In four of the first five months of 2022 the Australian equity market has moved more than plus or minus 2% per month as it digests a potentially changing economic outlook. The perception is that risk has heightened and which can be measured in terms of volatility in stock prices and the Volatility Index (VIX) has indeed trended higher over the last twelve months. But to us, risk is not necessarily measured just in terms of the short term volatility of stock prices. Instead, we measure risk in more absolute or fundamental terms. And while questions about higher energy prices, inflation, recession, high stock valuations and the level of future corporate profit margins contribute to a more volatile stock market, the risk in the companies we own has not increased measurably, but their share prices have certainly come down.
We track the intrinsic value of companies in the portfolio through adding achieved earnings growth and distributed income. For the last few years the increase in the intrinsic value of companies has been largely reflected in the increase in the market value of the companies we own. For the financial year to date however the market value of our portfolio holdings has increased only 1.6% vs an estimated increase in the intrinsic value of the companies we own of 33.2%. In addition, over the last twelve months we have more than doubled our exposure to the highest quality companies. Investors selling the positions we are adding to are giving up the entire future value of the franchise in order to access liquidity and reduce equities exposure; an unattractive proposition for a medium long term holder.
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