During August 2021 the Fund returned 6.10% versus the S&P/ASX 300 Accumulation Index of 2.61%, outperforming the market by 3.49%. An overweight position in Consumer Staples, particularly Agriculture, and underweight position in Iron Ore stocks contributed to relative performance while an underweight position in Technology, notably Afterpay, detracted from relative performance during the month.
Over the last 12 months the Fund has returned 32.98% versus the market at 28.58%, outperforming by 4.39% (after fees). Financial results season is always our report card on the accuracy of our team’s earnings estimates and positioning. Key stocks during reporting season were:
Graincorp (overweight): While the company does not finalise its official year end until 30 September it reported a better than expected outlook based on efficiency measures that have been implemented at the same time as a record east coast grain crop. The stock rallied 21.2% during the month and our earnings estimates for FY22 are still above consensus.
Iron Ore (underweight): Lower steel production in China, significant weakness in the iron ore price and BHP’s (-14.7%, not held) corporate restructuring (to offload the oil and gas assets to Woodside) lead to the UK/Australian dual-listed company spread collapsing and compounded the stock’s underperformance during the month. Other iron ore players Rio Tinto (-10.7%, not held) and Fortescue (-15.7%, not held) also underperformed.
Australian Clinical Labs (overweight): Recently listed, the stock traded below its $4.00 issue price for much of its first three months. The company beat their already upwardly revised prospectus forecasts and guidance was above consensus estimates for 1H22 by more than 100%. The stock rallied 16.2% during the month.
PSC Insurance (overweight): The company delivered strong earnings growth driven by organic and acquired growth and rallied 14.5% during the month. It remains a strong founder-led business with a solid platform to continue expanding with a quality management team.
Blackmores (overweight): Despite a well-flagged weaker result which is coming off a low base in the prior year, management outlined a significant and credible plan for a step up in revenue and margins over the medium term. The stock returned 37.8% during the month.
Qantas (overweight): The stock had been weak into the result on rumours of an imminent capital raising but we had a more constructive view of the company’s financial capacity. Management’s commentary on forward bookings, cost savings and market structure were all better than expectations and the stock rallied 10.9% during the month.
FY21 reporting season concluded with the market delivering 26.5% earnings growth (driven mainly by large upswings in Banks +33.3% and Resources +54.8%) and a market return of 28.6% over the twelve months to 31 August 2021. Now all eyes are on FY22 earnings growth. Banks (over 20% of the local market cap) start the year with a more normalised earnings base and good provisioning levels and Resources (just less than 20% of local market cap) start the year with a mixed outlook depending on the underlying commodity and with some key commodities still in reasonable supply deficit. Industrials (ex-Banks & Property) earnings growth expectations have come back from over 25% to less than 15% (split 7% Domestic Industrials and 28% for International Industrials. So overall earnings growth expectations for the market are more modest and in our view, realistic at 10.4% for FY22 (Source: Macquarie equities).
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