Reflecting on the year that was 2020
Peter White, The Inside Network: Welcome to another podcast from Datt Capital. My guest today is Emanuel Datt from Datt Capital. Emanuel…Welcome and congratulations on a great year.
ED: Thanks, Pete. Its been a very good year for us, thankfully, and we hope it will continue.
PW: On my reading, you’ve scored over a 30% increase year-on-year to December, is that correct?
ED: Yeah, that’s right. So our calendar year return for 2020 was almost 32%. That obviously included quite a tumultuous time on markets in February and March. So we’re very pleased with that outcome.
PW: Can you give us a few insights into how you achieved such good results?
ED: Yeah, sure…
PW: Particular stocks/particular strategies?
ED: I think it’s a combination of good stock selection, but also good investment strategy. And the ability to keep a cool head during a big market downturn was especially valuable.
PW: I would say you must have had an ice cold head in March to get those sort of results!
ED: Yeah, even though my heart was thumping and beating very, very quickly at times, I’m a very rational person by nature. So I knew that things couldn’t necessarily continue and was more of a market overreaction than anything else I’d say.
PW: What strategies did you adopt when the market went down? Did you go for any particular stocks?
ED: We did definitely risk our portfolio as the market kept retreating. Basically what we did was re-deploy the cash at close to market bottoms or just as the market was turning, which I looked at very favourably for us, but also maintaining a lot of flexibility within the portfolio, not being too wedded to positions once they had appreciated or shown a sufficient profit. We were very quick to keep recycling our capital while good opportunities were there to be found. We had a great run on a few different stocks. Probably the two biggest from a returns point of view were our investment in SelfWealth.
So we first brought into SelfWealth, this was back in March when the stock was trading in the mid teens (teens in terms of cents!). And we recognised that there was definitely an increase in retail equity market participation at the time of the large market drawdown. And we felt this company had a number of advantages and it could continue to enjoy relatively strong organic growth going forward. And so we started picking that particular stock up sort of in the mid teens and as of today, it’s trading at about 70 cents or so or a little bit in excess. So it’s been a very successful investment for us and we think the company has a long way to go.
PW: So you’re still a holder, are you?
ED: Yeah, absolutely. We intend on keeping that as a long term holding for the portfolio itself. Another one that has worked out very well for us is an investment in Adriatic Metals.
ED: Adriatic Metals have one of the highest quality undeveloped resources worldwide, we think, and it was more or less sold down like the entire market was in Feb 2020. So, yeah, we definitely sort of took an opportunity to top up that investment when it was trading very cheaply, we thought. I think it bottomed out somewhere around 80 cents or so in March and has since traded as high as $2.80 since then. So, yeah, a very successful investment.
PW: And I’ve seen you writing on AfterPay, so presumably you’ve held it and enjoyed part of that ride? Have you got AfterPay still or have you bailed out there?
ED: We’ve bailed out of AfterPay. AfterPay has obviously been an incredible performer since the March 2020 market bottom, when it was sold down to about $8, we ourselves, we got out somewhere in the high $40s. But it’s totally blown past, I think anyone’s expectations in terms of price appreciation and valuation. We think the company is one of those fantastic businesses that we think will be around for a long time. But ultimately we felt there was better value to be found elsewhere, which is why we sold.
PW: Can we step back just for a minute to remind listeners of what the strategy and goals are of Datt Capital?
ED: We are a long-only fund. We invest solely in Australian equities and fixed income assets. Our objective is to achieve double digit returns per annum over a two year period. And we invest primarily in growth opportunities, relative value and special situation players. That’s sort of our bread and butter.
PW: And you’re a wholesale fund, obviously…yes?
ED: Yes. Wholesale only fund.
PW: So minimum is what, $50,000 or $100,000?
ED: Our minimum investment is $100,000.
PW: And of course the portfolio also has investments in real estate or real estate debt. Can you talk us through that?
ED: Yes. So we do have some residual exposures to real estate debt, which is pretty much unlisted, fixed income. We haven’t invested any new deals over the last 18 months or so just because with such low interest rates, our sort of first return hurdle or metric for these sort of investments is a double digit return to capture any liquidity premium, but we’re just finding that it isn’t on offer in today’s environment. So we only have a couple of residual exposures, but we’re not expecting that to be a huge part of the portfolio going forward at this stage.
PW: Speaking about going forward, what’s your feeling about the market now and what are some of your ideas going forward at this point of time in early 2021?
ED: There’s definitely potential for a drawdown at some stage during this calendar year. I say that more as a caveat, I guess, because the knock on effects caused by the COVID-19 lockdown’s that we experienced in 2020. And I expect that to be linked to some tapering of government subsidies and assistance that heavily benefited and supported society from the start of these lockdowns and the situation itself.
But conversely, I think there’s just a huge amount of stimulus going on. We expect markets to probably finish positive for this calendar year overall, notwithstanding the potential for some volatility to occur during the year.
PW: I noticed one of your holdings in one of your last reports is Dusk, which is, of all things, a scented candle maker. But you have pretty strong and optimistic thoughts about that company. Can you talk us through your views on that company? Dusk…D-U-S-K.
ED: Yeah, you’re right Pete. Dusk is best known for its scented candles. However, it does also sell diffusers, essential oils and other fragrance related homeowners. So it is a discretionary retailer. It is the largest player in the local market and pretty much the only corporate style player, I should say, in this market. So it holds about 22% market share (we estimate). And it runs somewhere around one hundred and twenty odd physical stores, although online has obviously become a much bigger part of what they’re doing, given the COVID-19 lockdowns.
Our sort of angle here is that given that people spend so much time at home, especially these past 12 months, there’s been a big emphasis on improving people’s living environments themselves.
So it’s been really a huge boon for the retail industry, which is historically it’s been quite a sleepy sort of industry sector (or quite a consistent performer!) so we’re expecting that people will continue to invest in making their home environment a pleasant place to live and continue buying these sort of homewares and consumables.
What also attracted us to Dusk was also the fact that it has an incredibly strong membership programme and it’s backed by a couple of very well renowned retail investors in the private equity firm Catalyst and Brett Blundy, who is a Aussie retail legend. Also, the valuation was just incredibly cheap from our perspective, and upgraded its guidance to a state that just for the first half of this financial year, they were guiding to private earnings before interest and tax figure of $26 million. And this is when the company was trading at an enterprise value of somewhere around $100 million or so odd. So incredibly cheap, considering…
PW: That’s a very attractive number!
ED: Yeah, yeah, absolutely. Especially in the context of looking at all the other retailers that would trade at, you know, 10 to 20 times multiples overall. So incredibly cheap, good operators and major shareholders benefiting from a tailwind that we hope will continue for some time on. So just seems like a no brainer to us.
PW: So what about gold? I know you’ve been very active in gold, ADT (Adriatic Metals) is a gold play…are there any other thoughts on gold or has it come to a plateau at the moment? What’s your feeling there?
ED: There are two particular aspects of gold. One is the commodity price itself, and…the second is the operational performance of particular gold producers. So our exposure to gold has been through explorers and developers. And generally these investment opportunities that we’ve chosen to invest in typically have a growth and an MNE angle attached to it. So we prefer to invest in companies which have very good grounds and the potential to find good resources that would be attractive to be gobbled up by an existing producer with a plant in the area that may be struggling with cost issues and require perhaps a better, greater feedstock to help improve the overall economics, and that’s been a pretty strong strategy for us, how it has performed over time.
And yeah, we hope to continue that strategy going forward, irrespective of any volatility in the commodity price itself.
PW: Just finally, on the global stage, there’s been a change of administration in the States. How does that impact on your thinking going forward, even though, of course, you’re only investing in Australian stocks? Has that made any difference to you at all or not?
ED: I would say that it has, because with this green agenda, or ‘green revolution’, whatever you want to call it, that has been part of the Biden administration’s policy goals, I think that it has actually been very bullish for commodities of all types. You combine that with unprecedented government stimulus and it’s really a raging bull market for commodities of all types from our perspective. So that can cover from base metals and precious metals all the way through to soft commodities like food items and grain. So I think that it’s a great time to be invested in these particular exposures and we hope to benefit going forward from our current policy exposures.
PW: Emanuel, thanks very much for talking to us today. It sounds like you’re talking optimistically towards the future, at least for the next year or so.