Why Seneca is overweight SaaS, selling oil stocks and the "most unique" idea in the fund

Ever wanted a deeper insight into how fund managers are seeing markets, and the first-hand thinking behind what they've been adding and removing from their portfolios?

In this new series, Inside the Portfolio, we're looking to do just that. We ask a fund manager to take us under the hood of their portfolio, explaining all the big recent changes - the ins, the outs, the overweights and underweights - as well as how they're thinking about markets more broadly.

This week, we spoke to Seneca Financial Solutions' Luke Laretive who talks us through the thinking behind some notable moves and banking some big winners and the promising ASX stocks the market misunderstands. 

What was the most notable addition to the portfolio recently and why?

I can't remember who it was, but someone once told me, "When you've got a good idea, you need more than one way to make money out of it." 

We've done a lot of work on HMC Capital (ASX: HMC) (mentioned before on Livewire here and more recently, here) and we think it's one of the best, most unique ideas in our portfolio.

We also added our position in Fiducian (ASX: FID) - we think the market misunderstands their recent run-in with the regulator and nature of their business model. This is a business that's delivered earnings growth of 12% p.a. over the last 5 years, on 33% EBITDA margins and delivered, on average over that period, a ~30% return on equity. The share price has diverged from reality.

What was the most notable sell or downsize in the portfolio recently and why?

Karoon Energy (ASX: KAR). 

We took profits into what we see as a temporary spike in oil prices.

What’s your most notable overweight and why?

As a cohort, it's software as a service (SaaS). We think the valuations looked particularly attractive mid-month. Some are old favourites we are re-visiting, others, we've never owned before. There's a handful of names, but Siteminder (ASX: SDR), Catapult (ASX: CAT) and Pro Medicus (ASX: PME) are the most overweight when I look across the Seneca Australian Shares Fund and Seneca Australian Small Companies Fund.

What’s your most notable underweight and why?

Large cap banks and healthcare. 

We don't own a single share in Commonwealth Bank (ASX: CBA), CSL Limited (ASX: CSL) or Cochlear (ASX: COH). We also are devoid of any exposure to the supermarkets (ASX: COL, ASX: WOW). 

This is pretty unusual across our peers in this sector of the market - we don't think our investors pay us to hug the index and make 0.5% tilts. 

In our opinion, active management should actually be active, and not just an exercise in salary-preservation.

What’s been one of your most notable performers recently?

Venus Metals Corp (ASX: VMC) announced it has sold its 1% royalty over Rox Resources (ASX: RXL)'s Youanmi gold project in WA to Franco-Nevada (NYSE: FNV) for $46m. It additionally informed the market that it intends to distribute its shares in RXL via in-specie transfer to shareholders. 

In effect, with franking credits, our fund will receive over $0.26 per share in value, while still retaining the optionality that comes with our shareholding, returning ~50% for our unitholders in a ~6 month timeframe. VMC is retaining some cash, and with its tight register and low share count, becomes a highly prospective shell company for high quality, privately held mining assets.

What themes and trends are dominating discussions right now?

There was nothing unusual or particularly unique to the month of May, we work hard to be across the bulk of our investable universe, most days. I'm constantly badgering Ben Richards  about catalysts and this month was no different, we spent a bit of time reconfirming timelines, ensuring each investment is progressing as we would roughly expect.

We are continuing to find significant value across a mining, technology, industrials and non-bank financials. 

There's been some significant forced selling across mid-cap names, on the back of some larger investors losing mandates from Industry Super - this forced selling has thrown up some select opportunities like Queensland copper miner AIC Mines (ASX: A1M), who continue to expand their production into a 30-year high copper price.

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Seneca Australian Small Companies Fund

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