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Investment Philosophy

2022 YTD Performance Update

2022 performance has so far been disappointing for the Fund on both an absolute and market relative basis. In this piece we will highlight the headwinds currently facing the portfolio, explain portfolio changes and provide an update on the recent reporting season and the current outlook for the portfolio.

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Media

Webinar: What Works in Behavioural Finance

In this webinar Fairlight's Senior Portfolio Manager, Ian Carmichael, discusses the important topic "What Works in Behavioural Finance". Exploring what behavioural finance can teach us about stock and fund selection and how it can influence investment outcomes.

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Stock Profiles

Quality Growth On Sale

In theory, the longer dated cashflows from technology shares are less attractive than the certainty on bonds as interest rates rise. We don’t disagree. However, caught in the speculative unwind are several high-quality technology companies, which are highly profitable and attractively priced even when factoring in higher rates.

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Investment Philosophy

Advantages of Decentralization

Over the history of the portfolio the Fairlight investment team has witnessed several long tenured holdings eschew traditional complex reporting structures with great success. This piece explores the similarities in the competitive advantages derived from their decentralized operating structures.

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Annual Reviews

2021 in Review

2021 was a successful year for the Fund, delivering investors a 31% return, outpacing the MSCI World SMID Index by 7 percentage points. Despite a year punctuated by market concerns on inflation, coronavirus variants, China sovereign risk and rate hikes the Fairlight portfolio grew earnings per share in aggregate by 24%.

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Stock Profiles

A Less Risky Definition of Growth

Fairlight’s definition of growth differs from that of the broader market as we have a far higher hurdle for profitability compared to sales growth. IT research provider Gartner is an example of a portfolio holding that possesses all the quality characteristics that we look for in a growth company.

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Investment Philosophy

Reflections on Quality and “The Ultimate Resource”

With 2021 characterised by strong commodity prices, we are often asked our view in terms of the sustainability of this trend. At the risk of embarrassment but with the benefit of historical precedent, we argue that investors may be better off avoiding the commodity sector entirely.

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Investment Philosophy

Tangible Returns from Intangible Brands

Brands are an important intangible asset from which some companies are able to derive significant value. Those businesses that understand how to develop and steward brands often exhibit both the qualitative and financial characteristics that Fairlight looks for in potential investments.

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Stock Profiles

Excuses Are For Others

A consistent theme emerging from the Fairlight portfolio over the past few quarters has been the outperformance of companies that seized the opportunity to invest throughout the pandemic-driven uncertainty without trying to optimise short-term earnings via myopic cost measures. Cordless power tool manufacturer Techtronic Industries, profiled in Sep

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Stock Profiles

The Behr Necessities

Masco Corporation, a recent addition to the Fairlight portfolio, has quietly transformed itself following a near-death experience in the GFC. The company has evolved from a low quality, cyclical business dependent on the traditionally volatile US new housing construction to durable, high returns on capital, stable compounder.

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Stock Profiles

Papa John's — A Supreme Turnaround

Papa John's, a portfolio holding since 2018, was founded in 1984 when "Papa" John Schnatter knocked out a broom closet in the back of his father's tavern in Indiana. He sold his 1971 Camaro Z28 to purchase $1,600 worth of used pizza equipment and began selling pies to the tavern's customers out of the converted closet.

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Stock Profiles

Zozo to the Moon

Zozo is a Japanese online apparel marketplace, catering to fashion conscious consumers under 40 years of age. The company was founded in 1998 by punk rock drummer Yusakau Maezawa originally as a mail-order service for imported records and CDs that were difficult to find in Japan

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Investment Philosophy

A Practical Approach to Corporate Culture

In a world where intangible assets such as research and development, employee training and branding increasingly form the backbone of companies’ competitive advantages, it makes sense that a good corporate culture can partly explain strong and consistent business performance, especially by companies who mostly rely on their people for their success

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Investment Philosophy

Global small caps as an inflation hedge

While the Fairlight investment process is predicated on bottom-up fundamental stock research and is not reliant on macroeconomic forecasting, one factor carefully considered by the investment team when evaluating potential investments is the risk posed by inflation.

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Investment Philosophy

The owner’s advantage

Fairlight has a strong preference for founder led businesses as there is evidence to support the view that founders are more likely to establish an enduring culture, plan for long-term performance and are more likely to take well informed but necessary risks.

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Annual Reviews

2020 in Review

2020 was a successful year for the Fund, delivering investors an 11% return, exceeding the MSCI World SMID Index by 6 percentage points. In Q1, the Fund declined 10% compared to a 17% decline for the Index. In contrast, the Fund appreciated by 24% in the remainder of the year versus an increase of 28% for the Index.

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Stock Profiles

Morningstar: A high quality business hidden in plain sight

The Fairlight investment process is designed to identify high quality businesses, generally those with sustainably high returns on capital and a long runway for future growth. However, identifying quality alone is not enough to ensure investment success if an excessive price is paid.

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Investment Philosophy

Managing risk in a concentrated portfolio

A simple real-world definition of risk is the chance and consequences of being wrong. In Fairlight’s business as an investment manager, being wrong implies that we fail to meet our stated investment objective of outperforming the broader global small and mid cap market over the medium to long term.

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Investment Philosophy

COVID-19: A test of resilience

The Fairlight strategy is designed to reduce risk within the Global Small & Mid Cap asset class and we are pleased by the performance the Fund was able to deliver during this difficult quarter. Our portfolio holdings continue to generate attractive returns on invested capital, with low leverage, whilst being operated by capable management teams.

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ESG Reports

Boohoo making greenwashing fashionable

Whilst Fairlight’s primary objective is to deliver superior investment returns to clients, we believe this can be achieved in an ethically aware manner. Consequently, Environmental Social Governance (ESG) considerations represent an important part of our process.

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Investment Philosophy

Serial acquirers: A dangerous addiction or under appreciated compounders?

Despite the evidence that acquisitions in aggregate fail, Fairlight has collated a cohort of acquisitive small cap companies that counterintuitively have managed to consistently outperform for decades. On average, companies within the Fairlight ‘Acquisitive Capital Optimisers’ contingent have delivered shareholders a return of 34% p.a...

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Investment Philosophy

The quality advantage in small cap investing

In the simplest sense quality companies are those that are highly profitable, growing and relatively safe. Over time a wealth of academic research has shown that excess returns have been historically available to investors in quality companies. The research has been robust to various definitions of quality and it hasn’t mattered whether you....

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Investment Philosophy

Is it possible to sell well?

While many are now seriously pondering stock-sell offs as fears about the financial impact of COVID-19 intensify, people may be surprised to learn that investment decisions made in regard to selling are generally far less disciplined and effective as those made about buying – even by professionals.

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Stock Profiles

SimCorp: a niche supplier to the finance industry

Copenhagen headquartered SimCorp is the global leader in integrated software solutions for large asset managers, insurance companies and sovereign wealth funds. Its main product, SimCorp Dimension, builds on the company’s state of the art investment book of records (IBOR) technology to provide front-to-back office multi-asset class functionality.

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Investment Philosophy

Investing during the pandemic

Whilst it gives us no joy to deliver a negative absolute return to investors (-10.4%), the Fairlight strategy outperformed the MSCI Global Small and Mid Cap index (-14.9%) for the month by 4.5% after all fees. Our one year rolling return is +8.0% as compared to -6.8% for the benchmark.

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Annual Reviews

2019 in Review

2019 was a pleasing year for the Fund, delivering investors a 36% return, outpacing the MSCI World SMID Index by 9 percentage points. Although this is understandably an important data point for investors, evaluating performance on a single number can be a blunt tool that obscures the nature of the underlying decisions.

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ESG Reports

How carbon intensive is the Fairlight portfolio?

Whilst Fairlight doesn’t market itself as a specialist ESG (Environmental, Social & Governance) asset manager, we are a signatory to the UN Principles for Responsible Investment and ESG considerations form an important part of our risk management process.

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Shareholder Activism

Fairlight's letter to Hexcel's Board of Directors

Fairlight Asset Management, a stockholder of Hexcel Corporation (NYSE: HXL), has delivered a letter to Hexcel's Board of Directors expressing our concerns regarding the proposed merger with Woodward, Inc., including that it has limited strategic merit and significantly undervalues Hexcel, a demonstrably higher quality business.

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Stock Profiles

Softcat leaps over Brexit

American IT reseller CDW Corp has been a core portfolio holding of the Fairlight Global Small and Mid Cap Fund since inception. On first glance, CDW appears to share many low-quality attributes with its peers such as razor thin margins, reliance on large suppliers and a competitive environment characterised by intense discounting.

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Investment Philosophy

“If you can’t feed a team with two pizzas, it’s too large”

A 2018 analysis demonstrated that boutiques significantly outperform non-boutiques in institutional equity categories (with the greatest outperformance in small cap and emerging market equities) and interestingly, also asserted that boutiques have added significant value not only versus institutions, but also verses indices.

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Investment Philosophy

Balancing quality and price in long term investing

When searching for high quality growth investments, Fairlight prioritises finding businesses with high returns on capital, evaluating the sustainability of the excess economic returns and only then considering price. This approach is informed by the notion that over the long term the returns achieved on any stock will approach the return on capital

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Investment Philosophy

The power of niche networks

Platform or network businesses take many forms and defy neat segmentation, but what we can confidently say is, in aggregate, leading network businesses have delivered immense value. In fact, one study suggests 70% of the value created in the Tech sector since the 1970’s has been driven by successful iterations of network-based business models.

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Stock Profiles

Drilling in on Techtronic

German businessman Horst Pudwill founded Techtronic in 1985 in Guangdong, China. Initially, the business operated as a contract manufacturer of power tools, but it has since evolved into a brand owner after acquiring the Ryobi brand in 2000 and Milwaukee in 2005.

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Investment Philosophy

The role of global small and mid cap in an Australian portfolio

Australian investors understand the case for including domestic small and mid cap (SMID) companies in their portfolios and have typically benefited from these allocations. This is however, at odds with their more sparing allocations to global SMID, leaving them underweight this non-trivial USD $13 trillion asset class.

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Stock Profiles

Auto Trader

Auto Trader is the UK’s dominant online used car marketplace, connecting consumers with 13,000+ used car retailers as well as manufacturers and direct consumer-to-consumer sales. The business employs a subscription-based business model, with retailers paying monthly subscriptions to list vehicles on the website.

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Investment Philosophy

The triumph of generalists over specialists

Our team is often asked why we choose to organise our investment process along generalist rather than sector specialist lines. The answer is partially empirical, in that we have noticed the cross pollination of ideas across sectors is helpful in generating investment ideas, but crucially, the answer is one of risk management...

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Investment Philosophy

Why does quality investing work?

Whilst defining quality is no minor philosophical challenge, we are fortunate that the application of the concept of quality to investing is robust to various definitions, be they qualitative assessments of competitive position or earnings quality and sustainability, or alternatively quantitative measures such as returns on capital.

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Stock Profiles

Ansys

The Fairlight investment process is grounded in quality; seeking businesses which have long track records of high returns on capital and strong cash flow throughout the cycle. In order to minimise risk, Fairlight avoids technology businesses that are dependent on one product that has a binary success/failure payoff distribution.

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Stock Profiles

Ritchie Brothers

Ritchie Brothers is a Canadian auctioneer of earthmoving, oil rig, tractor and other heavy equipment. With a storied history after launching its auctioneer business in 1958, today the group is the largest marketer of second-hand industrial equipment globally.

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Stock Profiles

Constellation Software

Constellation Software is a Canadian domiciled collection of Vertical Market Software (VMS) companies operating across a variety of industries. VMS companies provide products that are tailored and specific to a single industry (i.e. vertical) and are typically focused on billing, administrative, and operational systems.

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