Contango MicroCap Limited Listed Investment Company

By Kenneth Robson on December 8, 2013 • ( 0 )

DisclaimerA friend asked me to review Contango MicroCap Limited (CTN). This post is the outcome of my limited investigations. Any opinions expressed are my own, and should not be relied on in making investment decisions.

Readers should take into account their objectives, and risk profile with their own adviser before deciding to buy or sell share in Contango MicroCap.

Technical considerations

Oversold after corrective move lower.

Contango MicroCap had been in a steady uptrend since bottoming at 93.5 cents June 25, to reach $1.145, before loosing momentum.

In November a corrective move resulted in the share-price declining to $1.045, and reaching the 200 day moving average.

The RSI is now over-sold, and with the NTA $1.23, this is likely to be a favourable entry point. The candle-stick appearance for Dec 6 was a Doji, encouraging investors to think that this impulsive move lower might now have terminated.

Contango MicroCap Limited is one of a group of funds managed by Contango Asset Management.

Business Profile of Contango Asset Management

http://www.contango.com.au/contango_group.php

It was founded in 1998 by Melbourne fund managers David Stevens (now Managing Director). and Stephen Babidge.

Definition of Contango: The market is said to be in contango when the forward price is higher than the spot price.

The name is appropriate since the group pursues an active mostly long investment strategy to exploit opportunities for capital appreciation.

Contango Asset Management offers the following products to institutions and professional investors:

Core Australian Equities
Small Cap Australian Equities
Microcap Australian Equities
High Yield Australian Equities

David Stevens heads a large team of investment professionals, seven of whom did own 50% of Contango equity.

Contango MicroCap Limited (CTN)

CTN was listed on the ASX on March 25, 2004. The investment portfolio return since inception has been 17.6%

There are 156.5 million shares on issue, and 49.8 million options exercisable at $1.20 on the 28th February 2014.

The fund held 72 securities on the 30th November 2013 between $10 million and $350 million market cap.at the time of acquisition.

The investment strategy excludes biotech, IT and new technology stocks, mining stocks in the exploration phase, and pseudo-private equity companies.

Dividend policy is to pay a minimum of 6% of the NTA as at July 1 each year.

The top 10 holdings are:

Iproperty group 3.2%
Slater & Gordon 3.2%
Tiger Resources 3.1%
G8 Education 3.1%
Mayne Pharma Group 3.0%
Austbrokers Holdings 2.9%
BT Investment Manager 2.7%the
Village Roadshow 2.6%
Ingenia Communities 2.3%
Corporate Travel Management 2.3%

In addition CTN now owns 100% of Contango Asset Management Limited amounting to 5.5% of NTA.

22% of the portfolio are resource stocks, and 76% Industrial stocks with 2.2% in cash.

At the AGM 20 November 2013, Chairman Mark Kerr reported that as a result of difficult operating conditions for micro and small cap stocks, the company had generated a loss of $12.6 million. In this year:

the ASX Emerging Companies Index fell 29.9%
the ASX Small Ordinaries fell by 5.3%
the ASX Small Resources fell by 47.8%

However the return to shareholders was 7.6% including dividends of 8.5 cents.

Morningstar (Analyst Alexander Prineas on3/10/13) reports that high portfolio turnover disqualifies CTN from the LIC tax concession, and that the post-tax figure for the NTA is therefore more relevant. This is $1.15.

Fees (from Morningstar)

Annual fee is 1.25%.

Performance fee is 15% on returns above the All Ordinaries Index, with a high watermark.

This is more than most LICs, but in line with many unlisted funds.

My conclusions

The micro/small cap sector is more volatile than the larger cap sector, has higher risk, and this creates added difficulties for fund management.

However it is a sector that can greatly out-perform when conditions are favourable.

The Contango team is an experienced one that has the expertise to optimize returns. To me the fee structure is appropriate in creating incentive for outstanding returns.

This will suit larger investors. Retail investors may be better off with lower cost, index hugging funds however.

The price retracement in November/early December provides a discounted entry price to a quality boutique fund; it is in a difficult but potentially lucrative sector for those investors who would perhaps rather not trust to their own judgement.