'Australia's food sector is desperate, grossly underestimated'

“Prices at the farm level are rising, so farmers are doing their best,” he said.

“The dairy losers, but as the sun sets in the west, times change, circles occur. When assets are at their worst, that’s when we are at their happiest.”

The Micro Cap Activist Fund (MCAF), run by Mr Iafrate’s Melbourne-based company Armytage Private, was set up after commissioning a financial services empire to target small-medium-priced finance.

The fund is one of the top return equity funds of the past three years according to Morningstar data thanks to the busy M&Activities among small financial services companies and have received 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 games for OneVue.

Iafrate said he owed a fall in royal commissions, benefiting from mispricing in the market as big banks rushed out of the advice business. “These funds are focused on finance with a market cap of less than $70 million … these businesses tend to have boards that don’t work, management that doesn’t work, and they tend to have boards that protect their directors’ salaries and fees,” he said.

“After Hayne’s royal commission, the spotlight is given fairly and appropriately on the financial services sector. There is a galaxy of small cap financial services stocks that are listed and serve no purpose.

“Once the share price hit, the business lost the capacity to raise capital. Our fund was set up to identify takeovers and M&The A in this space… it is Nirvana.”

He recalls a spate of deals in 2020 where the fund participated in three takeovers in two days: “I walked into our investment committee meeting and said ‘what do we do now’ because we just lost almost half of the portfolio.”

Back to wealth

It’s not over yet, he says (“at least three more, maybe four” [deals] between now and June next year”) and he is busy raising shares in Diverger, which provides back office services to financial advisors and accountants and is currently bidding for the Centrepoint Alliance, and is a shareholder in the Centrepoint Alliance.

Iafrate is not a fan of banks. He said the vertical integration and exorbitant cost kept boutiques like Armytage off their platforms and models. But he tipped the advice back into the top four, saying the most important people are those who influence people with money.

“Banks take all their advisory businesses, throw them in the trash, sell them for nothing, and they turn the advisory business into these terrible criminals, these giants,” he said.

“But when night follows day, they will return. You mark my words. And they will come back for one simple thing. The most important person in the world of financial services is the one who has a say over the person who owns the checkbook, and the financial planner/accountant/lawyer who has the trust and respect of the client.”

Food is the next target, taking large stakes in dairy and poultry producer and retailer TasFoods alongside millionaire entrepreneur Jan Cameron.

Apart from MCAF, Armytage’s flagship offerings are the Australian Equity Income Fund and the Strategic Opportunities Fund. About two-thirds of businesses are accounts managed by individual net worth, the remainder in joint funds.

The microcap fund, “Armytage pure origins, heart and soul”, was only promulgated with approximately $18 million in management. They expect to get $75 million, beyond that capacity will be a problem. MCAF runs with only seven shares at a time and tends to take a 10-15 percent stake in companies with a market capitalization of less than $70 million.

The risk lies in very high concentrations, especially if a deal doesn’t happen, trapping substantial shareholders in an unloved company. In such a small area of ​​the market, liquidity is a major issue, making it difficult to exit quickly or execute large moves without moving the share price.

‘See where you least expect it’

An industry veteran, Iafrate’s career in financial markets began in the 1980s, developing a major 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 led two listed businesses, Easton Investments and Treasury Group, the latter of which held stakes in a number of boutique managers including Mutual Investor Anton Tagliaferro.

Asked about his approach to investing in today’s markets, Iafrate said, “it doesn’t look where you’d expect it to be”.

“If the market says things are going down, and it’s terrible, then it’s not going to happen – that’s too obvious,” he said. “It was a consistent theme throughout my 40 years in the game. If it had been clear, it wouldn’t have happened.”

Where is it unclear today? Iafrate says every man and dog knows about rising inflation and rising interest rates, and the eventual impact of that easy money on high-growth stocks. But, he expects the Reserve Bank to complete its tightening cycle by Christmas, leading to a rebound in equity markets.

With this timeline in mind, Australian equity funds pool stocks with a demonstrated ability to absorb and/or sustain price gains, and are eyeing those sectors that will bounce back once the market sees the worst behind them, i.e. cycles – infrastructure, resources, consumer non-discretionary and technology.

“We feel going into September-November that equity markets are going to start to fall, interest rates and the inflation genie are put back in the bottle, and the market is starting to pick up again going into the Christmas period,” he said.

Iafrate said, “You can’t get past BHP”, sitting against warnings from Goldman Sachs that China’s property crisis will sink iron ore prices.

He also likes copper producers IGO, OZ Minerals and Mineral Resources, adding that investors don’t need to “get down into the explorer” to profit from rising prices.

Seeing the row of empty buildings from his Melbourne CBD office, Iafrate thinks the commercial property sector is putting up warning signs, arguing workers are unlikely to return to work in the same number. He also noted the Caydon collapse, saying more property developers were likely to fall.

“Where there’s a lot of supply, you’re less likely to want to be in that type of stock, and in commercial property … there’s a lot of supply.”

Armytage has a deep history in the sector, launching a property fund in 2008 to target property trusts that have beaten so far to risk causing brand damage to their parents.

Rejecting popular opinion, Iafrate backed the Reserve Bank, saying he was nervous when people at golf clubs thought they could do a better job than the experts. “It’s so easy for people to take cheap pictures and after the pandemic hit… everyone became an interest rate guru overnight. It’s very boring,” he said.

“If [the RBA] already gung-ho and trying to anticipate inflation genie or health recovery, or wrong…wow. They adopted the approach: ‘we are going the wrong way’. I can live with that.

“I’m not saying they got it right 100 per cent, but people forget the real circumstances they’re in.”

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