Barramundi – June 2019 Quarter Newsletter

Quarter Update Newsletter
31 March 2019 – 30 June 2019
»»Continuing»the»strong»start»to»the»calendar»year,»
Barramundi»returned»+8.3%»gross»performance»for»the»
quarter»to»30»June»2019,»while»the»adjusted»NAV»return»
was»+7.7%»and»the»benchmark»return»was»+8.1%.
Summary from the June Quarter
The Australian market, along with global equities and particularly
interest rate sensitive equities, benefited from the relentless
grind lower in interest rates. The Australian government bond
rate fell to the lowest levels in history, and closed out June with
a 1.3% yield. The RBA joined the ranks of dovish central banks in
cutting the cash rate in June for the first time since 2016 to 1.25%,
providing some support to the beaten up housing market and
the consumer.
The Federal election in May was also a key catalyst supporting
the Australian equity rally. In one of the larger political upsets in
recent times, the Coalition were returned to power after beating
the favoured Labour Party at the polls. The Liberals were seen
to have more market friendly policies relative to Labour and this
boosted equity sentiment in the weeks following the election.
The election outcome may truncate the economic downside case
in Australia. However, the tone of commentary from management
teams in recent weeks remains muted. In fact, of the 30+ ASX200
companies providing trading updates in the last two months,
over 80% have downgraded earnings. To some extent these
updates are backward looking. But it remains to be seen whether
the positive post-election market sentiment will translate into a
sustained lift in operating performance for businesses.
Navigating Landmines
The majority of our portfolio companies performed well over the
June quarter, and as highlighted above, drove a strong portfolio
result. That said, it wasn’t smooth sailing across all of our portfolio
companies. For this quarter’s newsletter we give you some insight
into our approach to navigating equity market landmines using
Link Administration, which slumped -32% in A$ across the quarter,
as a live example.
By way of background, we have invested in Link for a number
of years. Link’s primary operations are located in Australia, and
following an acquisition in 2017, in the UK. Amongst other things,
it specialises in providing outsourced back office administrative
functions for superannuation funds and corporates. Link is a
key conduit for managing the interaction between super funds /
corporates and their many members or shareholders. Link’s moat
stems from its position as the scale player, making it the lowest
cost provider in its sector. We’ve liked the traditionally defensive,
recurring nature of its revenue and earnings stream.
So what happened to this predictability?
Firstly, the Australian government, in a surprise move last year,
indicated that it would implement legislation to sweep inactive,
duplicate super fund accounts to the Australian Tax Office
for administration from October 2019. After dragging its feet,
parliament rushed this legislation through at the last minute before
the federal election in May. This left the super industry scrambling
to meet the October deadline in managing this process for
their customers. Link, to its credit, has stepped up and thrown
additional labour and resource behind this programme on behalf
of its customers. This added unexpected but temporary costs
to Link’s business, while funds have also pre-emptively moved
inactive accounts to funds that pay lower fees to Link.
We applaud Link for doing what is necessary to support its clients.
This is exactly what we’d expect from our management teams.
In helping its customers meet a tight deadline, Link undoubtedly
highlights the importance of its services to its clients, and longer
term we think this will help with client retention and stickiness.
The second factor contributing to the warning was soft market
activity related to ‘Brexit’, which affected Link’s UK operation.
Wouldn’t it be nice if politicians could get their act together so
this word could fade from our lexicon? While the market has been
focussed on Brexit for a while, Link had not seen disruption to its
business until March / April when management said client activity
softened. How long this lasts for and how Brexit evolves from here
will likely remain uncertain for a while. Ultimately we see this as a
cyclical rather than structural headwind.
Thirdly, Link has been in the headlines in the UK for an oversight
role it performed for a fund manager client that ended up
suspending redemptions from its investors. While the regulator
is looking into the events leading up to the redemption
suspension, Link management are satisfied that they met their
required obligations in the matter. We note that the regulator has
publicly commented that the problem is more a failure of rules
than supervision. However, until the investigation is complete,
uncertainty will exist over the extent of Link’s culpability (if any).
Link management are unable to talk publicly about this issue
while the investigation is underway. However, we will speak
with them in due course about the risks the company faces in
Notable Returns for the Quarter
in Australian dollars
NANOSONICS
+29
%
ARISTOCRAT
LEISURE
+26
%
XERO
+23
%
SEEK
+21
%
LINK
ADMINISTRATION
-32
%
BRM NAV
$
0.69
1
SHARE PRICE
$
0.63
DISCOUNT
2
7.8
%
as at 30 June 2019
1
WARRANT PRICE
$
0.02
¹ As at the date of this Newsletter the Barramundi year end NAV has yet to be audited, and therefore it may change.
2
Share price discount/(premium) to NAV (including warrant price on a pro-rated basis).

2
Barramundi Limited
Private Bag 93 502, Takapuna, Auckland 0740, New Zealand
Phone: +64 9 489 7074 | Fax: +64 9 489 7139
Email: enquire@barramundi.co.nz | www.barramundi.co.nz
performing this oversight role for fund manager customers and
the lessons learnt from this experience. While these headlines
may impact the degree to which Link wins new business in this
division, we think the risk of the company losing existing clients
because of this is low.
Taken together with the reasons for the earnings downgrade,
while all this detracts from Link’s near term earnings and its
outlook, these issues do not in our view negate the investment
case for Link. From what we can judge, Link’s moat and its core
economic drivers remain intact, and these earnings headwinds
will pass. In fact, the steps Link have taken to help its clients
meet tight deadlines in Australia arguably improve its brand
equity with its clients.
It clearly feels horrible stepping on this landmine today.
However, we think the share price has overreacted. We believe
it is time for patience, and that it would be a mistake to sell
If you would like to receive future
newsletters electronically please email
us at enquire@barramundi.co.nz
our shares. We have consequently used this sell-off to top up our
shareholding in Link.
We will no doubt write about Link in the future. For now, we leave
the last word to Link MD John McMurtrie who commented “the
last couple of weeks have been quite edifying.”
Edifying indeed!
Robbie»Urquhart
Senior Portfolio Manager
Fisher Funds Management Limited
18 July 2019
Company News
Dividend Paid 27 June 2019
A dividend of 1.31 cents per share was paid to Barramundi
shareholders on 27 June 2019, under the quarterly distribution
policy. Interest in Barramundi’s dividend reinvestment plan (DRP)
remains high with 35% of shareholders participating in the plan.
Shares issued to DRP participants are at a 3% discount to market
price. If you would like to participate in the DRP, please contact
our share registrar, Computershare on 09 488 8777.
Performance
as at 30 June 2019
3 Months
3 Years
(annualised)
5 Years
(annualised)
Company Performance
Total Shareholder Return+13.3%+10.5%+9.4%
Adjusted NAV Return +7.7%+10.0%+9.2%
Portfolio Performance
Gross Performance Return+8.3%+13.2%+12.7%
Benchmark Index¹+8.1%+13.3%+11.1%
1
Benchmark Index: S&P/ASX Small Ords Industrial Gross Index until 30 September 2015 &
S&P/ASX 200 Index (hedged 70% to NZD) from 1 October 2015
Non-GAAP Financial Information
Barramundi uses non-GAAP measures, including adjusted net asset value, adjusted NAV return, gross
performance return and total shareholder return. The rationale for using such non-GAAP measures
is as follows:
»adjusted net asset value – the underlying value of the investment portfolio adjusted for capital
allocation decisions,
»adjusted NAV return – the return to an investor after fees and tax,
»gross performance return – the Manager’s portfolio performance in terms of stock selection
and currency hedging before fees and tax, and
»total shareholder return – the return to an investor who reinvests their dividends, and if in the
money, exercises their warrants at warrant maturity date for additional shares.
All references to adjusted net asset value, adjusted NAV return, gross performance return and total
shareholder return in this newsletter are to such non-GAAP measures. The calculations applied to
non-GAAP measures are described in the Barramundi Non-GAAP Financial Information Policy. A
copy of the policy is available at http://barramundi.co.nz/about-barramundi/barramundi-policies/
Disclaimer: The information in this newsletter has been prepared as at the date noted on the front
page. The information has been prepared as a general summary of the matters covered only, and
it is by necessity brief. The information and opinions are based upon sources which are believed to
be reliable, but Barramundi Limited and its officers and directors make no representation as to its
accuracy or completeness. The newsletter is not intended to constitute professional or investment
advice and should not be relied upon in making any investment decisions. Professional financial
advice from an authorised financial adviser should be taken before making an investment. To
the extent that the newsletter contains data relating to the historical performance of Barramundi
Limited or its portfolio companies, please note that fund performance can and will vary and that
future results may have no correlation with results historically achieved.
Company
% Holding
Ansell3.1%
ARB Corporation3.3%
Aristocrat Leisure2.6%
AUB Group3.3%
Brambles3.5%
Carsales7.1%
Commonwealth Bank5.5%
Credit Corp4.2%
CSL7.3%
Domino's Pizza4.1%
Ingenia Communities1.5%
Link Administration Holdings4.3%
Nanosonics2.5%
National Australia Bank4.2%
NEXTDC3.5%
Ooh! Media4.7%
ResMed4.1%
Rio Tinto2.5%
SEEK7.4%
Sonic Healthcare3.0%
Technology One2.0%
Westpac4.2%
Wise Tech Global3.9%
Xero Limited5.3%
Equity»Total97.1%
Australian dollar cash1.3%
New Zealand dollar cash0.6%
Total»Cash1.9%
Centrebet Rights 0.0%
Forward foreign exchange contracts1.0%
TOTAL100.0%
Portfolio Holdings Summary
as at 30 June 2019