August, 2023
The fund returned -0.9% in August, 0.2% below the ASX 300 Accumulation Index return of -0.7%. August was reporting season when most companies report their financial results for the period to June 30. Broadly speaking, shares prices follow earnings so it is a critical time to assess how a company is performing and how it is likely to perform in future. We meet with over 100 companies during this period.
It is clear the economy is softening, which is to be expected after multiple rate rises that started in May 2022. As you would expect. the more cyclical sectors are experiencing the toughest conditions, namely media (advertising), retail and residential housing. Advertising softened from late 2022 while retail took another c. 3-6 months to be impacted (depending on the category).
Residential housing impacts were staggered with house prices softening first in mid 2022, which flowed through to weak listing volumes (houses for sale), followed by weakening household goods demand and more recently softer construction activity. Interestingly these are starting to improve in the same order with house prices starting to rise moderately c. 6 months ago, which has flowed through to higher listing volumes recently. Should this be sustained, it’s likely household goods purchases and construction activity will also improve.
Cost pressures were a feature in reported results but are easing. It’s easier to find employees and staff turnover is reducing. Shipping rates are typically at or below pre-covid levels after increasing c. 500% previously. Many are reporting manufacturing costs out of China have reduced. These easing pressures are being reflected in softening inflation data globally and locally which is a positive sign in that it reduces upward pressure on interest rates.
The rearview is interesting insofar as it helps assess implications for future performance. Kelsian reported a result below expectations due to challenges sourcing labour, however we view this as a short-term issue and increased our holding after the stock fell. Sourcing drivers of their buses is becoming easier and should result in an earnings uplift in 2024. The business is relatively defensive, its US acquisition was surprisingly strong and valuation is compelling in our view.
We are finding some very attractive investment opportunities in the current market. Businesses with defensive and growing earnings streams are trading at attractive valuation multiples.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Growth-Fund-August-2023.pdfJuly, 2023
The fund returned +2.8% in July, in line with the ASX 300 Accumulation Index return of +2.9%. Key fund contributors over the month were Lindsay Australia (LAU +18.4%), Commonwealth Bank (CBA +5.4%) and SG Fleet (SGF +13.9%). Key detractors were Austal (ASB -7.2%), CSL (CSL -3.2%) and Kelsian (KLS -4.5%). July continued the strong recovery in the ASX 300 Accumulation Index which is actually +8% from the beginning of the interest rate tightening cycle in March 2022. As we mentioned last month, very few investors expected such strong market returns highlighting that short term returns are hard to predict and long-term investing is best. We highlight this via a couple of twenty-year charts, the first of which shows the monthly returns of the ASX 300 Accumulation Index since July 2003, which appears relatively volatile and lacking direction.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Growth-Fund-July-2023.pdfJune, 2023
The fund returned +2.4% in June, 0.7% above the ASX300 Accumulation Index return of +1.7%. June concluded the financial year and returns were strong with the fund +14.0%. Very few expected such strong market returns highlighting that short term returns are hard to predict and long-term investing is best. There are good years and bad years but over the long term, returns are very strong.
By being invested, unit holders have benefitted from a +14.0% year when many other asset values declined. Over the last 2 years the fund has marginally underperformed the ASX300 Accumulation index (+0.4% v’s +3.3% p.a.). This is because the fund is overweight small industrials which have underperformed large capitalisation stocks which dominate the ASX300 index. The small industrials accumulation index return over the last 2 years has been -8.8% p.a., creating a significant headwind to performance. When markets rebound, smaller companies typically rebound more meaning this headwind will turn into a tailwind. We saw this over the last 6 months with the fund outperforming the ASX300 by 3.3% (+7.7% v’s +4.4%).
Small industrials is an appealing market segment as it is a deep pool of opportunity. There is a large variety of companies in very different niche industries and most have limited research coverage. We meet 4 companies per day on average ensuring we find the best ideas and have them in the fund. Markets are currently trending positively and it appears we are nearing the end of the RBA’s rate hiking cycle so there are reasons to be positive on the market outlook. However, as always, it is very difficult to forecast markets in the short term. Over the long term we are confident markets will be significantly higher so the fund’s returns should be strong. Over the last 2 years of market turbulence, many quality businesses have fallen significantly, presenting the opportunity to buy at discounted prices. Earlier this year we started buying Domain Group (DHG) after its share price had halved in the previous 12 months. DHG is a high-quality business being the second largest online property portal in Australia.
The industry is concentrated with 2 main players, high barriers to entry and strong pricing power. Since our purchase the stock is up c. 20% in anticipation of an improving residential property cycle (increased listings). This highlights the market is forward looking and you can’t wait for ideal conditions to invest. In our view, investing in equities is not a speculative game. It provides the opportunity to be the part-owner of very high-quality businesses at attractive prices (when timed right). A cursory glance at the wealthiest people in Australia and globally illustrates that being a business owner is a fantastic way to generate wealth. Market falls over the last 2 years is presenting investment opportunities that should provide strong investment returns in the years to come.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Growth-Fund-June-2023.pdfMay, 2023
The fund returned -0.2% in May, which was 2.3% ahead of the ASX 300 Accumulation Index which returned -2.5%. The month was characterised by strong returns from Technology and Lithium stocks, and weak performances from the broader Resources and Retail sectors. Local Technology stocks appeared to rally following a material profit upgrade from US-listed Artificial Intelligence beneficiary, NVIDIA. Conversely, softer Chinese economic data saw Resource stocks sold off, while Retail stocks were hit by signs that consumer demand is softening.
Key fund contributors in May were Kelsian (KLS +11.5%), Newscorp (NWS +11.3%) and Austal (ASB +19.0%). Key detractors were BHP Group (BHP -5.4%), AUB Group (AUB -8.0%) and Helloworld (HLO -10.6%). Kelsian (KLS) rose on limited new news, and has steadily become one of the fund’s largest holdings. For us, it is a reminder of the importance of investing in quality businesses at the right price. For a long time, we have been attracted to Kelsian’s resilient public bus business model, that sees it generate inflation-protected cash flows with no fare box risk from longterm contracts with government counterparties, and without material capital investment in key infrastructure in some regions. However, we were not alone in appreciating these qualities, with investors pushing the stock beyond our valuation tolerance levels to >$9ps for much of 2021 following a series of contract wins and renewals. But no-one has a perfect win rate, and shortly thereafter, the company’s extraordinary winning streak came to an end as it missed out on several tender opportunities. This saw investors lose faith and push the stock down into our hitting zone, resulting in our initial purchase in Jan 2022 at c. $6.50ps.
Further ‘disappointments’ from the failed attempt to acquire a large UK bus operator saw the stock fall lower, providing the opportunity to add 25% to the fund’s holding below $6ps in Sept 2022, and a further 25% addition below $5ps in Oct 2022. Through this time that the stock halved in price, nothing had changed with regards to its business model or operating performance; investors had simply fallen out of love. And just as a perfect hit rate is unobtainable, a perfect loss rate is sustained by few, and Kelsian has since enjoyed more than its market share worth of new wins through the NSW Government’s recent tender process, resulting in a ~50% share price rise since (to $6.80ps).
Our most recent opportunity to add to the position came in Mar 2023, participating in an equity raise (at $5.55ps) as the company acquired a large US bus business with an experienced management team and impressive organic growth profile. The key in this case study is the importance of the entry price of an investment; it is a key component of the returns ultimately generated. It will surprise many to learn that the share price of the median company in the ASX300 index is trading 17% below its 52-week high, while also trading 27% above its 52-week low – that is, the median ASX300 company has traded in a >40% share price range over the past year.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Growth-Fund-May-2023.pdfApril, 2023
The fund returned +2.6% in April, 0.7% above the ASX 300 Accumulation Index of +1.9%.
The fund is overweight smaller companies in a focused, lower risk way i.e. growing, high quality, less cyclical businesses. Since the beginning of 2022 smaller companies have underperformed larger companies by circa 20% and this has been a major headwind to performance. In recent months this has started to reverse. When combined with the fund’s outperformance relative to the small company index (Small Ordinaries Accumulation Index), fund performance has been improving. To some extent, future performance will also be driven by the dynamic of small v’s large. However small companies are trading at an abnormally large valuation discount to large companies and that will unwind at some point. This implies there is more upside to small companies long-term. The timing is uncertain, but it can happen quickly.
April’s solid returns were driven by our exposure to smaller companies. All 3 of our best performers were small while our largest detractor was a large cap (BHP).
Lindsay Australia (LAU.ASX, +38%) is a relatively small position in the fund but materially benefitted performance after upgrading guidance for earnings in the current financial year. EBITDA is now expected to be 50% above last year and it appears this may be conservative. The recent liquidation of Lindsay’s largest competitor (Scott’s) has removed capacity from the industry coming into the seasonally strongest period which provides strong pricing power to incumbent operators. In many cases, contracts are being locked-in for 3-5 years at significantly higher prices thereby ensuring long term benefits for the company. Despite the stock price tripling from our original purchase last year, it remains attractively priced on an FY24 PE of c. 10x, yielding 5% fully franked.
Helloworld (HLO.ASX, +36%) is a tourism operator exposed to international travel. In April HLO also upgraded earnings guidance for the current financial year. Guidance still appears conservative given the implied earnings for the fourth quarter is similar to the seasonally weaker third quarter. It is reasonable to expect the fourth quarter to be materially higher. Momentum remains strong for tourism operators globally due to pent-up demand after 3 long years of covid restrictions and health concerns.
AUB Group (AUB.ASX, +8%) is an insurance broker that made a UK acquisition in 2022. Initial concerns with the risk of a large offshore acquisition are dissipating and the insurance premium cycle is still positive, further supporting earnings growth.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/200053679.pdfFebruary, 2023
February was a weak month for equities, as company results illustrated declining earnings momentum. The MSCI Developed Markets Index fell (-1.5%), and the S&P500 Index also lost momentum (-2.4%) in local currency terms. Emerging markets underperformed Developed Markets, falling (-4.3%) across the month.
The RBA began the month with a more hawkish tone outlining their intention to take interest rates further. Australian 10-year bonds fell in reaction to tightening monetary policy, with yields rising 30bps to 3.86%. US 10-year bonds also fell with yields rising 39bps to 3.92%, in reaction to stronger than expected economic data.
The fund’s return was -1.3% in February, 1.3% better than the ASX 300 Accumulation Index of -2.6%.
We continue to hold a portfolio of stocks which individually are high quality, all are profitable and most we consider structurally growing with less dependence on the economic cycle. The equity we own in this group of companies should grow in value over coming years and provide a reasonable dividend stream along the way. Less certain is market sentiment and how this value is reflected in stock prices in the short term. We hold stocks for an average of 4 years which reflects our belief in the power of compounding wealth through the patient ownership of quality assets that grow in value over time.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/198426960.pdfJanuary, 2023
The fund’s return was +4.7% in January, 1.6% below than the Small Ordinaries Accumulation Index of +6.3%.
The strong market performance was led by stocks in the Retail and Mining sectors. Retailers benefited from still strong consumer spending (refer to strong updates from the likes of Super Retail and Accent Group), while Miners benefited from strong commodity prices (and is a sector in which the fund tends to be underweight due to a low predictability of earnings).
The fund currently has a limited exposure to Retailers given the exhaustion of ‘excess’ savings that resulted from COVID stimulus payments and the pending fixed rate mortgage cliff. This sector of the economy has experienced conditions that are about as good as it gets, both in terms of sales and margins, which we expect to revert over the medium-term. In particular, the household savings rate has returned to a more normal level of ~7%, having increased to as high as 24% in June 2020 as land-locked households were restricted from spending on services that were in lockdown, instead deflecting this spend into buying more goods than ever. Additionally, a temporary low cost funding facility provided to the banks through COVID saw them offer very low fixed rate mortgages that will largely expire over 2023. This will result in ~10% of Australians move from fixed rates of ~2%pa into higher variable interest rates of ~6%, which will likely further impact consumer spending levels.
Key fund contributors in January were BHP Group (BHP +8.2%), CBA (CBA +7.3%) and Macquarie (MQG +12.2%). Key detractors were Austal (ASB - 20.2%), Regis Healthcare (REG -7.2%) and Lindsay (LAU -7.2%). BHP was strong on higher commodity prices which were buoyed by China’s re-opening, with Iron Ore and Copper both +10% in January.
CBA rose on no news flow, as the major banks continuing to gain market share against non-bank lenders due to a cost of funding advantage.
Macquarie (MQG) also rose on limited news flow, with some expectations that its 3Q trading update could highlight benefits from the dislocation in natural gas markets.
Austal (ASB) downgraded its FY23 earnings guidance by ~40% as it raised a provision for an onerous contract with the US Navy. The company has submitted a claim for reimbursement of higher quantities of steel and cost inflation in relation to the T-ATS contract, which may or not succeed. Either way, the outcome should not, in theory, impact future earnings.
Regis Healthcare (REG) was weak following the release of the Department of Health’s Aged Care Star Ratings which ranked REG in the bottom quartile of the larger peer group.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/197034837.pdfDecember, 2022
The fund’s return was -2.3% in November, 1.0% better than the ASX300 Accumulation Index of -3.3%.
Key positive contributors in December were Lindsay (LAU +19.5%), NIB Health (NHF +6.2%) and Hotel Property Investments (HPI +6.3%). Key detractors were Commonwealth Bank (CBA -4.9%), Omni Bridgeway (OBL -15.8%) and Austal (ASB -14.8%).
It was good to see the end of a tough year for equities in 2022. Rising inflation resulted in higher interest rates that impacted valuations, particularly for small cap companies (-18% in 2022) in which the fund has exposure. Equities generate strong long term returns however volatility is part of the trade-off. There are good years and bad years. Thankfully the good years far outnumber the bad years.
Historically small cap stocks rebound strongly after years like 2022 which was the 3rd worst in the last 20 years (chart below). But forecasting the timing is very uncertain. Global macro factors are a key driver which are notoriously difficult to forecast. Our best estimate is “sometime in 2023”.
Historically when equities rebound, smaller companies rebound the most. We expect it will be similar this time with the steeper falls experienced by smaller companies in 2022 during the downturn reversed in the upturn.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/196062703.pdfNovember, 2022
The fund’s return was +3.0% in November, 3.5% below the ASX300 Accumulation Index of +6.5%.
It was a strong risk-on month for equities, and particularly for resources, which made up 15 of the top 20 performing stocks in the index in November (and which the fund tends to be underweight in).
Key positive contributors in November were BHP (BHP +21.8%), Kelsian (KLS +17.3%) and AUB Group (AUB +11.6%). Key detractors were IPH (IPH -8.4%), SG Fleet (SGF -12.2%) and Collins Foods (CKF -18.6%).
BHP (BHP) was a key beneficiary of the outperformance in resource companies, as investors increasingly anticipate adjustments to China’s COVID-zero policy that could trigger a re-opening of its economy in 2023.
Kelsian (KLS) shares benefited from a contract renewal, reversing recent performance which has seen the stock -23% over the previous 3 months.
AUB Group (AUB) rose on upgraded FY23 earnings guidance, while investors gained more comfort with the recent Tysers acquisition.
IPH (IPH) was weak on a stronger AUD/USD as investors became more cautious on the US economy and interest rate expectations lowered.
SG Fleet (SGF) fell on limited news, with some concerns emerging that used car prices could be headed lower given US market trends.
Collins Foods (CKF) produced an in-line 1H23 result, but disappointed with its outlook commentary, noting inflationary pressures will continue to impact profit margins through 2H23 and into FY24.The chart below neatly highlights the extent of volatility this year, showing the % of months over the past 10 years and over the past 1 year in which the market has moved strongly (one way or the other). It is quite staggering that 7 of the last 12 months has seen the index move +/- >5%:
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/193783872.pdfOctober, 2022
The fund’s return was +5.0% in September, 1.0% below the ASX300 Accumulation Index of +6.0%.
Key positive contributors for the fund in September were Commonwealth Bank (CBA +15.4%), Omni Bridgeway (OBL +19.6%) and Regis Healthcare (REG +19.3%). Key detractors were NIB Group (NHF - 10.2%), BHP (BHP -3.0%) and National Tyre & Wheel (NTD -13.2%).
2022 has been a tough year for equities, particularly Small Industrials (where we are biased) at -22%. Yet economic growth remains strong and recent AGM updates by listed companies indicates they are broadly performing very strongly. This apparent detachment is due to equities looking ahead and reacting to; 1) higher interest rates (lower valuations), and 2) expectation of weaker economic growth ahead (cyclicals have been hit hardest).
Our underlying assumption is that 2023 will be a tough year for global growth with Australia also softening but one of the better performing regions. Consequently, we prefer domestic exposure over international and defensive growth over cyclicals. There are some exceptions to these themes where stocks have fallen so far that the risk/reward is heavily favourable and a strong balance sheet ensures durability of the business.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/192651845.pdfSeptember, 2022
The fund’s return was ‐8.5% in September, ‐2.2% below the ASX300 Accumulation Index of ‐6.3%. This underperformance was partly due to significant underweight exposures to the Miners and Banks.
We note that only 9% of index constituents posted a positive return for the month, with most of these represented by companies the fund tends either have an underweight exposure to (ie Mining), or does not typically invest in (ie non‐profitable tech / biotech businesses).
Key positive contributors for the fund in September were Lindsay Australia (LAU +3.5%), IPH (IPH ‐0.7%) and NRW (NWH ‐2.9%). Key detractors were AUB Group (AUB ‐14.6%), Omni Bridgeway (OBL ‐17.5%) and Commonwealth Bank (CBA ‐3.2%)
Lindsay Australia (LAU) shares bucked the broader market trend as investors continued to absorb its strong FY22 profit result, driven by the transformation of its Transport segment towards the less capital intensive and growing Rail business. The competitive landscape remains rational, following increased Private Equity ownership in recent years.
AUB Group (AUB) shares fell on limited new news, albeit we note that the company was the strongest contributor to the fund’s performance in August. Positively, the company completed the material Tysers acquisition at the end of the month, which was earlier than anticipated.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/191370353.pdfAugust, 2022
The fund’s return was +2.2% in August, 1.0% above the ASX300 Accumulation Index of +1.2%.
Key positive contributors for the fund in August were AUB Group (AUB +14.7%), nib Holdings (NHF +13.0%) and NRW (NWH +26.0%). Key detractors were Hansen (HSN -14.0%), Commonwealth Bank (CBA -3.2%) and City Chic (CCX -29.1%).
August is reporting season when most listed companies report their financial results for the period ending June. Consequently most of the major contributors / detractors were caused by results that were either above or below expectations.
AUB Group (AUB) reported a strong profit result with underlying net profit after tax +22% for the year and provided guidance forthe upcoming year of c. +12%. Insurance brokers were one of the few sectors to provide earnings guidance as their business is relatively defensive and less reliant on the economic cycle. Inflation can be a positive as it causes higher claims costs and therefore higher insurance premiums. Higher premiums are a positive tailwind for insurance brokers which generate a commission on the premiums its client’s purchase. This visibility is particularly valuable in the current environment where rising interest rates make the economic outlook less predictable. In addition to the strong earnings growth, AUB is rebounding after some indigestion of its recent equity raise for the purchase of Tysers in the UK. AUB remains one of our larger holdings in the fund.
Hansen (HSN) fell despite a solid earnings result with underlying net profit after tax +6% for the year. It flagged higher wages costs crimping earnings growth in the year ahead. The investment case for HSN is not driven by strong earnings growth. It operates in mature but highly stable & defensive industries (utilities & telecommunications) and generates strong cashflow which it then re-invests in highly accretive acquisitions. With a strong balance sheet, it is well placed to undertake further acquisitions which are value accretive. We continue to hold the stock.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/190983849.pdfJuly, 2022
With equity markets rebounding in July, the fund returned +7.3%, above the ASX300 Accumulation Index of +6.0%. Risk‐on sentiment saw loss‐ makers comprise 8 of the top 10 returning stocks for the month, such as Zip Co which rose +158% in July, but remains ‐83% over the past 12 months. The fund does not typically invest in loss‐making companies, preferring to focus on those with more predictable earnings profiles. Key positive contributors for the fund in July were Austal (ASB +48.9%), Pinnacle (PNI +42.4%) and Commonwealth Bank (CBA +11.5%). Key detractors were BHP Group (BHP ‐6.2%), Alliance Aviation (AQZ ‐9.8%) and EQT Holdings (EQT ‐2.1%).
While equity markets performed strongly in July, we would not be so bold as to declare the current bear market over, particularly given continued uncertainty over the level of inflation, interest rates and economic growth for the year ahead. Equity markets do not move in straight lines, and it is common to experience mini rallies throughout a downturn. To that end, the upcoming August reporting season will be important in providing us with real‐time updates on how corporate Australia is faring.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/189747314.pdfMay, 2022
Key positive contributors for the month of May were BHP (BHP +4.6%), Regis Healthcare (REG +7.6%) and Propel Funerals (PFP +7.4%). Key detractors were AUB Group (AUB -18.0%), News Corporation (NWS - 13.8%) and Macquarie Group (MQG -10.2%). One of our small industrial holdings is Propel Funeral Partners (PFP). PFP is Australia’s second largest funeral operator. A key driver of volumes is the number of deaths in Australia which are expected to accelerate from 1% p.a. to 3% p.a. over the next 10 years due to an ageing population. We expect accelerating volume growth to have a magnified benefit to earnings given the fixed cost nature of the business.
Death is not corelated to inflation, interest rates or the economic cycle. In a period of higher inflation, pricing power is increasingly important. Funeral operators including PFP have demonstrated the ability to raise prices above inflation given the emotional nature of the product which is typically a large social event including family & friends. Over the last 7 years average revenue per funeral has increased 2.7% p.a. above the inflation rate of c. 1.8%.
In addition to volume and price growth, PFP has a long & successful track record of undertaking bolt-on acquisitions. In October 2021, the company raised equity to re-stock the balance sheet for more acquisitions. It is now well placed to deploy this capital and accelerate earnings growth.
We expect PFP to perform strongly over coming years with the number of deaths structurally growing. Equity markets may go up and down but we have a high level of certainty that PFP’s earnings will be higher in 3-5 years and are confident this will be reflected in a higher stock price. We hold many other defensive companies that we have a high level of confidence will grow their earnings over coming years. It is very difficult to predict what value equity markets will put on those earnings in the short term. But with valuation multiples increasingly attractive, we expect stock prices to be higher in the long term.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/187928578.pdfApril, 2022
The prospect of higher interest rates leading to slower growth weighed on equity markets.
The Fund returned -0.9% in April, in line with the ASX300 Accumulation Index of -0.8%. Underweight positions in the mining and banking sector helped offset underperformance from being underweight energy and utility stocks. The fund is largely exposed to businesses that are relatively defensive and less influenced by the economic cycle.
The fund’s return was -0.9% in April, in line with the ASX300 Accumulation Index of -0.8%. The fund’s underweight exposure to banks and resources companies helped offset the underperformance from being underweight energy and utility stocks.
Key positive contributors for the month of April were nib Holdings (NHF +11.3%), United Malt (UMG +10.1%) and Kelsian (KLS +12.5%). Key detractors were BHP (BHP -7.2%), Omni Bridgeway (OBL -10.5%) and Pinnacle (PNI -10.3%).
nib Holdings (NHF) rose strongly in a weaker market, as the government further eased COVID restrictions and international travel bookings ramped up. Health insurance is a resilient industry that has the ability to pass on inflationary pressures through higher insurance premiums, and while the current decline in the number of elective surgeries (and therefore hospital claims) is creating excess profits in the short-term, the opening up of international travel and increasing international student mobility is set to benefit the group’s travel and overseas student insurance businesses in the years ahead.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/187437207.pdfMarch, 2022
The fund’s return was +4.4% in March, 2.5% below the ASX300 Accumulation Index of +6.9%. The fund’s underweight exposure to resources and banks was the key driver of underperformance. Key positive contributors for the month of February were Uniti Group (UWL +43.8%), BHP (BHP +10.9%) and CBA (CBA +13.2%). Key detractors were United Malt (UMG -10.9%), City Chic (CCX -13.0%) and IPH (IPH - 3.9%).
Uniti Group was the highlight in March when it received several takeover offers, the latest at $5.00 / share. This has been a fantastic investment for the fund, with an average entry price of $1.57 reflecting a gain of 220% in just under 18 months. The deal is not yet finalised but looks likely to complete in coming months. We reduced our holding in March to lock-in some of these strong gains. Interestingly the offer came after the stock was sold down heavily in February (-21%) highlighting the importance of patience when investing in quality businesses.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/186225322.pdfFebruary, 2022
The fund’s return was -1.5% in February, 3.6% below the ASX300 Accumulation Index of +2.1%. The fund’s underweight exposure to resources and banks was the key driver of underperformance. February was “reporting season” when most companies report their financial results for the 6 months to 31 December. Financial results drive share prices so it is an important month. Importantly most companies in the portfolio reported strong results and have a positive outlook. So the fundamentals of the portfolio remain strong, regardless of short term share price volatility. Consequently we made little change to the portfolio during the month. One stock was added (Iress), a software business trading on an attractive valuation multiple with a highly predictable subscription revenue model.
A common theme in reporting season was companies with relatively low valuation multiples and low expectations performed well, while those trading on higher valuation multiples and high expectations often fell. We hold a balance of both in the portfolio and broadly speaking this theme was reflected in the main positive and negative contributors to the fund in the month.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/185072393.pdfJanuary, 2022
The fund’s return was -7.2% in January, 0.7% below the ASX300 Accumulation Index of -6.5%. Negative returns are always disappointing, but it is a normal part of investing in equities. Equities generates strong returns over the long term however they do experience short term volatility.
Forecasting the short term direction of markets from here is very difficult and our track record is no better than others. February has started strongly and recouped almost half of January’s decline (at the time of writing).
Key positive contributors for the month of January were BHP (BHP +11.7%), Kelsian Group (KLS -4.7%), and Austal (ASB +3.1%). Key detractors were Pinnacle Investments (PNI -27.7%), CSL (CSL -10.5%) and Macquarie Group (MQG -10.6%).
Despite Kelsian’s negative return in January, it was a positive contributor to the fund as we purchased the stock during the month near its lows. It is a new entrant to the portfolio. We have watched the business for many years but never invested. January’s market sell-off provided the opportunity to establish a position at a very attractive price. The silver lining to sell-off’s is that they provide the opportunity to buy quality businesses at discounted prices. Kelsian is relatively defensive through the provision of bus services to governments while also having exposure to the re-opening of borders through its Marine & Tourism division (nb ferries). We hope to own Kelsian for many years.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/184290170.pdfDecember, 2021
The Fund returned +2.2% in December, 0.5% below the ASX300 Accumulation Index of +2.7%. Key positive contributors for the month were Commonwealth Bank (CBA +8.4%), AUB Group (AUB +12.5%) and Omni Bridgeway (OBL +13.2%). Key detractors were CSL (CSL -5.2%), City Chic (CCX -8.5%) and Pinnacle (PNI -5.5%).
Future market returns are exceptionally challenging to forecast and our record is no better than others. It is likely 2022 will see higher volatility as central banks are moving to a tightening phase. However we are excited by the investments in the portfolio. We are stock pickers and each holding in the fund must be attractive on its own merit. If attractive opportunities are not present, we hold cash.
The portfolio has a good balance across sectors and styles with holdings a mix of both growth and value. We continue to be in a changing environment making diversification and balance important. Our focus is generating solid returns across most markets conditions.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/182658359.pdfNovember, 2021
The Fund returned -0.8% in November, 0.3% below the ASX300 Accumulation Index of +0.5%. Key positive contributors for the month were Uniti Group (UWL +8.9%), BHP (BHP +7.6%) and Alliance Aviation (AQZ +12.8%). Key detractors were CBA (CBA -11.0%), EQT Holdings (EQT -8.9%) and Bapcor (BAP - 9.8%). While index moves have been relatively modest in recent months there has been heightened volatility at a stock level. This reflects the changing economic environment (lockdowns ending/new covid variant emerging), the prospect of tighter monetary conditions and reportedly some large mandate transitions going through the market.
In November Uniti Wireless updated the market on the activation of a share buyback along with a positive trading update. The outlooks appear solid for value accretion as a strong pipeline of work drives higher earnings combined with a reduced share count. BHP announced the merger of its oil & gas assets with Woodside. In return BHP will receive Woodside shares equivalent to 48% of all Woodside shares on issue. The combined business will have greater scale, generate over US$400m of synergies p.a. and remove a fossil fuels from BHP’s business.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/181788295.pdfOctober, 2021
The Fund returned -0.8% in October, 0.9% below the ASX300 Accumulation Index of +0.1%.
Key positive contributors for the month were Macquarie Group (MQG +8.7%), Pinnacle Investments (PNI +9.2%) and Uniti Group (UWL +5.2%). Key detractors were SG Fleet (SGF -14.8%), AUB Group (AUB -9.7%) and Alliance Aviation (AQZ -12.2%).
Macquarie continued its strong run and reported a half yearly result above expectations. Pinnacle Investment rebounded after a weaker September and a market update highlighted continued strong growth momentum in asset flows. Uniti Group rebounded after a weaker September but was also helped by the announcement of a share buyback. On the negative side SG Fleet, AUB Group, Alliance Aviation and News Corp all declined after being positive in September. These include some larger holdings in the fund which dragged on October’s investment returns. At the time of writing all 4 stocks are up in November. SG Fleet provided an AGM update indicating its recent LeasePlan acquisition was performing strongly but supply constraints on new vehicles is causing lease extensions which delay the sale of older vehicles and the recognition of end-of-lease profits. This appears largely a timing issue
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/180718277.pdfSeptember, 2021
The Fund returned -1.4% in September, 0.5% above the ASX300 Accumulation Index of -1.9%. Key positive contributors for the month were Helloworld (HLO +41.4%), Macquarie Group (MQG +9.2%) and News Corp (NWS +8.3%). Key detractors were BHP (BHP -17.5%), Uniti Group (UWL -10.8%) and CSL (CSL -5.9%).
3 negative issues have recently grabbed headlines; 1) falling iron ore price, 2) Chinese property market, specifically uncertainty around the developer Evergrande and 3) rising bond yields.
On the first 2 issues, it is important to note that the Growth Fund has a relatively low weight in the mining sector and does not invest in Chinese equities, so we have low direct exposure to these issues. We do have indirect exposure should they cause broader economic impacts to Australia and the global economy. However we are weighted towards less economically sensitive parts of the economy so it’s likely the fund would be relatively resilient, if these issues were to deteriorate.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/179861035.pdfJuly, 2021
COVID variants emerged as a global concern but markets have remained largely calm and looking through the short-term noise. The Fund returned +1.3% in July, 0.2% above the ASX300 Accumulation Index of +1.1%.The Fund’s returns have been increasingly strong delivering +35.6% over the last 12 months and significantly outperforming the index over 1 and 2 years
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/176305739-1.pdfJune, 2021
Global share markets were broadly higher in June concluding a strong financial year on a positive note.
-The Fund returned +3.4% in June, 1.2% above the ASX300 Accumulation Index of +2.2%. -June brings a close to the current financial year. Over the last 12 months, the fund has returned +36.9%, 8.4% above the index return of +28.5%.
The fund’s return was +3.4% in June, 1.2% above the ASX300 Accumulation Index of +2.2%. Key positive contributors for the month were Pinnacle (PNI +15.9%), City Chic (CCX +17.1%) and EQT Holdings (EQT +13.3%). Key detractors were Collins Food (CKF -9.0%), Austal (ASB -9.3%) and Omni Bridgeway (OBL - 5.8%).
Forgive us for taking a minute to reflect on performance over the past year. The fund returned +36.9, 8.4% above the ASX300 Accumulation Index. On a relative basis we are strongest in falling markets so to generate these returns in rapidly rising markets is pleasing.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/174813413.pdfMay, 2021
Global share markets were broadly positive in May, with commodities particularly strong. The ASX300 Accumulation Index gained 2.3% in May, led by large cap stocks in banks, resources and healthcare sectors. The Fund returned +1.4% in May, 0.9% below the ASX300 Accumulation Index of +2.3%. For the first 11 months of the current financial year, the fund has returned +32.4%, 6.7% above the index return of +25.7%. The S&P500 Index delivered sales growth of +10.3% and earnings growth of +47% YoY. Sectors with strongest earnings growth were Financials, Basic Resources and Technology.
Despite this, Tech stocks fell on rising inflation concerns. The MSCI World Developed Markets Index rose (+1.6%), outperforming the Emerging Markets World Index (+1.2%) in US Dollar terms. The Developed Markets outperformance was driven by the Euro Stoxx 50 Index (+4.1%). The FTSE 100 (+3.8%) and the ASX 300 (+2.6%) indices were also key drivers of the outperformance. Brent Oil prices rose $2.07/bbl to $69.23/bbl, partly driven by the reflation trade and strong global demand. Iron ore prices surged to $US218/Mt, and then retraced slightly, still ending the month up $US14.50/Mt at $US201.50/Mt. Gold prices rose $132.30/oz to $1,899.95/oz largely driven by a weaker US Dollar and cooling US April manufacturing data. The Australian Dollar finished the month 0.23% higher. The Australian Dollar outperformed the G10 complex into the start of the month as commodities rallied.
The ASX300 Accumulation Index continued its rise in May, closing 2.3% higher. Resources and Industrials performed positively across most size indices with Small Industrials (-0.6%) the only negative performer in the month. Large caps (+2.9%) performed strongly in May. Mid (+0.9%) and Small caps (+0.3%) lagged but were still positive. Within sectors, Financials rose the most (+5.7%) followed by Consumer Discretionary (+3.5%) and Health Care (+3.5%). Info Tech (-9.9%) and Utilities (-6.6%) sectors fell most during the month. The fund’s return was +1.4% in May, 0.9% below the ASX300 Accumulation Index of +2.3%. Key positive contributors for the month were Commonwealth Bank (CBA +12.0%), CSL (CSL +7.0%) and Uniti Wireless (UWL +7.9%). Key detractors were NRW (NWH -17.0%), Macquarie Group (MQG -5.3%) and AUB Group (AUB -5.0%).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/173427888.pdfApril, 2021
The fund’s return was +6.0% in April, 2.3% above the ASX300 Accumulation Index of +3.7%.
Key positive contributors for the month were Uniti Wireless (UWL +20.4%), City Chic (CCX +17.6%) and Pinnacle (PNI +15.0%). Key detractors were Southern Cross Media (SXL -9.9%), Redbubble (RBL - 18.2%) and Helloworld (HLO -13.0%).
Positive contributors to performance in April was broad based. Several companies rebounded after being relatively flat in March eg Uniti Wireless, City Chic and Pinnacle Investment. There appeared little reason for these trends in either month. As they are 3% - 4% of the p
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/172022123.pdfNovember, 2020
The fund’s return was 9.7% in November, 0.6% below the ASX300 Accumulation Index of 10.2%. Key positive contributors were News Corp (NWS +32.8%), BHP (BHP +12.7%) and Commonwealth Bank (CBA +14.5%). Key detractors were Bapcor (BAP -8.5%), Breville Group (BRG -7.6%) and Collins Foods (CKF -3.2%). To put the current market in context it’s worth looking back at the 3 main phases this year; Phase 1 (February-March): the ASX300 Accumulation index (index) declined 27.0% as the implications of a global pandemic became evident.
There were few winners in this market with Fisher Paykel Healthcare a rare exception as it provides equipment for the treatment of covid patients. Phase 2 (April-October): the index rebounded +18.9% as it became evident that government and central bank support would limit the economic impacts. There were clear covid winners (incl tech, online retail) and covid losers (incl travel, media). We maintained a long term view, selling winners when valuations became stretched and selectively purchasing covid losers (vaccine beneficiaries) when valuations were extremely attractive eg Southern Cross Media. Phase 3 (from November): multiple successful vaccine trial results in early November switched the focus to a world post covid. Initially, stocks reversed previous trends and previous covid winners (incl tech, online retail) fell and covid losers rose sharply (incl travel, media). In November the index rebounded +10.2% and we captured almost all of this upside.
So where to from here? We are not in the game of picking markets (we pick stocks) but the outlook does appear positive for equities; an impending global rollout of multiple vaccines with high efficacy, global economic growth likely to rebound strongly in 2021 as economies reopen and interest rates likely to stay very low for many years. A supportive combination. Looking out 12 – 24 months it’s possible to imagine a world where health risks have largely normalised and our freedoms restored. Australia’s response to the pandemic is likely to enhance its reputation as a safe and prosperous place to live and do business. We remain optimistic on the outlook for the fund and continue to find many appealing new investments. Times of change are good for experienced stock pickers.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/162702427.pdfticker: PVA0011AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://primevalue.com.au/resources/product-information/growth-fund/
Fund Updates
asset_class: Domestic Equity
asset_category: Australia Large Growth
peer_benchmark: Domestic Equity - Large Growth Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund
manager_contact_details: Array
fund_features:
Prime Value Growth B aims to provide superior medium to long term capital growth with some income by managing a portfolio of predominantly Australian equities listed on the Australian Stock Exchange Limited (ASX). Strategy: PVGF will be comprised of securities, primarily Australian listed equities. The fund may from time to time invest in Cash and Fixed Interest investments when appropriate. Benchmark: S&P/ASX 300 Accumulation Index.