September, 2023
The Fund fell 2.8% in September, compared to the ASX300 Accumulation index’s 2.9% decline. The Fund ended the September quarter up 0.1% compared to the ASX300 Accumulation’s 0.9% decline. The Fund’s robust September quarter performance was underpinned by a strong August reporting season for many of our key portfolio holdings; and was despite short term headwinds due to investors’ concerns of higher bond yields late in the quarter. The best contributors to fund performance in September were conglomerate Seven Group (+11.4%), oil and gas company Santos (+3.0%) and insurer QBE (4.9%). The largest detractors in September were CSL (-8.3%), leading industrial property owner Goodman Group (-8.2%) and health insurer NIB Holdings (-10.7%).
Seven Group has largely remained under the radar for a long period of time, partly due to the relatively low liquidity of the stock. Despite Seven’s large market capitalisation, the company was seen as a small cap company until more recently. It’s the quirk of indices that companies such as Seven are deemed as a small cap company mainly because of its low free float despite its large market capitalisation. For us, being benchmark agnostic, it meant an opportunity to invest in an undervalued company that has been significantly re-rated up since our initial investment. Seven consists of Caterpillar supplier WesTrac and equipment hire business Coates. Recent results point to both businesses doing well – margins are improving which indicates a strong ability to price well into markets where demand is high. The conglomerate also owns stakes in listed companies Boral (70%), Beach Energy (30%) and Seven West Media (40%), as well as unlisted energy, media and property holdings. Of these investments, it is the recently acquired 70% stake in Boral that is the most material in terms of value creation for Seven. We estimate Seven is trading on a PE multiple of 13.5x FY24 earnings, which is at a substantial discount to the ASX300 Index— suggesting that Seven remains undervalued.
Goodman and NIB Holdings fell -8.2% and -10.7% (ex-dividends) respectively in the absence of stock specific news, despite pleasing results during their August reporting seasons.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Opportunities-Fund-September-2023.pdfAugust, 2023
The Fund gained a solid 0.4% in August, building on gains posted in the previous 3 months. The Fund is up by 2.9% and 5.8% for this financial year and calendar year respectively. The performance of the Fund holdings in August was pleasing against the backdrop of a very mixed corporate profit season that saw ASX300 Accumulation Index decline by 0.8% during the month. The focus of the reporting season was very much on the difficulties of growing top line revenue growth as demand is being capped by higher interest rates. Costs, and hence, margin pressures, was another key thematic in August. The Fund’s ownership of companies with the ability to price better despite a softer economic environment has yielded positive outcomes over the past year—these include real estate classifieds portal REA Group, AUB Group which has toll booth type features and industrial conglomerate Seven Group. The standout performers during August reporting included G.U.D. Holdings(+24.0%) which rallied following a result that exceeded expectations. GUD reported stronger cash flows, lower than expected debt alongside improvements its acquired towbar business.
Overall, 9% of portfolio missed profit expectations, 42% in line with expectations and 27% of portfolio had better than expected profits (balance of portfolio did not report earnings in August).
The best contributors to fund performance in August were industrial property owner Goodman Group (+13.7%), News Corporation (+14.9%) and insurance broker AUB Group (+7.5%). Global healthcare company Resmed (-24.2%), litigation funder Omni Bridgeway (-25.5%) and BHP Limited (-2.5%), having gone ex-dividend in the month, were the largest detractors to performance during the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Opportunities-Fund-August-2023.pdfJuly, 2023
The Fund gained 2.5% in July, building on gains posted in the previous month. For this calender year, the Fund is up by 6.8%. The best contributors to fund performance in July were banks, Commonwealth Bank (+5.4%) and National Australia Bank (+7.8%) and real estate listing portal REA Group (+10.1%). Global healthcare company CSL (-3.2%) and transport related company Austal (-7.2%) and transport and logistics group Kelsian Group (- 4.6%) were the largest detractors to performance during the month.
Moderating inflation numbers and robust economic growth in July saw markets give weight to a low inflation and soft economic landing outcome.
Consequently, Australian bank stocks benefitted from investor flows. This was quite the turnaround from expectations just two months earlier when the prevalent view was the best days of banks are in the rear view. We raise this point as investors are currently very short term focussed and are flipping between negative and positive views with extraordinary frequency.
We have invested in real estate listing portal REA Group for more than 10 years. Segments of the market view REA Group as a proxy to the Australian real estate listing environment. Listing volumes have no doubt been weak over the past 18 months as the RBA raised interest rates aggressively. With an impending surge in Australian immigration and possibly a peak in interest rates, property listings have started to improve in recent months.
REA Group should benefit from the cyclical improvements in listings – but that view detracts from the reasons why REA Group has been a successful investment for the Fund over the long term: REA Group has proven to be an innovator and essential services provider to both property buyers and sellers. That ability to translate services to consistent earnings growth has reduced the cyclical aspects of REA’s earnings profile leading the company to become a long-term winner for the Fund.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Opportunities-Fund-July-2023.pdfJune, 2023
The Fund gained 1.9% in June, regaining most of the decline posted in the previous month. For the 2023 financial year, the Fund gained 10.0%. We continued to position the Fund in quality companies helmed by strong management teams for FY23. With inflation and interest rates moving higher through the year, the Fund benefitted from strong performances of essential services providers operating in good industry structures, including insurance broker AUB Group and bus operator Kelsian Group. Minimizing mistakes, a fundamental part of our approach to investing, also led us to exit most of the Fund’s exposure to discretionary spending in the retail and advertising sectors as we foresaw the impact of higher interest rates on the consumer.
The best contributors to fund performance in June were BHP (+7.1%), AUB Group (+16.3%) and Commonwealth Bank (+3.6%). Global healthcare company CSL (-9.5%), regional aviation company Alliance Aviation (-8.6%) and transport and logistics group Qube (-4.0%) were the largest detractors to performance.
CSL announced a rare profit downgrade relative to analysts’ expectations as the company prepared its financial budget for FY24. CSL’s share price did fall following the FY24 guidance which, while strong at +8-13% profit growth, was below the expectations of the more bullish analysts in the market. Notably the impact of COVID-19 has continued to make an impact CSL’s profit margins as donor fees have remained high compared to history. Overtime, we expect CSL to recoup margins through efficiency improvements. Regardless, in our view, the company is well placed to deliver strong earnings growth and is attractive over the medium-term.
Alliance Aviation’s share price has been weak due to the prolonged engagement with the ACCC with regards to Qantas’ proposed takeover of the company. In February, Alliance Aviation announced that it had entered into a sale and purchase agreement for an additional 30 E190 aircraft from AerCap Ireland Limited. Should all the aircraft be added to the Alliance Aviation’s operating fleet, its total fleet size will eventually reach 100 aircraft with 37 Fokker 100/70s and 63 E190s. In the short-term, carrying additional capital expenditure requirements will place pressure on the balance sheet at a time when interest rates are high and rising. However, successfully deploying these aircraft into a strong demand outlook market should result in profitable earnings growth over the next three years.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Opportunities-Fund-June-2023.pdfMay, 2023
The Fund fell 2.0% in May, driven by stock-specific factors, compared to the SX300 Accumulation index’s 2.5% decline. The Fund continues to demonstrate strong downside protection in weaker markets, which we believe is a key pillar for fund outperformance over the medium to long term. Fund performance is driven by bottom-up stock selection that results in portfolio that is distinctly different to the share market index and has yielded strong downside protection.
The best contributors to fund performance in May were health insurer NIB Holdings (+9.5%), media conglomerate Newscorp (+11.3%) and transport company Kelsian (+11.5%). Larger cap companies such as BHP (-5.4%), National Australia Bank (-9.9%); and IDP Education (-22.5%) were the largest detractors to performance.
As we approach mid-year, we observe that share markets, including the ASX, have performed much better than anticipated. So far this year, economic indicators have been mixed. China’s reopening has been the source of much excitement at the start of the year. However, the pace of China’s economic recovery has been disappointing. Against this backdrop markets, have therefore shown reasonable strength, particularly in Australia. Whilst we expect economic activity to slow over the next 12 months as the lagged effect of higher interest rates comes through, this slowdown has been widely anticipated. We are of the view that Australia is well positioned: Demand for resources should remain robust with structural factors driving medium-term demand for some commodities, such as copper and nickel; and when combined with elevated population growth, Australia looks more resilient than many other markets.
Newscorp, which falls into the Valuation category of our investment thesis, reported a better-than-expected 3Q23 results during the month. Newscorp has sizable advertising-linked businesses, through Dow Jones and the Australia/UK/US News Media businesses. However, Dow Jones and News Media revenues are becoming more digital and subscription driven. We estimate subscription revenues has increased from 33% of revenues in FY11 to 60% in FY22, protecting the business from softer advertising revenues.
IDP Education fell sharply following Canadian regulators expanded the set of approved English proficiency test providers for students applying for a study permit through the Student Direct Stream (SDS). The Canadian market is a key market for IDP and one where the company had a monopoly over English language testing. We expect IDP to lose Canadian market share to new competitors, but IDP should sustain its market leading position. We believe IDP’s brand and reputation are key differentiators that sits well with the student referral infrastructure that has been built over time. IDP’s valuations have declined to a material discount to its long-term averages but the company’s prospects driven by structurally growing demand for higher education is undiminished.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Opportunities-Fund-May-2023.pdfApril, 2023
The Fund rose 1.3% in April, driven by stock-specific factors, compared to the SX300 Accumulation index’s 1.9% gain. The Fund is higher by 10.2% for the financial year to date. The best contributors to fund performance in April were CSL (+4.3%), insurance broker AUB Group (+7.7%) and National Australia Bank (+4.0%). Larger cap resources companies such as BHP (- 6.0%); and Omni Bridgeway (-13.9%) were the largest detractors to performance no doubt affected by weaker sentiment towards financial institutions.
United Malt, one of the largest maltsters in North America (- 7.4%) was affected by a weak trading update, which followed a very strong share price performance in the prior month. Given the strategic value of United Malt’s assets we remain confident the takeover offer by peer Malteries Soufflet, that was announced last month, has a reasonably high probability of proceeding.
Outlook: Looking back over the past year, the portfolio has largely protected investors capital through challenging market environments in the first half of 2022 and has recovered positively since the middle of 2022. While market conditions have been volatile, dictated by top-down events including one of the most aggressive phases of interest rate increases in history, this phase is close to drawing an end as global inflationary pressures are easing.
The economic implications of higher interest rates are still unclear as it takes time for higher interest rates to work through the economy. Hence, we conclude that the market environment may still be choppy in the short term. We also believe that as economies slow, corporate earnings would be harder to come by, creating opportunities for active, fundamental investors. This favours our long term, bottom-up approach.
File:March, 2023
The Fund fell by 1.9% in March, compared to the SX300 Accumulation index’s 0.2% decline.
The Fund ended the March quarter up 2.0% and is higher by 8.9% for the financial year. The best contributors to fund performance in March were BHP (+7.5%), reversing from an exceptionally weak performance in the prior month, REA Group (+12.3%) and global malt company United Malt (+33.0%). Larger cap companies such as National Australia Bank (-7.6%) and Macquarie Group (-7.1%) were the largest detractors to performance no doubt affected by weaker sentiment towards financial institutions.
Similarly, insurance broking group AUB Group (-7.8%) was affected by the weak sentiment, which follows a very strong share price performance in the prior month. We have owned REA Group for more than 10 years in the Fund and have been investors in REA through other Prime Value funds for approximately 20 years. The on-line property advertising portal is almost like a core holding for the Fund. Over our 10 years of ownership, we have increased our ownership gradually although we reduced our weighting in REA last year as interest rates rose aggressively. Our thinking then was it would be only a matter of time before the property market started to soften. We have maintained our ownership of the company.
REA continues to account for a meaningful part of the portfolio. We believed the reasons for investing in REA remains unchanged: it’s a business with high incremental margins, low capital requirements with great flexibility to scale business. Finally, the threat of substitution is low and allows REA to price well. As for the property market, a recovery will see listing volumes improve and will be a bonus to a quality business franchise.
File:February, 2023
The Fund fell by 1.3% in February compared to the SX300 Accumulation index’s 2.6% decline—with the Fund’s consistently lower than index exposure to resources and bank stocks, the Fund’s relative to index performance in February was positive. The best contributors to fund performance in February were insurance broker AUB Group (+17.4%), QBE Limited (+9.8%) and auto parts supplier GUD Holdings (+23.3%). Larger cap companies such as BHP (-8.5%), Commonwealth Bank (-8.5%, ex dividend $2.10) and National Australia Bank (-5.6%) were the largest detractors to performance.
We have followed, but not owned, QBE for a long period of time. Past earnings have been volatile and inconsistent, and the business was difficult to understand. Following several changes in leadership and strategy over the past ten years QBE is finally demonstrating potential of a company in turnaround. QBE’s shares performed well in February following a robust FY22 results, with cash NPAT 15% ahead of consensus estimates. More importantly, the result demonstrated QBE is making considerable progress in delivering stronger and more consistent earnings. In the North American market, which presents large growth opportunities for the group, QBE had failed to execute to its potential. We believe QBE’s management has more recently be able to improve the performances of the North American business.
Auto part supplier GUD rerated strongly following its 1H23 result as the recently acquired tow bar manufacturer APG delivered a result that exceeded the market’s low expectations. APG and similar auto OEMs had been curbed by supply chain delays due to semi-conductor shortages and widespread lock downs curtailing new car production capacity across the industry. Consequently, the reduced demand for APG products and uncertainty in demand for APG products has been a headwind for GUD. We expect these headwinds to ease as new car production recovers with GUD’s core aftermarket auto parts division likely to be resilient in a slowing consumer spending environment.
Outlook: We were pleased with the performances of our portfolio companies through the February reporting period. 27.2% of companies in the portfolio had reported profits ahead of expectations, 30.9% in line with expectations and 27.1% below expectations (the balance being cash and companies that did not report this period). A key takeaway from the February reporting period is the expectation of a more challenging backdrop over 2H23. The Fund remains focussed on companies with resilient earnings, with a relatively high cash position providing good optionality.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Opportunities-Fund-February-2023.pdfJanuary, 2023
The Fund rose a strong 5.5% in January (marginally lower than the ASX300 Accumulation Index’s 6.2% gain) and has gained 12.5% for the first seven months of 2023 financial year. The Fund continues to make up ground from the drawdowns experienced in the first six months of 2022, with contributions from investments across a diversified range of companies. The best contributors to fund performance in January were larger companies BHP (+8.2%), Macquarie Group (+12.2%) and Commonwealth Bank (+7.3%). Companies which were seen as more defensive such as Amcor (-5.1%), Computershare (-9.4%) and IPH Limited (-2.6%) were the largest detractors to performance.
Broadly, large cap companies were the largest contributors to January’s performance while companies with stable earnings were the largest detractors. An interesting observation we made over the past few weeks was that investors have started to look past soft reported results of a small sample of companies, suggesting that some may be starting to look through short term headwinds to medium fundamentals. We carry this observation to Alliance Aviation, a company we have owned for approximately three years.
Alliance Aviation has continued to operate under pressure from COVID related constraints. Training of pilots has been curbed despite strong flying hours demand from its clients. The result was a much weaker-than-expect 1H23 result. Positively, Alliance Aviation’s management commented that the company is on track to achieve strong FY24 results as short term constraints ease.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Opportunities-Fund-January-2023.pdfDecember, 2022
The Fund fell 3.4% in December (marginally lower than the ASX300 Accumulation Index’s 3.3% decline), and -10.8% for the calendar year, in challenging market conditions. Whilst we never like posting negative absolute returns for our investors, the Fund posted a better second half for the year, gaining 6.7% compared to a decline of 16.5% the first half of 2022.
The key differential between Fund and the ASX300 Accumulation Index performance in 2022 was the heavy influence of resources stocks within the ASX300 Index. Commodities as an asset class appreciated over 20% in 2022 with the three major Australian resources companies BHP, Fortescue and Rio Tinto very strong performers over the past 12 months. These three companies rose an average of 28.9% compared to the market which declined by 1.8%. The Fund certainly got the directional call on resources correct through our holdings in BHP, Mineral Resources and Oz Minerals but perhaps did not push far enough. We view resources companies as a source of alpha and a great option for the Fund. We have been investors in resources companies since the Fund’s inception, but we are also aware of the downside risks of resources companies should we make a mistake. For this reason, we have always held a smaller proportion of our investments in resources companies compared to the market as we seek to protect the Fund’s downside—consequently, the Fund’s lower resources weighting is reflected in the Fund’s smaller drawdowns and faster recovery.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Opportunities-Fund-December-2022.pdfNovember, 2022
The Fund rose 4.1% in November, compared to the ASX300 Accumulation Index’s 6.5% rise. For the first five months of FY23 (July to November 2022), the Fund posted a return of 10.6% compared to the ASX300 Accumulation Index’s 13.3% increase. The Fund’s top performance contributors in November included: BHP (+21.8%) and AUB Group (+11.6%) and CSL (+7.0%). The top detractors from performance in November were: James Hardie (-14.1%), IPH Limited (-8.4%) and National Aust Bank (-2.7%). The Fund’s resources holdings were strong contributors to performance in November. BHP, and other iron ore exposed miners, appreciated substantially over the month due to developments in China. The Chinese government has announced further incremental stimulus measures to support the property market which coincided with indications that Chinese COVID lockdown measures may begin to be eased earlier than expected. Copper miner, Oz Minerals was up 13.5% following a revised takeover offer (and most likely final offer) from BHP. We believe Oz Minerals assets will be a positive addition to BHP as it’s best placed to extract efficiencies from a combined operation, whilst in the longer term, the demand for copper should increase as electrification increases. Building materials supplier James Hardie downgraded its outlook for next year as weakness in the US housing market started to bite harder. US housing loan interest rates have been rising sharply as the Federal Reserve seek to slow demand in the US economy. We weighed the balance of owning a high-quality company, trading at historical low valuation levels against the expectation of a slowing US market. We concluded positively that the business is on a path that should lead to further market share gains due to its strong product suite and expansion into its direct-to-consumer strategy.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/193783871.pdfOctober, 2022
The Fund rose 4.8% in October, compared to the ASX300 Accumulation Index’s 6.0% rise. The main difference in performance was attributable to the strong performance of the bank sector during the month. The Fund has consistently held a lower weighting in banks compared to the share market index with the Fund’s portfolio much more diversified. For the first four months of FY23 (July to October 2022), the Fund posted a return of 6.2% compared to the ASX300 Accumulation Index’s 6.4% increase. The Fund’s top performance contributors in October included: major banks National Australia Bank (+12.5%) and Commonwealth Bank (+15.4%) and Macquarie Group (+11.0%).
The top detractors from performance in October were: BHP (-3.0%), leasing company Eclipx Group (-16.4%) and health insurer NIB Holdings (-1%). NIB raised $150m in new capital during the month to fund its acquisition of several NDIS related service providers. Our past conversations with NIB’s management team had revealed the company’s interest of expanding into the NDIS. We believe it’s a logical adjacency for NIB’s future expansion plans. We have observed NIB over a number of years and have been impressed with how the company has gained market share in the domestic health insurance market consistently over time. It's a competitive sector and one where NIB does not appear to hold natural competitive advantages over larger peers. To consistently gain market share points to the strong leadership team at NIB and spotlights the forward-thinking nature of their executives. We recognise that current conditions are quite ideal for health insurers currently, as claims have been held back by the pandemic, which is why we will be watching the normalisation process closely over 2023.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/192651850.pdfSeptember, 2022
The Fund fell 6.5% in September, marginally more than the ASX300 Accumulation Index’s 6.3% decline. For the first three months of FY23 (July to September 2022), the Fund posted a return of 1.4% compared to the ASX300 Accumulation Index’s 0.5% increase.
The Fund’s top performance contributors in September included: medical device company ResMed (+5.3%), Mineral Resources (+2.8%) and global registry company Computershare (+0.2%). The top detractors from performance in August were: insurance broker AUB Holdings (‐14.6%), Macquarie Group (‐13.8%) and Goodman Group (‐19.8%).
Mineral Resources’ price appreciated 2.8% in September and added an outstanding 38.3% over the quarter. Following our comments on Mineral Resources last month that the company has demonstrated a long track record of building shareholder value and continues to own undervalued assets within its portfolio, the Australian Financial Review carried an article suggesting that Mineral Resources was considering a spin‐off of its lithium assets. For context, Mineral Resources owns 40% of the Wodgina Mine, 50% of the Mt Marion Mine and 40% of the Kemerton lithium hydroxide converter in WA. The significance of a lithium assets spin‐off is two‐fold: First, should a spin‐off lead to a listing in the US stock market, Mineral Resourcesshould benefit from a better look through valuation of its assets. We observe that valuation multiples of US listed lithium companies such as Ablemarle are more than double Mineral Resources’ current multiple. Second, cash raised from a sale of assets is likely to be directed towards other opportunities including the expansion of planned iron ore mines. There was no specific news to emerged that drove the short‐term trading of AUB Holdings, Macquarie Group or Goodman Group. The rise in bond yields clearly affected share prices of REITs in general, with Goodman Group similarly affected by valuation concerns for the sector. AUB Group and Macquarie Group appears to have been sold off together with the broader market weakness.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/191370419.pdfAugust, 2022
The Fund rose 1.8% in August, outperforming the ASX300 Accumulation Index’s 1.2% increase. Fund performance benefited from a number of investment companies reporting better-than-expected FY22 profits, at the recent August reporting period. More importantly the companies’ outlooks into FY23 had also remained positive. The Fund’s top August performance contributors included: insurance broker AUB Group (+11.7%), Oz Minerals (+42.4%) and health insurer NIB Holdings (+11.5%). The top detractors from performance in August were: City Chic (-29.1%), Commonwealth Bank (-3.2%) and Goodman Group (- 1.9%).
Oz Minerals received a takeover offer from BHP, at $25.00 per Oz Minerals share. Despite a softer and more challenging economic outlook, corporate activity was elevated with Maca Ltd, Nearmap, Pendal and Tassal all receiving takeover offers in August. We observed that Oz Minerals was trading at $25.72 at the end of August (a premium to BHP’s offer price)— clearly investors expect BHP to offer a higher price for Oz Minerals, or at least believe Oz Minerals is worth more to BHP that the $25.00 offer price. We believe Oz Minerals offers BHP several strategic options including sizable exposure to copper and nickel, both critical for batteries needed for electric vehicles, and opportunities to create significant efficiencies in its Australian copper resources base. We expect further updates on BHP’s position over the coming months. Oz Minerals and Mineral Resources (share price appreciated 19.0% in August) form two key resources company exposures for the Fund. Investors will be aware that the Fund does not invest in a ‘top-down’ fashion, for example forecasting commodity prices and tilting the portfolio towards favourable sections of the commodities complex. Rather we seek to invest in companies that are led by strong management teams that are well equipped to allocate capital to build up long life, low cost quality assets. Both Oz Minerals and Mineral Resources have demonstrated those qualities over a long period of time; and continues to own undervalued assets within their portfolios.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/190983785.pdfJuly, 2022
The Fund posted a 6.5% gain in July, against the broader market’s 5.9% gain. The Fund’s top July performance contributors included: National Australia Bank (+11.7%), Pinnacle (+42.4%) and Commonwealth Bank (+11.5%). The top detractors from performance in July were: BHP Group (‐ 6.2%), Alliance Aviation (‐9.8%) and NIB Holdings (‐1.9%).
Fund performance in July benefitted from developments in offshore markets. In particular, investors reacted positively to US corporate earnings that were announced, on the hope that the worst has passed. Consequently, a number of companies that had been sold down aggressively in the prior 6 months posted large gains in July. On the flip side, companies that were seen to be ‘defensive’, such as health insurer NIB Holdings, were sold off. Pinnacle Investments, an investment the Fund made four years ago for the company’s growth potential, was one of those companies whose share price surged in July. Pinnacle is quite a different company today compared to the one we invested in four years ago. Starting off as an equity market focused company, Pinnacle now hasinvestmentsin a broad suite of affiliate fund managers investing across numerous asset classes. This provides diversification and opportunities to grow across different pools of capital. In early July Pinnacle announced the company earned performance fees totalling $16.4m for the second half of the financial year compared to $10.0m in the first half – which underpins the benefits of diversification.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/189747158.pdfJune, 2022
The Fund was not immune to the challenging trading conditions in June, falling 7.9%. However, the Fund demonstrated underlying resilience through the month as the broader ASX300 Accumulation Index fell 9.0% and Small Ordinaries Accumulation Index by a heavier 13.1%. Our decision to reposition the portfolio towards the end of 2021 by reducing exposures to smaller retail and technology companies helped protect fund downside, which saw our high-quality Core Companies such as Amcor, CSL and EBOS perform relatively better than the market over the past 6 months.
For the 12 months to June 2022 (FY22) the Fund fell 11.2%. This compared to the ASX300 Accumulation Index’s fall of 6.8% and the Small Ords Accumulation Index’s 19.5% decline. It was a case of two halves: The Fund performed well over the first half of FY22, rising 6.3% compared to the ASX300 Accumulation’s 4.0% increase. The Fund fell 16.5% in the second half of FY22, against the ASX300 Accumulation Index’s 10.4% decline: the strong performance of the resources sector, particularly energy stocks, was a key differentiator between the Fund and market performance. Investors will note that the Prime Value Opportunities Fund is a much more diversified portfolio compared to the ASX300 Accumulation Index investing across a number of high-quality companies and has a much lower exposure to resources companies. Another significant factor was the Fund’s larger weighting in small and mid-cap companies. The withdrawal of liquidity from the market affected the short-term share prices the Fund’s smaller companies. A recovery is expected as our investments are typically well managed strong businesses with excellent balance sheet strength. The Fund’s top June performance contributors included: Woodside Energy (+7.0%), ResMed (+5.2%) and Collins Foods (+7.5%). The top detractors from performance in June were: National Aust. Bank (-12.4%), Commonwealth Bank of Aust. (-13.4%) and BHP (-7.5%).
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/189452056.pdfMay, 2022
The Fund fell 4.8% in May, underperforming the ASX300 Accumulation Index’s 2.8% decline. The Fund’s top May performance contributors included: BHP (+4.4%), Amcor (+8.5%) and Alliance Aviation (+7.4%). The top detractors from performance in May were: AUB Group (-18.0%), Goodman Group (-14.3%) and CSR (-23.9%). Whilst May was a difficult month for the portfolio, the Fund’s category of Core companies – which shares similar characteristics of resilient growing businesses, backed by strong balance sheets and management teams – such as Amcor and CSL, has proven to be solid contributors to Fund performance during more challenging share market conditions. Amcor is a Core company that we have invested for approximately 10 years.
The company supplies packaging to defensive end markets, such as food and beverages with 30% of sales from developing markets, which provides diversification and the opportunity for increased earnings growth vs. developed markets. Amcor has a strong balance sheet, positioning it well to navigate difficult markets. Our investment strategy to seek out and invest in a group of strong Core companies is the key reason for the Fund’s solid long-term record of outperforming in down markets. Since inception in 2012, the Fund has outperformed the ASX300 Accumulation Index 73% of the time the index posted negative months.
Outlook: Investors are currently having to deal with a period where central banks are removing unprecedented levels of quantitative easing at a time when interest rates are rising rapidly to counter inflationary pressures.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/187928583.pdfApril, 2022
The prospect of higher interest rates leading to slower growth weighed on equity markets. The Australian share market fell 0.8% but continues to outperform its global peers, as defensive Australian companies in the Healthcare and Utilities sectors carried market performance. The Fund fell 0.3% in April, which was ahead of the ASX300 Accumulation Index’s 0.8% decline
Whilst share markets have been more challenging in recent months, the Prime Value Opportunities Fund’s investment philosophy of focusing on quality stocks led by strong management teams can provide downside protection in these market conditions. The Fund returned -0.3% in April, outperforming the ASX300 Accumulation Index by +0.5%, reaffirming the Fund’s good record of outperforming in down markets.
The Fund continues to be well diversified and has a differentiated strategy to that of the stock market index. We are maintaining our strategy of holding diversified exposures across the market and remain consistent in seeking to invest in quality businesses led by strong sound management and can grow its earnings over time. The Fund’s top April performance contributors included: NIB Holdings (11.3+), Amcor (+10.4%) and GUD Holdings (+10.7%). The top detractors from performance in April were BHP (-7.2%), IDP Education (-14.9%) and Pinnacle Investments (-10.3%). Fund performance was carried by several ‘defensive’ companies whose earnings will continue to do well regardless of the economic climate.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/187437139.pdfMarch, 2022
The Fund rose 5.7%% in March, recovering all of the Fund’s decline posted in the prior month (-2.5%). Fund performance in March was solid given the ASX300 Accumulation Index’s 6.9% rise was attributed to a narrow group of companies. According to data compiled by UBS only 13 of the top 50 companies did better than the market’s 6.9% rise in March—emphasising the fact that the market’s rise was carried by a narrow basket of large cap companies. The Prime Value Opportunities continues to be well diversified and has a differentiated strategy to that of the stock market index. For example, the Fund only holds 6 of the 20 largest listed stocks and has a high active share of over 65% (active share being a measure of the difference between a portfolio's holdings and the benchmark index). The Fund’s top March performance contributors included: Uniti Group (+43.8%), NAB (+11.8%) and BHP (+10.9%). The top detractors from performance in March were: City Chic (-13.0%), James Hardie (-21.2%) and United Malt (-10.8%).
Uniti Group received two non-binding indicative takeover proposals over the past few weeks, with the latest proposal from a consortium led by HRL Morrison & Co, at $5.00 per Uniti share. In recent weeks we have been reducing our holdings whilst awaiting the outcomes of the proposals. Uniti has added substantially to the value of the Fund since we initiated our position in the company in 2020 with an entry price of approximately $1.50.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/186017228.pdfDecember, 2021
The Fund gained 1.9% in December, closing 2021 20.3% higher. The 2021 Fund return was a solid performance when compared to the ASX300 Accumulation’s 17.5% gain for year.
The Fund’s top December performance contributors included: insurance broking group AUB Group (+12.5%), Commonwealth Bank (+8.4%) and National Australia Bank (+5.6%). The top detractors from performance in December were: CSL (-5.2%), City Chic (-8.4%) and Pinnacle Investment (- 5.4%). Notably investment manager Pinnacle Investment, telco company Uniti Group, retailer City Chic and AUB Group were the strongest contributor to fund performance in 2021—in contrast to ASX300 major contributors which included the major commercial banks and Telstra. We are particularly pleased that the strong 2021 Fund outcome reinforces our consistent approach of firmly focussing on well managed quality companies with growing outlooks regardless of size or index positions. At Prime Value, our history has been in small and medium-sized companies. The Fund, while invested in a number of large cap companies, has the flexibility to invest in companies across the range of market caps. For example, the four mid-sized growth companies we cite above as key contributors to fund performance in 2021 have been significant opportunities
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/182649815.pdfNovember, 2021
The Fund gained 0.6% in November, a pleasing outcome compared to the broader market’s fall of 0.5%. The Fund has gained 4.2% for the 2022 financial year (from July 2021) and over 16.5% for the calendar year to date. The Fund’s top November performance contributors included: Goodman Group (+12.7%), BHP (+7.6%) and Uniti Group (+8.8%). The top detractors from performance in November were: CBA (-9.7%), Bapcor (-12.2%) and NAB (- 7.9%).
Early in the month Goodman Group upgraded its FY22 Operating EPS growth guidance from +10% to +15% despite delaying the recognition of $200m in development profits. So far, this financial year, all three areas of the business (development, investment and management, including performance fees) were said to be running ahead of expectations. Goodman, a global industrial property developer and fund manager, has work-in-progress of $12.7bn and materially was ahead of prior Goodman guidance ($10-11bn). FY22 closing Funds-under-management guidance was also upgraded from $65bn to $70bn. Goodman fits into the portfolio’s Thematic category: the company’s global leadership position in large scale industrial properties has led to numerous partnership opportunities with large institutional investors keen to increase their exposures to industrial property assets. Lead by a high quality and deep management team the company is extremely well positioned in this multi-year property asset cycle.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/181790902.pdfOctober, 2021
Share markets recovered strongly in October following a softer September, with the US share market posting convincing gains due to a robust 3Q reporting period.
➢ The ASX300 Accumulation Index however, lagged its global peers, gaining a small 0.1%. ➢ The Fund gained 0.3% in October, outperforming the broader market, as we continued to receive positive updates from portfolio companies. The Fund gained 0.3% in October, outperforming the ASX300 Accumulation Index’s 0.1% gain for the month. The Fund has gained 3.7% for the financial year (from July 2021) and over 16% for the calendar year to date. The Fund’s top October performance contributors included: IDP Education (+9.8%), Macquarie Group (+8.7%) and Pinnacle Investment (+9.2%). The top detractors from performance in October were: AUB Group (-9.7%), Alliance Aviation (-12.2%) and News Corp (-7.9%).
Alliance Aviation’s share price has been on soft over the past few months with lock downs affecting short term travel activity and appears to be deferring some deployment of wet leased aircraft. News of Qantas weighing up options for smaller aircraft types, that sit within Alliance Aviation’s sweet spot, also seemed to dampen sentiment on Alliance’s share price. We note that Alliance Aviation announced in early November of increased flying activities in the company’s E190 capacity with Qantas. Thus far, Qantas has exercised an additional five options on top of the initial options over three aircraft, taking the total to eight—this is in line with expectations
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/180683428.pdfSeptember, 2021
The ASX300 Accumulation Index fell 1.9% as investors sold down companies with higher earnings certainty for cyclical sectors. The Fund fell 1.4% in September, outperforming the broader market’s 1.9% decline. For the September quarter, the Fund is up 3.3%
The Fund fell 1.4% in September, outperforming the ASX300 Accumulation Index’s 1.9% decline for the month. The Fund had a good start to the new financial year, posting a 3.3% gain over the September quarter and is up approximately 16% so far this calendar year. The Fund’s top September performance contributors included: IDP Education (+18.4%), Macquarie Group (+9.2%) and Newscorp (+8.3%). The top detractors from performance in September were: BHP (-17.5%), Uniti Group (-10.8%) and CSL (-5.9%). Newscorp has been on a path to unlocking value across its conglomerate media structure in recent years. Divestiture of non-core assets, move to increase digitisation to complement and drive organic growth momentum, mergers and acquisitions and turning around Foxtel are broad plans to drive shareholder value—pleasingly shareholders are increasingly seeing signs of good progress. In September, Newscorp announced a US$1b share buy-back program. We believe the buyback reflects the strong operating momentum for the Group, which is being driven by its three core segments of Digital Real Estate, Dow Jones and Book Publishing. Our sequential tracking of Newscorp’s quarterly results point to increasing Group profitability, with better shareholder disclosures a positive for highlighting the value of Newscorp’s underlying businesses
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/179814746.pdfJuly, 2021
The Fund had a robust July, gaining 0.9% during the month. Although there wasn’t a real strong theme that drove Fund performance during the month, as the macro picture and investor sentiment swung about, there were several clear stock specific drivers that assisted Fund’s performance—we discuss several of these below. The top contributors to performance in July were: BHP (+10.1%), IDP Education (+15.0%) and Pinnacle Investments (+9.8%). The top detractors from performance in July were: Australian Finance Group (- 9.1%), Qube (-7.9%) and Bapcor (-4.0%).
One of the defining features of the ASX’s performance this year has been the high level of M&A activity that had descended on the market. It’s clearly one way of adding value to shareholders. A core part of our investment process is to discover companies that are well financed (not necessarily debt-free), helmed by management teams that are able to allocate capital (including via acquisitions) in a disciplined manner for profitable returns. In the past 12 months some of our investee companies have been able use their stronger financial positions, to take advantage of weaker competitors through acquisitions, and emerge in stronger market positions. Alliance Aviation, Macquarie Group and Uniti Group are some of our investments that are already benefitting from acquiring assets that have enhanced their market positions.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/178604824.pdfJune, 2021
Global share markets were broadly higher in June, with the ASX300 Accumulation Index gaining 2.3%. The Australian share market posted its strongest financial year return since FY07, assisted by both monetary and fiscal stimulus. The Fund returned 3.0% in June and 27.7% over the past 12 months. Fund performance was driven by a broad number of contributors with BHP, City Chic and Redbubble amongst the major contributors to the Fund over the past 12 months.
The Fund rose 3.0% in June, bringing the total return for FY21 to 27.7%. The top contributors to performance in June were: City Chic (+17.1%), Austbrokers (+15.5%) and Pinnacle Investments (+15.9%). The top detractors from performance in June were: Collins Food (-9.0%), NAB (- 2.7%) and CSL (-1.7%). Over the past 12 months (FY21) BHP, City Chic and Redbubble contributed the most to fund performance. Bravura, A2 Milk (exited) and Austal (exited) were small detractors to the financial year performance.
As we enter the new financial year, the market appears to believe we could be headed into an inflationary environment. However, we don’t invest based on whether future interest rates or inflation will be higher or lower. We just don’t think it’s possible to predict big macro factors with any degree of accuracy. However, looking at the history of stock performances during inflationary environments, the two type of stocks that tend to perform best over the long haul tend to have pricing power and/or high returns on invested capital. For this reason, we seek to invest in stocks with sustainable long term growth opportunities. More generally we have found that the quality businesses we favour tend to take market share during downturns.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/176023260.pdfMay, 2021
The Fund rose 1.3% in May, bringing the total return for the first eleven months of FY21 to 24.0%. The top contributors to performance in May were: CBA (+12.0%), CSL (+7.0%) and Collins Food (+10.8%). The top detractors from performance in May were: Macquarie Group (-5.3%), AUB Group (-4.9%) and Elders (-8.0%).
The Fund’s three largest detractors during the month, Macquarie Group, AUB Group and Elders, reported results or profit updates in May. In our view, all three companies are currently executing well, and each with tailwinds to back their growth profiles over the next few years. There were few flags in their latest updates that gives rise to concerns over their business operations. Each one of these companies fit a number of criteria that we look for in our investments—strong management teams leading good businesses to compound growth over time. The track records of Macquarie, AUB and Elders over a duration of time have proven that value has been created for shareholders as their profitability improve.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/173427890.pdfMarch, 2021
The Fund rose 1.5% in the month of March and 3.7% for the March quarter, bringing the total return for the first nine months of FY21 to 17.0%. The top contributors to performance in March were: James Hardie (+9.1%), Macquarie Group (+7.3%) and News Corp (+9.2%). The top detractors from performance in January were: IDP Education (-12.4%), BHP (-7.8%) and Southern Cross Media (-10.8%).
Macquarie Group ended the March quarter on an all-time high share price of $152.83. Macquarie has been a Thematic holding for the Fund for more than five years. Macquarie Group has been a prime beneficiary of management’s long term plan to establish the Group as a global manager and investor in asset management. Since our initial investment, Macquarie has proven itself to be an excellent capital allocator, acquiring key asset management businesses at depressed prices (e.g. during the GFC, and more recently during the current pandemic) to grow shareholder value. It’s no coincidence we hold a large position in Macquarie as we like companies with strong balance sheets that could be deployed
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/169885298.pdfDecember, 2020
The Fund gained 2.1% in December, bringing the total return for the first six month of FY21 to 12.7%. The Fund gained 8.7% in 2020 which was 700 basis points higher than the ASX300 Accumulation Index’s 1.7%. The top contributors to performance in December were: City Chic (+45.7%), BHP (+11.4%) and Pinnacle Investments (+15.6%). The top detractors from performance in December were: CSL (-4.8%), Worley (-10.9%) and IDP Education (-18.9%). Company specific positive news during the month enabled some of our more growth orientated companies to perform well despite the recent market preference for cyclical or value stocks.
In a rapidly changing market environment where new themes seem to emerge weekly, we are being patient and look for companies with unique characteristics and advantages. One key feature we look for is companies’ ability to take advantage of industry change to enhance their market position through market share gains or acquiring weaker competitors--we highlight three of our investments below. These investments were made long before COVID-19 impacted markets and the decision to invest were made based on work that has been made in the prior two, three, five years. City Chic (+45.7% December; +61.3% 2020) announced the company was acquiring Evans, a UK based plus-sized women e-commerce fashion retailer. Evans is part of the UK retail conglomerate Arcadia that fell into administration in November 2020. We observe that the Evans business has been operating since 1930 and will give City Chic access to the estimated A$9bn p.a. UK plus sized women’s market. City Chic will pay $41m for the Evans assets. We expect City Chic’s management to translate the Evans potential into revenues through improvements in stock position and fashion offerings. The Evans acquisition is consistent with the company’s stated goal of building a global footprint focused on the plus-sized market, which started with the acquisition of another weakened retailer, US based Avenue, last year. Alliance Aviation (+11.0% December; +48.8% 2020) announced another acquisition of a fleet of 16 Embraer E190 aircraft, in addition to the 14 they announced in mid-2020. The net 30 aircraft acquired adds to Alliances’ existing active fleet of 42 Fokker aircraft. As we have highlighted before, Alliance is well placed to take advantage of disruption in the aviation industry by buying assets at deep-discounted prices.The latest aircraft acquisition would further suggest strong emerging demand from its client base, notably mining companies in regional areas. Pinnacle Investments (+15.6% December; +52.4% 2020) has been steadily building a composite group of fund managers across different asset classes over a number of years. We have found management to be forward looking and highly motivated to build a group of assets that will grow into the future.
We believe latent value resides in the group’s asset distribution capability that can be leveraged for future growth opportunities. We start 2021 with a confidence that new opportunities have arisen with conditions favourable for equities. We will continue to monitor the economic data and developments closely, and we are encouraged by the outlook— however, our best work is around individual companies, not predicting the macro environment, where we continue to find great opportunities.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/166013074.pdfasset_class: Domestic Equity
asset_category: Australia Other
peer_benchmark: Domestic Equity - Other Index
broad_market_index: ASX Index 200 Index
manager_contact_details: Array
ticker: PVA0005AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://primevalue.com.au/resources/product-information/opportunities-fund/
fund_features:
Prime Value Opportunities aims to achieve superior absolute total returns by providing medium to long term capital growth without the constraints of a share market benchmark. The Fund will be comprised of securities, primarily companies listed on an Australian stock exchange or due to be listed in the next 12 months.
- The Fund is designed for an investor seeking absolute returns via a highly concentrated portfolio of securities, who is prepared to accept some fluctuations in short-term returns.
- This type of investment may be appropriate as a significant part of a properly diversified investment portfolio for individuals, companies, trusts, superannuation funds and non-profit organizations.
structure: Managed Fund