Discussion with Simon Conn and Marc Whittaker

Portfolio Managers Simon Conn and Marc Whittaker discuss the performance of financial markets during financial year 2023, as well as the performance of the QVE portfolio and key stocks.

Edited transcript

Marc: So, Simon here we are, another financial year, and another quarter for QVE, really on the back of what was a strong period for global markets? What did we actually see in global markets?

Simon: Yeah. Thanks, Mark. Obviously, it was quite a strong year. Coming off the back of a pretty volatile and difficult year last year. So for the quarter, we saw the MSCI index, so the broader index up 6.7%. But, you know, the main stand out was obviously the Nasdaq and the US, up 17% for the quarter.

Marc: Yep.

Simon: Very strong sector driven really initially by the AI, thematics, and Nvidia, obviously had a very strong result. And they’ve got investors very excited about the technology sector, leading to those very strong gains in that sector of the market. I think importantly, towards the end of the quarter, you know, real rates now in the US are slightly positive.

Marc: Yep.

Simon: And they have been rapidly increasing interest rates. The economic data is showing that the economy is okay. And so we saw, you know, more of a broader rally towards the end of the quarter. Those gains will lead to the broader MSCI index being up 17% for the financial year, Nasdaq up 26% was the stand out. But the S&P, the broader index for the US was up 20%.

Marc: Yeah. They were some some big numbers weren’t they. The local markets were not quite as effervescent,

Simon: No. I think Australia is in a very different position.

Marc: Yeah, we’re still sort of playing catch up on the neutral market rate levels. And, obviously, the US is ahead of us and they’ve got more of a neutral position. And what we did say actually was interestingly in April, we did see the economy felt like it hit a bit of a red light, so the traffic stopped, didn’t it? And a lot of the corporates we spoke to talked about consumers really falling off the cliff in April and things really coming to a…,

Simon: No, April was a very difficult month for many corporates.

Marc: Yep. It was indeed, and then obviously, we saw a couple of rate rises across this last quarter as well, which again was a bit of a roadblock to the consumer. But, so Aussie markets not performing as strongly as what we saw offshore, and that leads us to how we performed on the back for QVE.

Simon: Yep. So, yeah, for the quarter, QVE portfolio, disappointingly, it was up only around 0.7%, really more in line with the broader ASX 200 index. But lagged the Ex 20 sector, which was up 2.6% for the quarter. For the financial year, up 4.2%, again lagged the benchmark, which was up 14.9%. That was quite a strong performance. Yeah. And that index was really driven, you know, along strong gains by the miners, in particular, the lithium names. And that technology sector, you know, talked about, the rally in the US.

Marc: Mhmm.

Simon: But we saw strong gains in some very expensive stocks already, companies like Wise Tech and Altium very strong. So, you know, quite a narrow rally. And still with this trend to higher interest rates, we see a lot of investors gravitating to the more liquid names, which is still throwing up a lot of value opportunities, but many of our stock prices haven’t already participated in the rally.

Marc: No. But having said that a number of our key holdings performed pretty well, names like Aurizon, which was up about 17% for the quarter.

Simon: Yep.

Marc: Really rallying on the back of the fact that a couple of things, firstly, coal volumes are recovering. And so the bulk business is seeing a bit of recovery as weather improves and coal volumes improve, which is great. But also I think the market finally appreciating to a greater degree, the fact that this new regulatory pricing period that the company is moving into should see their regulated asset base, which is the rail network that they end up in Queensland should increase in value on the back of higher rates, and also the allowable return that the regulator will allow them to earn on that regulated asset base is actually going up as well. So in short, they’ll be earning more money on a bigger asset base, which is encouraging for us, given it’s our largest position in the funds.

Simon: Yep. I think the other performances that were strong for the portfolio over the quarter, were Home Consortium, or now called HMC Capital. Mhmm. So just towards the end of the last quarter, they raised capital for their Health Co REIT. You know, to buy the Healthscope Portfolio, that saw them increase their assets under management. And then following that, they put an announcement saying that they’re on track to get to the ten billion target of funds under management by December. They’ve raised further funds in the interim, which I think is continuing to drive expectations of good earnings growth for that company, and that’s rallied significantly.

Also importantly, a big holding and a company we’ve owned for while IAG, which has been a bit of a laggard for some time, but one we saw a good value in. They gave a good update at their Investor Day. Really been saying they’re benefitting from higher premium growth. And now we’ve seen claims costs come under control. So we’re seeing some positive operating leverage. They reaffirmed their targets, which led to the stock rallying significantly. And near on 15, 16 times and a 5% yield still looks good value at these levels.

Marc: We had a couple of disappointing stocks as well, Pact and Bega were both disappointing, particularly in the back end of that year, which was disappointing. Earnings not quite being where we thought they were. And then in the case of Pact, obviously, happy for an announcement around an asset sale at some point in the near future, but we haven’t quite got that announcement yet, and the market is a little bit disappointed around that delayed outcome.

Simon: Yeah. Obviously heavily impacted by that April weakness in the economy. You know, they had a soft update around that date. But I think, you know, obviously focusing on asset sales, stock looks very oversold at these levels. And we think it was really well positioned for the circular economy move. To that point through the end of the quarter, they announced that they’ve signed Aldi as a customer for their reuse program, which I think really speaks to the volumes to the quality of the rigids business and the reuse programs they’re putting in place. So frustrating share price performance, we can see a better outcome with Pact. Clearly, they have to move on the asset sales and the cost out programs, but we think they’re moving in the right direction and definitely, I think it’s very over sold.

Marc: That’s right. So moving into a new year now Simon, FY24, fiscal 24, Exciting, and uncertain, and perhaps a little bit more volatile than what we’ve seen, but.

Simon: Yeah. Like, I think Australia, as you’ve sort of said, talked about, Australia is in a very different place to the US. We’ve still got very negative (real) interest rates. Governments here continue to spend money on the economy, so you’ve got the RBA trying to put their foot on the brake with the government putting their foot on the accelerator. Under unemployment remains low, we’re seeing immigration bounce back, which are positive for the economy. But clearly, higher interest rates are portent unless inflation, miraculously comes under control.

So I think we’re foreseeing more interest rate increases, which will weigh on the consumer and create headwinds for more of the cyclical sectors. Since our focus on finding good quality defensive industrials with focus on yield, and earnings growth, which could be separated from just being reliant on the economic cycle. So a defensive position, I think, is the right one in the current environment.

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