Armytage Private chairman Lee Iafrate is turning from underperforming financial companies to the food sector


“The farm gate prices are going up, so the farmers are doing the best,” he says.

“The milk processors are losing, but like the sunsets in the west, times changing, circles happen. When assets are at their ugliest, that’s when we are at our happiest.”

The Micro Cap Activist Fund (MCAF), run by Mr Iafrate’s Melbourne-based firm Army­tage Private, was established after the financial services royal commission to target mid-priced small-cap financials.

The fund is among the top returning equity funds over the past three years according to Morningstar data thanks to a flurry of M&A activity among small financial services firms and have been on the receiving end of 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’ play for OneVue.

Iafrate says he owes his good run to fallout of the royal commission, benefitting from mispricing in the market as the big banks rushed to exit the advice business. “The fund focuses on financials with market caps less than $70 million…these businesses tend to have dysfunctional board, dysfunctional management, and they tend to have boards that were protective of their salaries and directorship fees,” he says.

“After the Hayne royal commission, the spotlight was put fairly and squarely on the financial services sector. There was a galaxy of small-cap financial services stocks that were listed and had no purpose.

“Once the stock price was hammered, these businesses lost the capacity to raise capital. Our fund was set up to identify takeover and M&A in this space…it has been Nirvana.”

He remembers 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 the f*** do we do now’ because we just lost almost half of the bloody portfolio.”

Return to wealth

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

Iafrate is no fan of the banks. He says vertical integration and exorbitant fees kept the boutiques like Armytage off their platforms and models. But he tips the return of advice to the big four, saying the most important people are those who influence people with money.

“The banks unloaded all of their advisory businesses, threw them in the bin, sold them for nothing, and they turned the advice business into these horrible criminals, these ogres,” he says.

“But as night follows day, they’ll be back. You mark my words. And they’ll be back because of one simple thing. The most important person in the world of financial services is he or she who has the say over the person who has the chequebook, and the financial planner/accountant/lawyer who has the trust and the respect of the client.”

Food is its next target, taking a substantial shareholding in dairy and poultry manufacturer and retailer TasFoods alongside millionaire businesswoman Jan Cameron.

In addition to the MCAF, Armytage’s flagship offerings are the Australian Equity Income Fund and Strategic Opportunities Fund. Around two-thirds of business is individual high-net wealth managed accounts, the remainder in pooled funds.

The micro-cap fund, “the pure genesis, heart and soul of Armytage”, is invitation only with around $18 million under management. They hope to get to $75 million, above which capacity would become an issue. MCAF runs with just seven stocks at a time and tends to take 10-15 per cent holdings in companies with a market cap less than $70 million.

The risk lies in the incredibly high concentration, especially if the deals don’t eventuate, trapping substantial shareholders in unloved companies. In such a small area of the market, liquidity is a key issue, making it difficult to make a quick exit or execute large moves without moving the share price.

‘Look where you least expect it’

A veteran of the industry, Iafrate’s career in financial markets dates back to the 1980s, developing a key interest in business after analysing Cadbury Schweppes at university. He went on to work for Barclays Bank and Tolhurst Noall and McKinley Wilson, before founding Armytage Private in 1995.

He founded and chaired of two listed businesses, Easton Investments and Treasury Group, the latter of which held stakes in a number of boutique managers including Anton Tagliaferro’s Investors Mutual.

Asked about his approach to investing in current markets, Mr Iafrate said, “look least where you expect it”.

“If the market is saying it’s all going to go down, and it’s terrible, then it won’t – it’s too obvious,” he says. “That’s been a consistent theme for the 40 years I’ve been in the game. If it’s obvious, it ain’t going to happen.”

Where’s the non-obvious today? Iafrate says every man and his dog knows about rising inflation and rising rates, and the impact the end of easy money it’s having on high-growth stocks. But, he expects the Reserve Bank will finish its tightening cycle by Christmas, leading to a rebound in equity markets.

With this timeline in mind, the Australian shares fund is accumulating stocks with demonstrated ability to absorb and/or pass on price increases, and eyeing sectors that will bounce once the market takes the view the worst is behind it, namely cyclicals – infrastructure, resources, consumer non-discretionary and tech.

“We feel coming into September-November that equity markets will start to base out, the interest rate genie and the inflation genie be put back into its bottle, and the market starts to rise again coming into the Christmas period,” he says.

Iafrate says, “you can’t go past BHP”, sitting in opposition to warnings from Goldman Sachs that China’s property crisis will sink the iron ore price.

He also likes copper producers IGO, OZ Minerals, and Mineral Resources, adding that investors don’t need to “drop down to the explorers” to benefit from increasing prices.

Looking out at the rows of empty buildings from his office in Melbourne CBD, Iafrate thinks the commercial property sector is flashing warning signs, arguing workers are unlikely to head back to the office in the same numbers. He also makes note of Caydon’s collapse, saying more property developers are likely to fall.

“Where there’s a lot of supply, you tend not to want to be in those types of stocks, 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 were beaten down so far that they risked causing brand damage to their parents.

Pushing back against popular opinion, Iafrate backs the Reserve Bank, saying he gets nervous when people at the golf club think they could do a better job than the experts. “It was easy for people to take cheap shots and after the pandemic hit…everyone became an overnight cash rate guru. It’s so boring,” he said.

“If [the RBA] had gone gung-ho and tried to anticipate the inflation genie or the health recovery, or got it wrong…wow. They adopted the approach: ‘we’ll get it wrong on the way up’. I can live with that.

“I’m not saying they got it 100 per cent right, but people forget the surreal circumstances they were dealing with.”

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