Just four companies — Afterpay (ASX:APT), Appen (ASX:APX), Altium (ASX:ALU) and WiseTech (ASX:WTC) — provided more than 60 per cent of the Small Ordinaries Index’s returns for the month of August.
For many small cap fund managers, if you didn’t own those stocks, you generally under-performed in August.
One fund that looks to have beaten the odds is the Bennelong Avoca Emerging Leaders Fund.
Writing in its August update, the fund returned 3.15 per cent for August, beating its benchmark S&P/ASX Small Ordinaries Accumulation Index return of 2.49 per cent. The fund does not appear to own any of the four tech stock market darlings.
Powering the fund higher were gains by its holdings in EQT Holdings Ltd (ASX: EQT), Webjet (ASX:WEB), AUB Group (ASX:AUB) and Blackmores (ASX:BKL).
Its biggest detractors to performance in August included Western Areas (ASX:WSA) and Oz Minerals (ASX:OZL).
The fund said reporting season was characterised by further ballooning of valuations for companies in the most expensive stocks in the ASX 300.
Tech stocks gone wild
The Appen share price rose 41 per cent in August despite an only 8 per cent earnings upgrade.
The Wisetech share price rose 40 per cent despite guidance being only 12 per cent ahead of consensus.
Afterpay shares rose almost 30 per cent in August with Altium shares gaining almost 40 per cent in the month.
The fund said although these companies issued positive guidance, the consensus change to forecasts was minimal, something it said left many sell-side pundits scratching their heads.
Goldman Sachs said it was struggling to make sense of the share price moves, saying high quality stocks had a record earnings season that looked very disconnected to fundamentals.
The Paragon Australian Long Short Fund — which is short Wisetech shares — said that company’s FY19 guidance “set off one of the most intense short squeezes in recent memory which did not involve a takeover.”
The Bennelong Avoca Emerging Leaders Fund concluded by issuing this dire warning for holders of these ASX tech stock darlings…
“At some point, this quant-led, valuation unaware merry go-round will stop, potentially abruptly. The question for investors is: how long do you play chicken with these vastly inflated quality names?”