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QVE Investment Update – August 2022

QVE Portfolio Manager Simon Conn discusses the markets performance during reporting season and the performance of the QVE portfolio.

Subtitles for QVE investment update 2022.

So for the month of August, global markets were very soft.
The S&P, NASDAQ, Euro indexes were down between 4 and 5% for the month,
and the MSCI, the global index, was down just under 3%. But locally,
on the strength of commodity prices, the local markets were up.
so the ASX 300 was up 1.2%
and the ex-20 was actually up 1.7%, so bucking that trend.
And also later in the month the Jackson Hole comments by the Fed Chairman,
led to weakness in the equity markets as
people realised that they were determined to push
interest rates to high levels to stamp out inflation.
Locally, the news flow was dominated by reporting season,
with most companies reporting their full year results,
very mixed, I mean obviously very difficult impacts
and also increased costs and inflationary pressures.
It’s a very volatile environment. Most companies were pretty
reluctant to give guidance statements.
And the results vary from company to company depending on how they’ve been able to deal with,
what has been a very difficult and volatile twelve months.
So, for the month of August, the QVE portfolio is down 1.6%,
underperforming the benchmark, really a function of our very low exposure to the Resources sector,
which is extremely volatile and the stocks are looking really, fully priced.
For the month, we had some good performances.
So our holding in Ampol, which reported their first half result,
was very strong on the back of particularly their refining division,
but also as volumes are recovering from COVID levels,
COVID impacted levels. So, again, it’s delivered a good result.
Bega Cheese recovered from oversold levels
very strong cash flow reported in their full year results
and news that they’d recovered most of the imposts of their
increased dairy prices through pricing, led to that stock to rally.
We did have some disappointing results on outlook statements,
particularly from a couple of companies, Pact Group and Codan
gave a little bit softer than expected guidance
and that led to a sell off in both share prices.
And then TPG’s result was a little bit softer than expected,
but led to a big fall in the share price down 15%,
a really over-sized reaction to a small miss.
And so for the month of August, it was a really quiet month in terms of activity,
but we did take advantage of a sell down by Crescent Capital
and Australian Clinical Labs to top up on that stock.
So $4.50 was cum 41 cents fully franked,
which was a really attractive dividend boost,
you know, $4.10 effective ex price,
is a very attractive, pretty solid business.
We also added to our Suncorp position, which again,
on a yield close to over 6% fully franked looks very attractive.
And then we also used the strength in a couple of share prices,
so Amcor was strong through the month. We used the opportunity to trim that position.
And then the other big news of the month was Mayne Pharma
sold their Metrics Contract Services business, which is a business we’ve always sort of covered
and thought there was hidden value in the business
sold that for $600, close to $680 million Aussie.
Good price, leaves the company with net $300 million of
cash and they flagged capital returns or a special dividend on the back of that.
And the stock was strong over the month in response,
and we used that strength as an opportunity to trim some of the Mayne Pharma position during the month.
So with investors facing a very different environment
and different paradigm going forward than we’ve witnessed over the last decade,
you know, we think interest rates, higher cost of doing business,
of being wages or electricity or just general supply chain pressures,
will be an ongoing issue for many companies.
And in that environment, we’re very focused on positioning the portfolio in
good quality businesses that have strong market positions
and the ability to continue to move price in terms of recovering the
imposts that they might witness in their business.
So, very focused on quality business,
also very focused on the price. So it’s,
you know, interest rates being very low
has really seen over-inflated valuations in many sectors of the market.
We’re very cautious around those sectors that look extremely highly valued.
So, focusing on owning good quality businesses at the right price,
and with management teams that are very capable to manage through,
an environment which we haven’t witnessed for many,
many, years in Australia. We’re also very focused on dividends.
So in a more volatile environment, I think investors will gravitate to dividends,
so, looking for companies that have the capacity to continue to generate good cash
so they can keep paying a reasonable level of dividends going forward.
Got a good modicum of cash, just over 15%, which presents the opportunity to continue to chip away and acquire stocks
in this volatile environment when opportunities present themselves.