Strong Returns & Small Cap Opportunities – ICE Fund Investment Update

December 2024 Quarter Update with Roger Walling, portfolio manager ICE Fund

ICE Fund’s Impressive Annual Performance*

The ICE Fund returned 0.95 percent for the December quarter, which rounded out a full year return of 18.22 percent net of fees. These pleasing numbers are a product of both strong absolute return for many stocks in the fund, together with an improved sentiment towards that small cap segment of the market.

The ICE Fund is of course benchmark unaware. But for reference, across calendar year 2024, the S&P/ASX Small Industrial segment of the market returned 12.1 percent, and then the Small Ordinaries overall for the same 12-month period returned 8.36 percent.

Key Contributors

We had several strong contributors to the fund during December.

Redox

The first of those was Redox, Australia’s leading importer and distributor of chemicals.

We first participated as an investor in the IPO in early 2023. This is a family and founder led business that has operated for more than 50 years and delivered really strong profit growth over that period. The customers of Redox are miners, manufacturers, the agriculture segment, food processors, and many more. And they absolutely rely on Redox to provide a key part of their supply chain. They use their products every day, which makes them very loyal. What also impresses us about Redox is their industry know how. They have quite bespoke and unique sales systems. Built over many decades, those sales systems have enabled Redox to consistently gain share in their market and to again grow profits at very healthy levels over 50 years.

Catapult Group

A further key contributor was the Catapult Group. Catapult’s tagline, aimed at athletes and sporting teams, is “Unleash your potential”. And so, after investing patiently over many years, it’s pleasing to see the company now begin to deliver on its own potential. Catapult, of course, has the leading wearables product for elite athletes globally.

And they continue to win elite sporting teams across a range of sports and a range of geographies. Most recently, though, they’ve begun to win customers sporting teams for their video product, in some instances displacing competitors. So for Catapult, the combination of strong revenue growth, market share gains, and now shifting to generating positive cash flows has seen the shares perform very well.

Generation Development Group

A third key contributor across the quarter was Generation Development Group or GDG. GDG own a leading, entrenched, dominant position in the sale and provision of investment bonds as an alternative investment product. Why are they so entrenched? They are really strong in advisor education. They’re really strong in product innovation and the tax effectiveness of the product they offer, full stop.

The second business that GDG own is Lonsec, who of course provide research services to our industry and also the Lonsec investment consulting businesses. Both of GDG’s businesses have really strong brand positions in their sector. And following that strong brand position, both have been witnessing and experiencing very strong inflows into their products, which of course has driven the GDG share price and for ICE investors, it’s actually seen a six fold return on our initial investment thus far.

ICE Franchise Criteria

The fund is approaching its 19th year anniversary at the end of this month. Over this time, the fund continues to invest in the small cap industrial segment of our market, where companies meet our franchise criteria.

What makes a franchise? Companies that have assets that are difficult to replicate, and sticky customers that are well managed by that business. And critically, where we can invest at the right share price to deliver appropriate returns to our investors.

Examples of Business Franchises in the Fund

Examples of business franchises within the fund include Paragon Care. Paragon hold critical distribution infrastructure within the healthcare system. Their products are distributed to hospitals, doctors and pharmacists on a daily basis.

Emotif holds a similarly strong position in the distribution of automotive parts. And we see the demand for automotive parts is being really steady.

A third stock within the fund is Monash IVF. Monash are a leading provider of IVF services within Australia. Their intellectual property position is strong, and in fact, they were part of the first ever IVF birth in Australia back in the 80s. To this day, they continue to gain, share, and grow revenue in that space.

And finally, Aus Brokers. Aus Brokers own a network of insurance brokers and provide network services to those brokers. What we’ve witnessed over time is the incredible stickiness of SME customers to their insurance broker. Both for understanding claims, and actually providing premiums in the first instance.

So there are four examples of franchises held within the fund.

Investment Discipline and Stock Management

Taking part two of the question first, I’d highlight the discipline of the investment process within ICE investors. Every stock within our fund, each franchise, has a target investment position when we purchase that stock. And where the share price of those stocks rise, um, we remain very disciplined.

So unless we find reason to increase the size of that investor position within the fund, we’re typically taking profits as the share price rises. And across calendar year 2024 that discipline was evident. With many strong performers, including Life360, Generation Development, Temple & Webster, Redox, and many more. We still hold each of those positions within the fund, the franchise remains strong, and the investment return remains attractive, but we maintain that discipline and reduce those position sizes accordingly.

Recent Additions and Sales in the Fund

Taking part one of the question, across the quarter, we added to positions in Australian Clinical Labs, Jumbo Interactive, and Paragon Care, which I mentioned earlier.

We also participated in the capital raise for Pinnacle, with those funds used as proceeds to continue to expand Pinnacle’s offshore expansion.

The key sale during the quarter was the Web Travel Group, post their market announcement, shortly after their demerger from the broader Web Group. Post pandemic, the Web Travel Group and their WebBeds business have been growing revenue very strongly and gaining market share.

Unfortunately, their market announcement in October highlighted a deterioration in the profit margin for that business. In simple terms, we couldn’t reconcile management’s prior comments with the explanations for why the profit margins had fallen. On that basis, the quality of the franchise was brought into question, and we sold that position on the day of that announcement.

Outlook and Future Expectations for ICE Fund

ICE focuses on small and mid-cap industrial franchises on the ASX. In the last three years, We’ve witnessed the large cap segment of the market materially outperform the small cap segment of the market.

On this basis, we see a strong relative opportunity in the small cap segment of the market over coming periods.

Most critically, in terms of the stock within the fund, we have a positive disposition in respect to the earnings power of the franchise stocks within the fund. This is a key tenet of our process. In recent times, we’ve continued to witness the positive business performance of stocks within the fund, the market share gains, and this should contribute to strong earnings growth.

With February reporting season just around the corner, our expectations are that the fund can once more deliver median earnings per share at a healthy double-digit rate. On this basis, this provides a strong foundation and outlook for the ICE Fund and stocks that we hold in the portfolio on behalf of our investors.

 

 

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*The text has been edited for clarity.

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