The surprising ASX tech stock in the lead: fund manager



Ask a fund manager

The Motley Fool chats with fund managers so you can get a taste of how professionals think. In the first part of this edition, Romano Sala Tenna, co-founder of Katana Asset Management, shares his ideas and reveals the best performing ASX share of the Katana Australian Equity Fund.

Motley Fool: How would you describe the Katana Australian Equity Fund to a potential client?

Romano Sala Tenna: What we have tried to do is remove all artificial constraints. So, constraints of sector, style, market capitalization, etc.

We like constraints that add value to the process, but not when they artificially allow us to tick a box, rather than trying to get maximum return.

We have 25% of our own funds under management in the fund, so we are very risk averse. This has allowed us, in the long term, to be in the top quartile at each deadline.

We are very proud to have a record of 16 years. Some funds only have a fraction of it. And we generated a return of 10.2% per annum net of fees over that period, which puts us in the top 10 for funds over 3 and 5 years.

MF: You invest largely without constraint on the market capitalization of a company. What are the advantages and disadvantages of investing in ASX small caps versus ASX 200 blue chips?

RST: The first thing to understand is that you have to be able to invest across the entire spectrum. We shouldn’t be artificially constrained by what we watch.

Now on the downside to the smaller end of the market, you have liquidity issues. Businesses are not as diverse. And many do not have the same level of experience, as they are in their infancy. You also have potential corporate governance issues due to lower review levels and research coverage.

On the positive side, because they’re smaller, they go under the radar. Thus, you are more able to find rough diamonds and companies in their infancy. You are more likely to find businesses that are on a very strong growth path, which you can pilot for a long time. And when you compound those returns, they can be considerably higher than investing in large cap companies.

MF: To have exchange traded funds had an impact here?

RST: With the rise of ETFs, we are seeing a lot more passive money than active money. I think passive money generally bodes well for large cap companies versus small cap companies. So that digression between small and large cap share of the market starts to expand further and you start to see more and more small cap companies being left behind.

MF: What has been your best investment in ASX stocks for the fund over the past year?

RST: Quite surprisingly, because we are not too strong in the technology sector, Uniti Group Ltd. (ASX: UWL) has been our best performing stock over the past 12 months. And we have started to see things in it that also give us confidence in the future prospects of this company.

MF: How long have you been involved in Uniti?

RST: We have been invested for several years. But we have strengthened this position as we have gained confidence. It is now one of the top three positions in the fund. For small businesses, it takes time to build that confidence in the business. Thus, we are more likely, with small businesses, to increase our position over time, rather than starting with a larger position.

MF: What made you decide to scale up with Uniti?

RST: At the macro level, we like the theme that we see emerging and can play through Uniti Group. Plus, we’re starting to see some really smart execution.

Multiple acquisitions are normally a bit of a red flag for us. But it actually worked backwards here, as they make these acquisitions at less than the cost of replacement. When they start to take in fiber [optics companies] they eliminate a competitor, they increase their economies of scale, and they also do so below replacement cost. And we love that there is a lot of growth that we can put our finger on in a tangible way.

What we have seen in a very short period of time is that the company is generating huge free cash flow and fixing its balance sheet to the point of announcing a buyout. We believe the outlook for this company is strong as it continues to grow its earnings.

MF: With Bitcoin (CRYPTO: BTC) and cryptocurrencies becoming more prevalent and packaged in ETFs, what do you think of these new assets?

RST: We are still in this phase where we have to work, is this a paradigm shift or is it the biggest bubble in history? There are very doomed people on both sides of the debate.

On our side, we don’t have enough data points to know what the answer is. The longer crypto remains unregulated, the more likely it is to lead to a paradigm shift in financial services. We may be witnessing one of those rare moments in history when we are witnessing the birth of a truly new asset class.

It is still too early to say definitively, but some elements are emerging.

One of the biggest risks to the market now is some of the irrational exuberance that has occurred in some industries. And I would put crypto in that category. Not so much for Bitcoin and those who may survive, but for the other 7,000 cryptos that will not survive. And it will wipe out huge amounts of capital.

At Katana, we are very risk averse. We will make sure we have understood things correctly, that it is in our circle of competence, before committing.

MF: Are you concerned about inflation in the coming year? What steps are you taking?

RST: We had a big repositioning moment in February and March of this year, when we saw bond yields have this substantial rally. It was then that we were convinced that inflation had arrived and that it was more than transient.

This is the great argument of the moment, is inflation structural or is it transitory? We believe there are elements of both. There is no doubt that there have been transient influences, with supply chain disruptions from COVID-19 and others. But we also see real structural elements. Hard commodities have increased dramatically. We are seeing increased offshore rates and world freight rates to high levels. And we are seeing the labor market tighten. This is going to have an impact on the Australian landscape.

(To learn more about the Katana Australian Equity Fund, Click here.)



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