copia Investment Partners Ltd (AFSL 229316) (Copia) is the issuer of the OC Premium Small Companies Fund, the OC Dynamic Equity Fund, the OC Micro-Cap Fund and the OC Mid-Cap Fund (the Funds). Current PDSs and Target Market Determinations are available at ocfunds.com.au. A person should consider the PDS before deciding whether to acquire or continue to hold an interest in the Funds. Any opinions or recommendation contained in this video are subject to change without notice and Copia is under no obligation to update or keep any information contained in this video current.
Past performance is not a reliable indicator of future performance. Total returns assume the reinvestment of all distributions. The performance is quoted net of all fees and expenses. The reference indices do not incur these costs. This information is provided for general comparative purposes. Positive returns, which the Funds are designed to provide, are different regarding risk and investment profile to index returns.
