August 2018

Arowana CVF July Newsletter and Net Tangible Asset Release

CVF NTA Reports

Arowana CVF July Newsletter and Net Tangible Asset Release

As At 31 July 2018

In July the Fund recorded +5.6% performance, net of all costs and fees, versus the S&P/ASX Accumulation 200 Index return of +1.4%.

NTA per share was $1.37 as at 31 July 2018.

The largest contributor by far to performance during the month was the Fund’s position in Afterpay Tough Group (APT.AU), followed by our position in GrafTech International (EAF.US), a stock we mentioned in a prior newsletter.

Afterpay rallied 51.7% during July, following a 19.6% rally in June and a 30.6% rally in May. The market has shrugged off the short case on Afterpay; the number of shares sold short has almost halved from 16.3 million at the peak in early May 2018 to 9.2 million currently.

The key driver of Afterpay’s performance in July was a particularly strong US business update. By its nature as a predominantly online business, the market has repeatedly been caught unawares by the Company’s capacity to acquire customers and merchants at a prolific rate. We trimmed the position materially during the month, cutting the number of shares held by ~45% in July. We remain extremely bullish on the Company’s long-term prospects; the business model is a work of genius with significant merchant and customer value creation at its core. Had we not trimmed the position (ever) it would now be well in excess of 50% of fund assets. It remains the Fund’s largest position at 12% of the portfolio.

GrafTech caught a bid in July, advancing 17.8%. The stock carries a heavy short interest of 28% of free float at the time of writing. Results released in early August were quite positive, which has seen material price target increases from several sell side analysts.

The largest detractor was our residual position in Bellamy’s Organic (BAL.AU), which fell 29.2% in the month. There is building doubt over the timing of the award of a Chinese label manufacturing licence, which would allow the Company to sell its wares direct to merchants in China, under Chinese language labelling. Currently the majority of Bellamy’s products sold in China are carried into the country by resellers. We have added to the position on the recent falls; if you like something and it falls 30% then unless something material has changed you ought to like it even more. The other factor here is that the industry is prone to profit surges by nature of the existence of a large and opaque distribution channel, most especially in China, which cause divergence between apparent and actual consumption rates.

From a portfolio perspective, we have materially reduced gross and net exposure versus just a month earlier. Predominantly this was a bottom up process however it is hard not to be cognisant of risk from rising US interest rates and building trade conflict. Typically our approach to mounting macro risk is simply to lift the bar on required prospective returns and prospective return asymmetry.

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