Founder firms continue to deliver strong returns, both globally and in Australia. Our Australian strategy delivered a return of 3.8% in the month of October, above the benchmark return (2.1%). The key contributors included Link Administration (27.6%), Afterpay (24.5%) and Polynovo (22.2%), while the main detractors were Flight Centre (-15.6%) and Megaport (-14.0%). In the past six and twelve months, the strategy has produced out-performance of 28.1% and 33.6% respectively. The main portfolio holdings include: Reece, Fortescue Metals, Nearmap, Afterpay and Megaport.
The global strategy earned a return of 1.1% for the month, above the benchmark return (-1.1%). In the past six and twelve months, the strategy has produced out-performance of 5.6% and 12.3% respectively. The main portfolio holdings include: MarketAxess, DR Horton, Fraser Group, Masimo Corporation and Costco.
The risk adjusted returns between the Australian and global strategies are comparable, whether measured in terms of Sharpe or information ratios because the global portfolio is weighted heavily towards mega-cap and highly liquid founder companies, which tend to have a lower volatility profile.
Focus on Megaport
MP1 provides a ‘network as a service’ offering to enterprises or “elastic interconnection services”. Clients of MP1 can build cloud connections that their businesses run on quickly and easily. Clients get connected to cloud services, managed services, and between data centres almost instantly. It has a subscription based billing model that offers annuity income streams from two sources: network service agreements and long-term contracts. It is well placed to continue to benefit from the ongoing migration of infrastructure to cloud computing.
Despite the 14% fall in Megaport (MP1) during October, the stock has remained a core portfolio holding since inception. The founder, Mr Bevan Slattery, retains a material ownership stake in the company, whether measured in terms of percentage of shares held or dollar value. Mr Slattery’s large ownership stake and active role in the company as Chairman points to interest alignment with minority shareholders which helps to mitigate the agency costs that arise from the separation of ownership and management of corporate assets. This represents the guiding principle of our investment thesis for founder companies.
We are also attracted to other aspects of governance: the company’s small board size, the relevant industry expertise and experience of its directors, and a remuneration framework that is easy to understand and offers its senior executives well defined and appropriate incentives. The company also ranks strongly in terms of our measure of its stock of intangible capital as a source of sustainable competitive advantage.