The broader market traded in an almost 9% range for the quarter as a combination of global economic and geopolitical headlines drove market gyrations. We remain of the view that the global economy is slowing and inflationary pressures are rapidly abating, albeit the path back to historical lower levels of inflation is less clear. We have seen signs of Central Banks responding to this shifting landscape as both the RBA and the US Federal Reserve have become notably less hawkish. We also saw two of the three largest US bank collapses in history during the quarter, as investor focus quickly turned to balance sheet quality and access to liquidity in more vulnerable parts of the economy.
Whilst the various machinations are interesting, our bottom-up process remains focussed on stock picking with a multiyear lens, derived from a combination of balance sheet discipline, valuation support, backing proven management teams and strong sustainability credentials. We continue to positively view the opportunity set for our portfolio companies. On positioning, there has been an uptick since we last wrote to you in the weighting of what we classify as defensive businesses held in the portfolio. Whilst the opacity on the outlook for the economy has increased, this uptick in defensive positions in select businesses is a stock specific decision where we see relative value as having emerged. Two examples to highlight are ASX Ltd and Ramsay Healthcare, where we have either recently initiated a position or increased the weighting. See the section included on portfolio changes for further details.
M&A activity on the rise
An uptick in M&A was a key theme during the March quarter with a number of stocks in the S&P/ASX 300 announcing they have received ‘change of control’ approaches. Mining related M&A, which has increased of late, is typically pro-cyclical. Mining M&A is positively correlated with the resources cycle. The more cash being generated the harder it is for boards to retain discipline, so the uptick in mining related deals should potentially be a warning sign for contrarian minded investors in the sector.
Conversely, on recent evidence of transactions in Small Caps, we note much of the M&A occurring in the industrials space could be considered counter cyclical. We believe this is due to the depressed valuations on both a relative and absolute basis, particularly in the Small Cap industrial segment of the market. It was pleasing to see the fund participate in this most recent M&A wave with United Malt Group the recipient of an Indicative proposal for all of the shares in the company, at a 45.3% premium to the previous closing price.
The fund is overweight Small Caps, particularly well capitalised industrials, which as a sector have lagged the broader market significantly and we continue to see value on offer. As can be seen from the below chart, the total return ratio of Small Cap stocks on the ASX versus their large cap peers is at an all time low. It would not be surprising to see this counter cyclical M&A in Small Cap industrials continue.
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