My lessons from a negative 7% year

In what is becoming a bit of an annual thing, Ben Richards and I reflect on lessons learned over the past 12 months of running the Seneca Australian Small Companies Fund.

Catch-up reading:  October 2025 Review  |  October 2024 Review

Why should you care about our lessons learned?

In the 12 months to 1 October 2026, the Seneca Australian Small Companies Fund returned 4.96%, after fees. 

The benchmark S&P/ASX Small Ordinaries Index declined -6.74% (ETF's that track that index include ASX: ISO and ASX: SSO).

That's an outperformance of +11.70% after fees, and beats the average manager in our peer group by +13.47% (FE Analytics ACS Equity - Australia Small/Mid Cap).

Since inception 3 years ago, the Seneca Australian Small Companies Fund has:

• Generated 23.31% p.a. after fees, 87.48% cumulative return.
• Outperformed our benchmark by +12.90%
• Ranked #1 among comparable open funds over that period (closed and single-sector funds excluded)
• Beat the average manager in our peer group by +13.71% p.a. (median = 9.60% p.a.)
• Beat the average of top quartile managers by +7.13% p.a. (average = 16.18% p.a.)

Most pleasingly, we've achieved this in a very tough market for active management - over the 3-year period, 56% of managers underperformed the index.

Lesson 1: Be agnostic. Go where the value is. Stay active.

While the primary S&P/ASX Small Ordinaries Index is down -6.74% over the last 12 months (to 30 September), this only tells you part of the story. This return comprises:

• S&P/ASX Small Resources index is up +12.60% and
• S&P/ASX Small Industrials index is down -14.39%.

Our call to be overweight resources has been right and has definitely contributed to our returns.

However, the Small Ordinaries benchmark has about a ~30% allocation to resources companies, so with our portfolio sitting in that 35-37% range for most of the year, the ‘macro’ call was not the main driver of our outperformance.

Analysing our performance, two things were very apparent: 

1. Trading

We are not a high-turnover strategy by design; it’s just not really Ben or my style. That said, we have traded a lot this year.

And that’s been for good reason – in a market that is trending down/sideways, and that included five drawdowns of more than -5.00% (including a -18.4% decline in late January) – the best possible returns for our investors come from actively managing our positions.

We could point to several examples, but the most obvious is Prospect Resources (ASX: PSC). We generated a +75% gain on our holdings over the course of the last 12 months, while passive shareholders achieved only a +13.5% return for the year

Pro Medicus (ASX: PME) is another unlikely example from this year. Shares are down 46.2% over the last 12 months. We picked up our position in March at an average of $120 per share, before selling in August for over $180 per share, a gain of more than 50% for the fund in 6 months.

This activity is not market timing, technical analysis or some trading strategy taught by a teenager on TikTok. The market consistently overvalues shares. Our job is to figure out which ones and act accordingly. We are not paid to perpetually believe in the companies we invest in; we are paid to consistently evaluate the price, in the context of our views on value, and the chance those views could be wrong.

2. Stock Selection

While Ben and I do our best to invest where supply/demand dynamics appear favourable, we do not want to rely on consistently getting commodity price calls right to generate returns.

Iron ore prices are down c. -12% in AUD terms over the past 12 months. Fortescue Metals (ASX: FMG) shares are down c. -8%, and Champion Iron (ASX: CIA) is down c. -33%.

Our portfolio exposure to iron ore is Red Hill Minerals (ASX: RHI), and that stock is up 29% over the last 12 months on stock specifics – its main asset is a royalty on the Onslow Iron Ore mine operated by Mineral Resources (ASX: MIN), which is ramping up production and increasing distributions to RHI shareholders. Of the 31% total return we’ve made on the stock this year, 6.6% came from dividends.

However, when we do get the underlying commodity call right, we want to make as much money as humanly possible!

Our two positions in copper, A1C Mines (ASX: A1M) and Aurelia Metals (ASX: AMI), are up 131% and 90%, respectively, the two best-performing stocks of the ASX-listed major copper companies.

We are unlikely to be capable of consistently and repeatedly investing in the underlying commodities that are going to run hard in any given period – we’d argue nobody can; what we can attempt to do is give our investors the best expression of a particular investment idea.

The "best expression of an idea" concept is really important. We never want to feel settled with our portfolio. We consistently and critically evaluate every company, every portfolio weight, and every available alternative to drive up our portfolio returns. This year our willingness to embrace change, even in the face of consensus opinion, has been key to our success. 

Lesson 2: There is always a special situation to exploit

The other thing that can work well in a bear market is catalyst-driven special situations.

These are uncorrelated and independent of investor sentiment and broader equity valuations, but usually involve time-consuming due diligence and research and are often more complex – your stockbroker isn’t going to be able to pitch this sort of thing down the phone to you.

Over the last 12 months, we added 3 more to what is a growing list of successful special situation investments we’ve made over the past 3 years.

Venus Metals Corp (ASX: VMC)

We initially covered this for Good Research subscribers before publicly outlining our thesis on Livewire - Seneca's special situation - Ben Richards | Livewire. 

It played out almost exactly as we outlined in the article – the royalty was sold to  Franco-Nevada (NYSE: FNV), paid shareholders a special dividend ($0.047), an in-specie distribution of Rox Resources (ASX: RXL) shares ($0.12c), and another dividend ($0.17), with the exploration assets and remaining funded shell company an attractive vehicle for project vendors. Yet another example of the share price chart telling you absolutely nothing in isolation.

Euroz Hartleys (ASX: EZL)

Euroz Hartleys is a company we have been talking about on Livewire for years:

• Seneca's sliding doors (10x ASX stock predictions) - Ben Richards | Livewire
• Top 6 ASX takeover picks for 2026 (and reviewing last year's picks - including one 10-bagger) - Ben Richards | Livewire
• What a 40% year taught us: 4 lessons from the past 12 months (and 3 new stocks to buy) - Luke Laretive | Livewire
• Which ASX shares to buy in a high gold price environment - Ben Richards | Livewire

The Bank of Montreal (NASDAQ: BMO) effectively took over the company on 30 June 2026, with EZL agreeing to sell its capital markets business divisions for A$145m in cash.

Over the last 12 months, the company has delivered a 7.4% return to our fund and investors from dividends and 42% from share price appreciation, with the major capital return from the sale still to be paid in Q4. 

This distribution should comprise about 65cps of sale proceeds after tax, plus some percentage of the 38cps in cash currently used to support business activities, which are transitioning to BMO in Q4. Our base case is that Euroz Hartleys’ remnant financial planning and retail stockbroking business would require no more than $20m in cash to support its operation, freeing up approx. $60m or 28cps for potential distribution.

In this scenario, we receive back $0.93 of the current $1.33 share price in cash distributions by Christmas, valuing the remaining financial planning/advice business at $66m. $25m in revenue in 2026 and normal 35% profit margins in this industry; that’s about 7-8x trailing PE.

Compare that to recent transactions in the Australian financial services landscape:

• Centrepoint’s SEQ state was sold for 7.2x EBITDA or 2.9x revenue
• Count acquired Oracle for 7.2x EBITA or 2.5x revenue

Our industry experience maps to this 2.5-3x revenue range, and from what we have seen, lenders have funded transactions supported by valuations on this basis.

If you take that as accurate, the EZL financial advice business is worth at least $62m-75m implying fair-ish value at the 30 September share price close of $1.33 and using our $20m cash retained assumption.

However, this ignores a significant franking credit on that 65c distribution, which adds another c. 20c in value...

Stellar Resources (ASX: SRZ)

We have outlined this one before as well.

• Top 6 ASX takeover picks for 2026 (and reviewing last year's picks - including one 10-bagger) - Ben Richards | Livewire

Stellar Resources owns the high-grade Heemskirk tin project in Tasmania, a tier-1 jurisdiction, with a resource of 77.9kt @ 1.04% Sn located just 18km from Metals X’s (ASX: MLX) 50%-owned Renison tin mine.

Metals X took a $22m placement in Stellar back in May, validating our initial takeover thesis. However, we opportunistically sold the stock during the year, booking a 28% gain as we thought this blocking stake reduced the likelihood of a competitive takeover scenario.

SRZ continues to provide shareholders with tin-price exposure, a commodity we are bullish on; however, with an array of attractive alternative ideas, retaining a spot in our portfolio is a high hurdle.

Lesson 3: It doesn’t matter how good something looks on paper

Matsa Resources (ASX: MAT) is a small-cap gold miner in Western Australia. Shares are currently suspended from trading after one of Matsa's subsidiary companies entered administration.

Matsa was clearly undervalued, on paper. It had:

• The Devon gold mine: a producing, high-grade (4.6g/t) small open pit mine, toll treating at the Greenfields mill, with estimated free cash flow (pre-tax) of $60 million at a gold price of A$4,250/oz. At the prevailing A$6,000/oz spot gold price, that would climb to $135 million over its 18-month mine life.
• Option agreement with AngloGold Ashanti for some fringe Matsa exploration tenure, which we thought AngloGold would exercise and bring in $50m-$100m cash for Matsa.
• A 1-million-ounce gold resource in Western Australia, close to relevant infrastructure, and noting that peer developers were/are trading on an EV/Resource of $100-$200/oz.

So, let's conservatively call that $200 million of value, at the low end. All for a market cap of $46 million (at the last traded price).

In practice:

• The Devon gold mine severely underperformed.  Management chose to take on expensive debt (rather than incur equity dilution) and attempt to turn the operations around. (These efforts were largely unsuccessful - Devon has materially deviated from feasibility study assumptions, calling those assumptions into question.)
• This was accelerated and exacerbated by a global diesel crisis - the economics of a gold mine that is reliant on trucking ore long distances are (unsurprisingly) materially impaired by higher-than-expected fuel prices. 
• No transaction on the 1-million oz gold resource, with management electing to pursue a standalone development. (We viewed this as a no-brainer tie-up with the nearby Sunrise Dam mill 23km away (owned by AngloGold Ashanti, ASX: AGG) which is short ore, or Genesis' (ASX: GMD) Laverton mill ~70km away.)
• MAT was subsequently forced to renegotiate the AngloGold option exercise price, bringing forward the exercise date for $55 million paid to Matsa, to keep the company alive.

We've written down the value of our small position in Matsa to zero, though we remain hopeful we can recoup some value for unitholders. Our lesson here is three-fold:

1. Stock picking is more than technical skills. On paper, this was a multi-bag opportunity. In practice, we will probably lose 80% of our capital invested.
2. Alignment ≠ Perfect Decisions.  Just because management has a significant ownership stake in the project and "strong alignment" doesn’t necessarily result in best-in-class management decision-making. Sometimes, reluctance to dilute their stake and raise capital when required (as in this case) destroys shareholder value more than the dilution ever would have. (Side note: We're already applying this lesson, having seen a similar setup in another portfolio holding recently and exited for a tidy profit before shares declined further.)
3. Finally, and somewhat predictably, diversification. You need lots of good ideas that filter down to a range of portfolio holdings, such that even when you make mistakes, you win in the aggregate. To quote my favourite movie, Moneyball...

“We are card counters at the blackjack table.” 

We will lose hands, but we are trying to turn the odds on the market, in the aggregate.

Thoughts for the next 12 months

We haven't been more excited about our portfolio since the fund's early days. Our portfolio expected return is currently very high, and we have never had this many names in the fund that we think can (at least) double in price.

When we look through the holdings, a few common threads appear. Here's our best attempt at summarising them:

Complexity

Some wise bon mot once said that nothing is fast, cheap and good – you can only pick two. My version of that is that no investment is cheap, simple and good – it’s usually only two.

Retail investors love investing in thematic ETFs because it seems like you just need to know one thing. Simplicity sells. Complexity, on the other hand, takes skill to understand and patience for it to play out in the real world (as we saw last year…)

You can own a fund manager growing double digits, trading at one-third the fair valuation – HMC Capital (ASX: HMC) is both good and very, very cheap. The value, however, is unlikely to be realised until the three complicated underlying issues are resolved – at which point it’s blindingly obvious to the average investor.

HealthCo (ASX: HCW) has now re-tenanted all its Healthscope hospitals and restarted dividends, DigiCo (ASX: DGT) looks on track with the SYD1 expansion, and, per the recent HMC full-year result guidance, the Illuma Energy business is on track to deliver above its target 20% IRR.

So, remind me again, what’s the problem with HMC Capital?

While we are on the fund managers, Regal Partners (ASX: RPL) trading on 7x earnings while L1 Group (ASX: L1G) trades on 20x is one of the more inefficient things I’ve seen on the ASX in the past 15 years. If that gap doesn’t close, L1 should just acquire Regal.

Everyone is always wrong.

Last year, nobody wanted to buy resources. At the time, everyone was trying to convince us that Droneshield (ASX: DRO) was a great buy at $6.50, calling our short thesis “sour grapes” and reminding us how wrong we are about Pro Medicus (ASX: PME) at c.$300 a share and on 200x earnings.

This year everybody thinks bond yields at 5%+ mean that growth investing is dead. They were wrong last year; they’ll be wrong again next year. 

For what it's worth, October 2026 reminds us of October 2022 - rising rates, small-cap underperformance and investors being really risk-averse and bearish saw the Small Ordinaries fall -26%.  It then spent the next 3 years rising +53%.

Value is most apparent when a particular company is hated by most in the market. Some of our very best returns over the last 3 years have come from identifying companies that, over our holding period, are just slightly less bemoaned. 

I'll spare you the rehash (case study in this article), but I can't help but remember our investment in MMA Offshore (ASX: MRM) after its share price fell more than 90% before we invested, as it tripled into an eventual takeover.

We think Boss Energy (ASX: BOE) might be another example over the next 12-24 months.

Boss Energy has spent the past 18 months going from uranium market darling to one of the most heavily shorted stocks on the ASX. The market’s scepticism is understandable: 

• Honeymoon’s resource was overstated, 
• the original wellfield design did not perform as expected, and 
• the production ramp-up was repeatedly reset.

But after an extensive operational review, a new feasibility study, and September’s technical Market Day, we think the investment case has changed: 

• Boss now has a commissioned, cash-generative uranium operation, 
• a substantially de-risked balance sheet, and 
• enormous leverage to any further increase in uranium prices.

With $207m in cash, no debt, uranium inventory and equity stakes in other listed companies, $0.86 of the BOE $1.46 share price (30 Sept) is underpinned. We are only paying $0.60 per share or $250m for the Honeymoon asset, an asset we think is worth over double that at spot uranium prices of US$90/lb.

Patience is a virtue necessity.

We still think the peak of the M&A cycle is ahead of us, and while we’ve seen some larger-scale deals in the WA gold sector, we think the bolt-on acquisitions are about to kick off.

We still don’t see the logic in Greatland Gold (ASX: GGP) trying to manage sub-0.5g/t stockpiles to profitability in a flat gold price environment – when Antipa Minerals (ASX: AZY) is ripe for the taking.

Forrestania (ASX: FRS) acquiring the Edna May mill in Southern Cross opens a world of possibilities. In our view, only one company has the scale, grade, and project maturity to immediately move the needle on that mill's economics: Golden Horse Minerals (ASX: GHM).

Ben wrote up our thoughts on the regional consolidation underway near Southern Cross in this recent Livewire article:  Seneca's Special Situation #2: a golden takeover and an upcoming IPO.

Want more from us?

• I write a free weekly market newsletter that covers some of our ideas on ASX-listed companies and what Ben and I have been working on during the week.  You can sign up for it at senecafs.com.au/subscribe
• Looking for our latest, high-return small-cap ideas?  Every fortnight, we release a new idea for Good Research subscribers. Each report outlines the investment thesis in detail and how we think about trading the stock.  Here's a free sample report to give you a flavour. 
• Invest with us. Our two funds are open to qualified wholesale, professional and sophisticated investors. All the details are on the website: 
• Seneca Australian Small Companies Fund
• Seneca Australian Shares Fund

Thank you to all our investors for your support over the first 3 years of the Seneca Small Companies Fund. As investors in the fund, we hope you are as pleased as we are with the ~88% return so far.