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The Spheria Emerging Companies Ltd (ASX: SEC) share price is edging higher on Wednesday after the release of its May investment update.

What happened in May?

During the month of May, Spheria Emerging Companies recorded a solid return but continued to underperform its benchmark.

The fund manager reported a 7.2% gain in May, compared to a 10.6% gain by the S&P/ASX Small Ordinaries Accumulation Index. This means its return over the last 12 months is now a negative 12.7%, whereas the index is down 2.9%.

What is Spheria invested in?

A number of companies contributed to its 7.2% gain last month. Positive performers in the fund included retailer Beacon Lighting Group Ltd (ASX: BLX), appliance manufacturer Breville Group Ltd (ASX: BRG), fashion retailer City Chic Collective Ltd (ASX: CCX), and telco Superloop Ltd (ASX: SLC).

Management commented: “These stocks continued their recovery over May post the selloff in March. Superloop is benefitting from increased data demand and a much greater focus on cash flow generation with a moderating capex profile.”

The fund manager also notes that Breville “appears to have continued to trade well through the shutdown period as consumers purchase small home appliances.” It took part in its $101 million capital raising during the month.

That wasn’t the only capital raising it took part in. It also added to its position in Blackmores Limited (ASX: BKL) by participating in its $117 million capital raising. This could be an indication that it remains optimistic on its prospects.

The detractors.

The biggest factor in its underperformance in May was not necessarily what it owned, but what it didn’t own.

Spheria notes that there were a few names in the gold space which it doesn’t own, including Saracen Mineral Holdings Limited (ASX: SAR) and Regis Resources Limited (ASX: RRL), which contributed strongly to the S&P/ASX Small Ordinaries Accumulation Index’s gain.

Though, one share in the portfolio that did weigh on its performance was Village Roadshow Ltd (ASX: VRL). It declined 10% during May on the back of a revised takeover offer from BGH Capital.

Where will the future gains come from?

Spheria appears optimistic on the future and notes that “the prospects for a reasonable economic recovery are real.”

In suspects that this could ultimately lead to a rotation into cyclical sectors which offer value for money.

“Whilst high growth concept stocks particularly in the fintech space have led the recovery so far, there remains the prospect of a strong rotation into cyclical sectors which offer far greater relative valuation appeal. Sectors which include building materials, consumer discretionary and media,” the fund manager explained.

It concluded: “The re-emergence of private equity and corporates on the acquisition path is also likely. With our focus on strongly cash generative businesses with modest gearing we should be the beneficiary of some of this activity looking forward.”

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of SUPERLOOP FPO. The Motley Fool Australia owns shares of and has recommended Blackmores Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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