Discussion with Simon Conn and Marc Whittaker

Portfolio Managers, Simon Conn and Marc Whittaker, discusses the market’s performance during February, reporting season and the performance of the QVE portfolio and key stocks.

Subtitles for QVE investment update February 2023.

Marc: Simon, so February, a very, very strong month for QVE, which is very pleasing to see. And it was even more pleasing given the very volatile backdrop we saw across global markets in February.

Simon: Yeah. So, for the month of February, we saw a weakness in the North American market…so the S&P, the broader index was down about -2.5%. That was really on the back of, you know, strong economic data there showing that there’s more work to do to get inflation under control., so we saw bond yields up, equity markets down. And then we saw in China, a weakness, sort of concerns around the property sector, which is a key part of the Chinese economy. The Chinese property developers weakened during the month, which made people question the reopening trade which got people excited back in January. So we saw the MSCI Emerging Markets down over -4%.

Marc: Yeah.

Simon: Weakness in those two big markets and Europe and the UK were up a little bit.

Marc: Yeah, and Australia no stranger to that drawdown across what we saw in North America and China. I think the ASX300 down about -2.5%. The Ex20 part of the market, which is where QVE plays was down not quite as much, but clearly banks and resources, the two ends of the barbell, are dragging the market down. But pleasingly, that industrial space, which again is where QVE likes to focus, was really an outperformer for the month. But even more importantly, the stocks that we own within that industrial space, actually, had a very good February across reporting season.

Simon: Yeah. So the QVE portfolio went up +2.3% for the month, which was a great outcome in light of the fact that index went down -1.6%. But really, I think coming to the fore was the focus on good quality industrials. And I think, for the first time for some time now, free of the COVID noise, we saw the operating performances of these businesses and I think in light of the volatility and the weakness in some share prices, clearly a lot of these stocks were heavily oversold going into reporting season. So, for the month, we had good gains by Pact for instance, reported in line with expectations, reaffirmed the full year guidance, announced a house brand contract with Woolworths to supply reuse, stock was up over +20%. We saw Ampol report, you know, very strong results obviously, at the refining business, generate a lot of cash, but also the F&I business, had a decent result, increased its final dividend and announced a 50 cent…fully-franked special dividend And then also, we saw Brambles, you know, a strong result, they’ve repriced, that’s fed through to operating earnings, and we saw them upgrade guidance for the full year for EBIT, to be up 15% to 18%.

Marc: One of the highlights for me in the result was GUD, it’s a stock that we’ve liked for a while. We pushed that across a number of different avenues. But the wear and tear, auto part of the business, growing at close to 10%, which is a very acceptable outcome for that sort of business, and also the more recent acquisition APG, which is a functional accessories manufacturer in the 4WD/SUV space, it’s back on track. I think the market was waiting to see some confirmation that was the case. That stock was up 25% in the month. So, one of our our best performers. And Medibank Private was a very good performer too, so washing through the noise of the cyber scare that they reported late last year, we saw policy growth return to the business. We saw the profit growth of 6%, a very solid result, and the stock up over 14% for the month.

Simon: Yep. And then, outside reporting season, we saw in the news flow, Origin was back in the news, Brookfield and EIG confirmed that they continue to do due diligence and proposed an $8.90 takeover price, which was only 10 cents lower than the previous approach. So, that stock rallied significantly over the month. So just in terms of the outlook, you know we remain cautious, obviously, there’s more work to do in terms of interest rates to get inflation under control, Hence our focus on good quality industrials, which I think really came to the fore in February, focused on resilient businesses that can generate earnings growth in this more volatile time and focusing on the income, which I think will be a big part of the return over the next little while. I mean…we’ve obviously got a reasonable amount of cash, just over 10%, and focus on using that cash at the appropriate time if the opportunities present.

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