December, 2020
The Ironbark Karara Australian Share Fund returned 13.13% (net) for the quarter, an underperformance of 0.66% when compared with the S&P/ASX 300 Accumulation Index return of 13.79% for the quarter. Although the timing has been uncertain, the Fund has been positioned for the pandemic re-opening trade. This reflected the view on the likelihood of improvement and, by any historical measure, the extreme valuations differentials. This was a major factor supporting fund performance over the quarter. Health care, which the fund is significantly underweight, was the second worst performing sector (down 4.7%). This added 0.91%, predominantly through CSL which fell 1.3%.
The sector was pressured by the strong currency, uncertainty around short term earnings from COVID 19 (both up and down), as well as rotation as investors covered bank shorts, jumped into tech and a few other niche sectors which seem to have stolen its thematic mantle. More broadly this could be characterised as broadening market earnings growth conflicting with high expectations and higher valuations. Qantas (up 19.8%), along with Star Entertainment (up 20.3%) and Sydney Airport (up 9.4%) saw belated appreciation that domestic travel will rebound strongly. Positions in each of these were trimmed in November following strong gains.
These lost steam in December with renews border closures. At below $5 a share, Qantas is pricing little for future international profitability, lowered costs and enlarged domestic market share. The investment manager expects Star can be re-rated for strong cost and cash performance not to mention its governance edge over Crown, which may create opportunities down the track. These gains were partly offset by the continuing gains in tech and disruptive thematic plays, which are adding billions of dollar of market capitalisation seemingly by the month. After pay (up 47.5%) alone detracted 0.34% and Xero (up 45.7%) another 0.31%. As a generalisation these stocks are being judged on short term metrics without context to the implied terminal market size, share and profitability. This leaves them highly vulnerable to any rise in interest rates, tightening in liquidity conditions or stock specific setback. Corporate activity and restructuring moves continued to simmer. Tabcorp (up 16.8%) rallied on press speculation that private equity was considering a take-private transaction. Telstra (up 7%) lagged despite setting out plans to monetise its mobile network towers and re-committed to improvement in mobile margins in the second half. Both companies have better growth, good potential for the removal in industry pressure points, and further restructuring upside when lined up against domestically oriented yield plays. Consequently, the investment manager sees their share price improvements as only reflecting part of the potential. Brambles (up 1%) and Aristocrat (up 3.8%) lagged despite upgrades to market estimates. Aristocrat’s accounting was aggressively conservative.
The declining Brambles share price assumes any uncertainty will be resolved to the negative and so surprised when guidance was tightened to the upside. Small cap positions within the Fund detracted approximately 0.80%. QBE’s downgrade was particularly disappointing given the investment manager’s expectation that COVID 19 related losses were sufficiently provisioned for. The company was caught by a historically large number of hurricane losses which got beneath their reinsurance cover. Importantly for the investment manager’s investment view, capital position remains solid enough and small attractional losses are to budget and ongoing extremely high premium rate increases suggest underlying earnings of the business should be lifting should normal conditions ever eventuate.
The investment manager expects portfolio rationalisation to be high on the agenda of a new CEO, which may provide a catalyst to close the discount to peers. Mining and metals exposures were largely a wash (overweight BHP, Rio and Saracen/Northern Star but underweight Fortescue, IGO and Oz Minerals) although energy companies made a good contribution. The Fund added to overweight positions in NAB, Telstra and Transurban.
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Fund Information->Performance -> Monthly Report
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asset_class: Domestic Equity
asset_category: Australia Large Blend - Core / Style Neutral
peer_benchmark: Domestic Equity - Large Cap Neutral Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund
manager_contact_details: Array
fund_features:
Ironbark Karara Australian Share has been designed to provide total return of 2% p.a. in excess of the S&P/ASX 300 Accumulation Index over a rolling 3-year period net of fees. The Fund will utilise a long only strategy through implementing a machine learning based quantitative investment process which primarily invests in listed Australian equities.