“Producer prices are going up, so farmers are doing the best,” he says.
“Milk processors lose, but like sunsets in the west, times change, circles happen. When assets are ugliest, that’s when we’re happiest. »
The Micro Cap Activist Fund (MCAF), managed by Mr Iafrate’s Melbourne-based company Armytage Private, was set up after the Royal Financial Services Commission to target mid-priced small-cap financial companies.
The fund is among the best equity funds over the past three years according to Morningstar data thanks to a wave of M&An activity among smaller financial services companies and have been subject to 10 takeovers since 2019.
The list includes Hub24’s bid for rival Xplore Wealth, Apex Group’s acquisition of Mainstream Group, 360 Capital’s deal with Evans Dixon, and Iress gambling for OneVue.
Iafrate says he owes his good run to the fallout from the royal commission, taking advantage of poor pricing in the market as big banks rushed out of the advice business. “The fund focuses on financials with market capitalizations below $70 million…those companies tend to have dysfunctional boards, dysfunctional management, and they tend to have boards that protected their salaries and attendance fees,” he said.
“After the Hayne Royal Commission, the spotlight was thrown squarely on the financial services sector. There was a galaxy of small cap financial services stocks that were listed and had no purpose.
“Once the share price was hammered, these companies lost the ability to raise capital. Our fund was created to identify takeover bids and M&A in this space… it was Nirvana.
He recalls a series of deals in 2020 where the fund was involved in three redemptions in two days: “I walked into our investment committee meeting and said ‘what are we doing now “because we just lost almost half the bloody wallet.”
Back to Wealth
It’s not over yet, he says (“at least another three, maybe four [deals] by June next year”) and he is busy accumulating shares in Diverger, which provides back-office services to financial advisers and accountants and is currently in the running for Centrepoint Alliance, and is a shareholder in this last.
Iafrate is not a fan of banks. He says vertical integration and exorbitant fees have driven stores like Armytage away from their platforms and models. But he advises the return of advice to the big four, saying the most important people are those who influence people with money.
“The banks dumped all of their advisory business, threw it in the trash, sold it for nothing, and they turned the advisory business into these horrible criminals, these ogres,” he says.
“But as night follows day, they will return. You mark my words. And they’ll be back because of one simple thing. The most important person in the world of financial services is the one who has a say in the person who holds the checkbook and the financial planner/accountant/lawyer who has the client’s trust and respect.
Food is its next target, taking a substantial stake in dairy and poultry maker and retailer TasFoods alongside millionaire businesswoman Jan Cameron.
In addition to MCAF, Armytage’s flagship offerings are the Australian Equity Income Fund and the Strategic Opportunities Fund. About two-thirds of the business is in high-income individual wealth managed accounts, the rest in mutual funds.
The micro-cap fund, “the pure genesis, heart and soul of Armytage,” is invitation-only with approximately $18 million under management. They hope to reach $75 million, above which capacity would become an issue. MCAF operates with just seven stocks at a time and tends to take 10-15% stakes in companies with a market capitalization of less than $70 million.
The risk is in incredibly high concentration, especially if deals don’t materialize, trapping major shareholders in unloved companies. In such a small part of the market, liquidity is a key issue, making it difficult to exit quickly or execute large moves without altering the stock price.
“Look where you least expect it”
An industry veteran, Iafrate’s career in financial markets dates back to the 1980s, developing a key interest in business after analyzing Cadbury Schweppes at university. He then worked for Barclays Bank and Tolhurst Noall and McKinley Wilson, before founding Armytage Private in 1995.
He founded and chaired two publicly traded companies, Easton Investments and Treasury Group, the latter holding stakes in a number of boutique managers, including Anton Tagliaferro’s Investors Mutual.
Asked about his approach to investing in today’s markets, Mr Iafrate said: “least look where you expect it”.
“If the market says everything is going to go down, and that’s terrible, then it won’t – it’s too obvious,” he says. “It’s been a constant theme for the 40 years I’ve been in the game. If it’s obvious, it’s not going to happen.
Where is the non-obvious today? Iafrate says every man and dog knows about rising inflation and rising rates, and the impact of the end of easy money on high-growth stocks. But, he expects the Reserve Bank to complete its tightening cycle by Christmas, leading to a rebound in stock markets.
With this timeline in mind, the Australian equity fund accumulates stocks with a demonstrated ability to absorb and/or pass on price increases, and monitors which sectors will rebound once the market deems the worst is behind them. him, namely the cyclicals – infrastructure, resources, non-discretionary consumption and technology.
“We believe that in September-November, stock markets will start to stabilize, the interest rate genie and the inflation genie will be put back in their bottle, and the market will begin to rise again as the price approaches. Christmas time,” he said.
Iafrate says, “you can’t overtake BHP,” objecting to Goldman Sachs’ warnings that China’s housing crisis will drive down the price of iron ore.
He also likes copper producers IGO, OZ Minerals and Mineral Resources, adding that investors don’t need to “indulge explorers” to benefit from higher prices.
Looking down rows of empty buildings from his Melbourne CBD office, Iafrate thinks the commercial property sector is showing warning signs, arguing that workers are unlikely to return to the office in equal numbers. He also notes Caydon’s collapse, saying more property developers are expected to fall.
“Where there’s a lot of supply, you tend not to want to be in those types of stocks, and in commercial real estate… there’s a lot of supply.”
Armytage has a long history in the industry, launching a real estate fund in 2008 to target real estate trusts that have been battered so badly they risked damaging their parent’s brand.
Pushing back against popular opinion, Iafrate backs the Reserve Bank, saying he gets nervous when people at the golf club think they could do a better job than the experts. “It was easy for people to take cheap shots and after the pandemic everyone became an overnight exchange rate guru. It’s so boring,” he said.
“Whether [the RBA] had become enthusiastic and had tried to anticipate the genie of inflation or the recovery of health, or had been wrong…wow. They took the approach: “we’ll be wrong on the way up”. I can live with that.
“I’m not saying they got it all 100%, but people forget about the surreal circumstances they faced.”
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