Spheria Emerging Companies Limited Posts -0.2% June Return, Surpasses Benchmark by 1.8%

June Outperformance Fueled by Stock Selection and Benchmark Divergence

Although the fund posted a marginally negative absolute return of -0.2% in June 2026, it outpaced the S&P/ASX Small Ordinaries Accumulation Index, which declined 2.0%, resulting in a 1.8% relative outperformance. This was driven by favorable stock picks and a deliberate underweighting of the materials sector, which faced significant declines. Spheria Asset Management’s bottom-up fundamental analysis approach focusing on emerging Australian companies contributed to this monthly relative success amid challenging market conditions.

The fund's June performance underscores the volatility in Australia’s small-cap equity markets. Despite the slight negative return, the relative outperformance indicates effective navigation of market headwinds by avoiding or reducing exposure to weaker sectors, consistent with the company's investment philosophy emphasizing quality fundamentals over sector or thematic bets.

Full-Year Underperformance Linked to Resources Sector Underweight

For the financial year ending 30 June 2026, Spheria Emerging Companies Limited recorded a 0.0% return, significantly trailing the benchmark’s 8.1%. The primary cause was a structural underweight in the materials and resources sectors. The management team cited difficulty in identifying quality small-cap resources companies that meet their investment criteria, noting that well-positioned firms with long reserve lives and low costs tend to be among the ASX’s largest 100 companies or have been acquired by larger miners.

The fund’s stance on gold stocks reflects this philosophy. Management views gold producers as challenging portfolio fits since industrial demand forms a small portion of gold demand, with prices driven more by speculation than fundamentals. Instead of investing in high-cost gold mines with limited reserves, the fund gained materials sector exposure via quality mining services companies like Mader Group Limited and Imdex Limited. However, these holdings did not fully offset the broader materials sector’s strong financial year returns.

Universal Store Holdings and Karoon Energy Impact June Performance

The top positive contributor in June 2026 was an overweight position in Universal Store Holdings Limited (UNI.ASX), which surged 15%, recovering from oversold levels amid weakness in consumer discretionary stocks. Universal Store demonstrated robust topline growth and cost management, outperforming peers facing growth and margin pressures. In May 2026, the company reported positive like-for-like sales across all brands, including 8.5% growth for Universal Store and 12.9% for Perfect Stranger over 43 weeks.

The largest detractor was Karoon Energy Limited (KAR.ASX), which fell 26% due to declining oil prices and a revised 2026 production guidance from 8.1–9.2 MMboe to 7.2–8.2 MMboe. The downgrade stemmed from lower output at the Who Dat field in the Gulf of Mexico caused by a subsea equipment failure expected to be fixed only in 2027. Management believes the market overreacted, emphasizing that Who Dat accounts for about 25% of normalized production, while the Bauna Project in Brazil, representing nearly 50%, is fully operational again.

Portfolio Breakdown and Leading Holdings as of 30 June 2026

As of 30 June 2026, the fund’s top 10 holdings accounted for 40.1% of the portfolio. Supply Network Limited was the largest holding at 5.0%, followed by Deterra Royalties Limited at 4.4%. Other notable holdings included Fletcher Building Limited and Imdex Limited (4.1% each), Sims Limited and Perpetual Limited (4.0% each), IRESS Limited (3.9%), Orora Limited (3.8%), Universal Store Holdings Limited (3.7%), and Mader Group Limited (3.1%). This allocation reflects the fund’s focus on quality emerging Australian companies with strong growth potential.

The portfolio is heavily weighted toward larger small-cap companies, with 66.5% in firms valued above $1 billion. Mid-cap segments of $500 million to $1 billion and $250 million to $500 million represent 12.2% and 11.6%, respectively, while companies under $250 million make up 7.8%. The fund held 1.5% in cash, maintaining liquidity for investment opportunities or redemptions.

Net Tangible Asset Valuation and Market Pricing

The fund’s post-tax Net Tangible Asset (NTA) per share was $2.229 on 30 June 2026, compared to a pre-tax NTA of $2.238. This post-tax figure incorporates provisions for taxes on realized and unrealized gains and other earnings, offering a conservative asset value estimate. Trading at $2.30 per share, the fund commanded a slight premium of approximately 0.3% to post-tax NTA. Market capitalisation stood at $137.9 million at the reporting date.

NTA calculations exclude deferred tax assets related to capitalized issue costs and income tax losses pending audit, ensuring reported figures reflect assets attributable to shareholders. The modest premium to NTA suggests investors view the fund’s active management and stock selection as adding limited value relative to net assets or that sentiment toward Australian small caps remains cautious.

Global Equity Rally Concentrated in Technology Misses Australian Small Caps

Global equity markets closed the 2025–2026 financial year strongly, with the MSCI World Index up 30% and the MSCI Small Cap Index rising 23%. The information technology sector led gains, notably the Technology Hardware sub-sector within MSCI Smaller Companies, which reported a 900% return. However, this surge was largely driven by SanDisk (SNDK.US), which soared approximately 4,900%, illustrating concentration risk and limited applicability of headline returns for diversified managers.

Australian equity indices lagged global peers, with small caps returning 8% and the ASX 50 about 6% for the year. While materials performed well locally, Australia’s direct artificial intelligence exposure remains limited compared to global markets. Outperformance was concentrated among electrical contractors and select data-centre companies. Combined with cumulative interest rate hikes amid rising inflation, these factors pressured Australian consumers and equity markets. The fund noted software sector de-rating as investors questioned AI’s impact on competitive barriers.

Fee Structure and Long-Term Performance Versus Benchmark

Spheria Emerging Companies Limited charges a 1.00% annual management fee (plus GST), calculated daily and paid monthly in arrears. Additionally, a 20% performance fee (plus GST) applies to portfolio outperformance against the benchmark, assessed every six months with a high-water mark. These fees align with industry standards for active Australian small-cap management, reflecting costs of fundamental research and stock selection.

Over three years to 30 June 2026, the fund returned 7.5% per annum, underperforming the benchmark’s 9.9% by 2.4 percentage points annually. Over five years, it returned 3.2% per annum, outperforming the benchmark’s 3.0% by 0.2 percentage points. Since inception on 30 November 2017, the fund delivered 6.6% per annum versus 5.6% for the benchmark, outperforming by 1.0 percentage point over nine years. This long-term record indicates the value of its fundamental investment approach despite recent underperformance.

Management Insights on Market Mispricing and Stock Opportunities

Management highlighted contrarian views on market pricing and value within the portfolio. Regarding Universal Store Holdings, they emphasized its quality retail position with growth potential through store expansion, a net cash balance sheet, and an attractive valuation trading at 8.5x forward FY27 enterprise value to EBIT. The company is expected to achieve 11.5% revenue growth and 15.4% EBIT growth in FY26 despite inflationary and labor cost pressures, demonstrating effective cost and margin management.

Despite Karoon Energy’s 26% decline, management remains constructive, believing the market overreacted to Who Dat field production issues. They noted Who Dat accounts for about 25% of normalized production, while the Bauna Project in Brazil, nearly 50% of production, is fully operational and commands a higher oil quality premium. This reflects a longer-term perspective on operational challenges and market overcorrection.

Monthly Dividend Policy Supports Regular Income Distribution

Spheria Emerging Companies Limited maintains a monthly dividend policy, providing shareholders with consistent income streams, contrasting with the quarterly or annual distributions common among Australian funds. The company did not disclose specific dividend amounts or yields for June 2026, as distributions vary based on monthly portfolio earnings and realized gains.

This monthly distribution approach positions the fund as an income-generating vehicle alongside capital growth potential, appealing to investors seeking regular cash flow. The sustainability and level of distributions depend on ongoing investment performance, portfolio transaction gains, and dividend income from holdings.