WASIX Commentary (Q1 2021)
March 2021
As always, we begin our report this quarter with a presentation of Seven Canyons Strategic Income Fund (WASIX) and benchmark returns over the past quarter, one, three, five, and ten years. A quarter is such a brief period of time that the results presented are mostly random noise; they can’t be used to evaluate the fund. Even the results for a year are insufficient. For this reason I like to include results for the trailing three, five, and ten years, as this longer period typically includes both rising and falling markets, providing better information for assessing fund performance.
| Periods ended 3/31/21 | WASIX | MSCI ACWI Index | Bloomberg Barclays US Aggregate Bond Index |
|---|---|---|---|
| Quarter | 11.57% | 4.57% | -3.37% | Year | 73.46% | 54.60% | 0.71% | 3 Years | 10.53% | 12.07% | 4.65% | 5 Years | 10.10% | 13.21% | 9.14% | 10 Years | 9.19% | 9.14% | 3.44% |
A fund’s performance for very short time periods may not be indicative of future performance. Data shows past performance. Past performance is not indicative of future performance and current performance may be lower or higher than the data quoted. The gross fee for the fund is 1.76%. For the most recent month-end performance data, visit www.sevencanyonsadvisors.com. Investment returns and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. The Advisor may absorb certain Fund expenses, leading to higher total shareholder returns.
WASIX had another good quarter, with gains coming in above our benchmarks. As the above table shows, WASIX returned 11.57% during the quarter compared to 4.57% for our stock benchmark, and -3.37% for our bond benchmark. Our shift towards a more global, smaller-cap portfolio has so far produced favorable results, as reflected in our performance over the last year. But it will take several years to get a good gauge on our new strategy.
While most of the stocks we own rose during the quarter, there were several large contributors to our returns. One was Arrow Global (ARW LN), a UK-based company that purchases bad credit card debt. Arrow’s skilled collectors are often able to get non-paying borrowers to resume making payments on their delinquent loans. Arrow contributed more than 3% to our 11%+ returns during the quarter, in part due to ARW’s strong business, and in part due a buyout offer which ARW received and accepted. We’ll admit that it is frustrating to have a company with such great prospects snatched away from us when ARW’s business is booming.
Two other major contributors to WASIX’s strong performance were Aubank and Aavas, two finance companies based in India. Each added more than 1% to our Q1 returns. During the Covid market panic both fell more than 50%, but both are now rebounding dramatically. However, the bounce isn’t the reason we own them. We own them for the almost unlimited opportunity in India for bringing rural and semi-rural consumers into the financial system. Some believe companies that help these consumers transition into the formal economy will have the chance to grow 20% yearly for 20 years.
Aubank focuses on vehicle loans for unbanked rural and semi-urban consumers, and secured loans for small and medium businesses. Aubank reported a strong quarter, which seemed to mark the nadir of the credit crisis as management expects no more credit losses stemming from Covid lockdowns. Unlike weaker competitors, Aubank invested in its infrastructure throughout the Covid panic, adding branches and headcount. Over the years we’ve found that companies willing to invest through a market disruption usually prove to be well run and good stewards of capital.
Aavas is a spin-off from Aubank with a focus on making small housing loans (~$12,000 USD) to rural and semi-urban home buyers or self-builders. Due to the immense size of the market, Aavas has a clear runway to grow earnings at a high rate for years. Like Aubank, the December quarter is likely the peak-loss quarter stemming from Covid lockdowns.
The final stock which contributed nearly 1% to our returns was Nac Kazatomprom (KAP LI) based in Kazakhstan. KAP is the largest and lowest-cost uranium miner in the world. KAP benefited from an increase in the price of uranium during the quarter.
A few of our stocks impacted our returns negatively. Fortunately, none of those companies hit our returns sufficiently to be called out.
Among the new stocks which we added to our portfolio are Chlitina, Generach, GTPL Hathaway, and Koukandkirkun.
Chlitina is a franchisor of beauty salons in China, similar to Ulta in the US. It is small relative to the size of the opportunity to expand in a country with a rapidly growing middle class, willing to pay for being pampered. Chlitina trains beauticians and, in turn, requires that only Chlitina’s products are sold in their salons.
GeneReach sells a portable diagnostic device which can be used to test both humans and animals for disease. Each relatively inexpensive device can be used for thousands of tests. The majority of profits come from subsequent reagent sales, as each application of the test requires reagents. The global pandemic has led to a large jump in the need for testing. Portability allows the device to be set up at any site needing abundant testing. Hypothetically, for example, the testing could be done in an airport where all passengers would be tested. The GeneReach system is automatic, so the test needn’t be performed by a trained technician. Results are available in 25 minutes, in contrast with lab tests which typically take a day to get results.
GTPL Hathaway provides both cable TV and broadband in India, where these services are newly affordable. Forecasters believe that GTPL also has the prospect of growing at 20% for 20 years.
Koukandekirukun (7695 JP) can be thought of as an online Home Depot. They sell and install a wide range of home appliances. An aging Japanese population is increasingly reliant upon such “do it for me” service providers.
During the quarter we sold several stocks. Golar (GMLP) received and accepted a buyout offer, which triggered our sale. The common theme for the rest of the sales was lack of a near-term catalyst. These are well run companies with a bright future. We still like these companies. For the present, however, they likely represent dead money.
Two examples of “dead money” stocks are Stor-Age and Helios Towers. Stor-Age (SSS SJ) is a South African self-storage company. Unlike the US, where self-storage companies proliferate, South Africa is virgin territory for self-storage companies. SSS is the market leader, with a gigantic opportunity to grow. However their growth comes slowly, at a unit-by-unit slog. Helios Towers (HTWS) is an African mobile phone tower company. Throughout much of Africa, the use of mobile phones is still in the growth stage. As more phones are in service, more towers are needed. In addition to this organic growth opportunity, Helios also has opportunities to grow via tower acquisition, as traditional phone companies are beginning to prefer a capital-light strategy which doesn’t require owning the towers. Both Helios and Stor-Age are fairly priced stocks which have great long-term growth prospects, but lack a catalyst to move the stock price in the short-term.
I expect markets to continue to be challenging as we pick our way through the aftermath of Covid. Getting fully back to normal, and dealing with the massive deficit incurred to soften the impact of Covid, are both difficult problems affecting the market. But WASIX’s emphasis remains on finding companies with the ability and the willingness to pay a growing stream of dividends.
I continue to be one of the largest shareholders in our fund, and I appreciate your willingness to invest alongside me.
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Seven Canyons Funds are distributed by ALPS Distributors, Inc.