SUMMARY
In the December quarter, the Fund fell 0.3% during another volatile period. By way of comparison, the RBA cash rate plus 6% returned approximately 0.8%, while the All Ordinaries Accumulation Index fell 1.3%.
The Fund continues to outperform its benchmark since inception, 17 years ago, with a return of 8.7% per annum versus its RBA equity risk premium adjusted benchmark of 8.6% and the market return of 7.3% over the same period.
Importantly, we remain intensely focused on our objective of capital preservation while generating a fair return for equity risk. We continue to avoid those segments of the market which represent quality business models but at prices that exceed our parameters. This proved fortuitous – the broader share price weakness during November and early December provided material opportunities to increase our equity holdings. Consequently, undeployed cash fell from 12% to 8%.
COMMENTARY
The broader market rallied into year end, securing a third straight year of double-digit returns. The December leaders were an unusual pairing of both resources and banks. With Australian tech names some of the most expensive in the world, that sector declined significantly (falling from very, very expensive to just very expensive) as the market wrestled with the rise of AI, introducing more risk than opportunity for software and marketplace business models.
Gold was the biggest driver of the market in 2025, up 127% on a 64% rise in the gold price. Our holding in Evolution Mining, as the lowest-cost producer, has been the largest contributor to performance over the quarter and year. With geopolitical uncertainty continuing and inflation subdued but not solved, we view an efficient gold/copper miner as a critical hedging component to the portfolio.
In contrast, Healthcare and IT have been the weakest sectors for the year, and our healthcare stocks were not without their issues. CSL experienced specific strategic and management issues. In our view, the core franchises remain intact and should deliver better profitability and underlying cash flows through lower capex, stable revenue and expanding margins.
ResMed has continued to deliver strong results and further cemented its dominant market position. The growth of GLP1s has more opportunities than risks. We anticipate robust future earnings and cashflows, This should offset the market’s incorrect fixation on the new weight loss drugs being a panacea for sleep apnoea.
The AI investment boom has driven US tech leaders, but the debate about what it means for the future earnings power of tech companies that sell software like Wisetech and Xero, or operate marketplaces like REA Group, Seek and Car Group, is less clear. This may provide us with opportunities, but as we have seen with CSL, the derating when growth slows and “option value” disappears can be enormous.
During the quarter, we introduced new positions in insurance broker AUB after its private equity suitors walked away, and L1 Group by participating in the discounted equity raising after its merger with Platinum.
Portfolio activity also saw us adding to Aristocrat, where the stock fell 8% in November despite beating market expectations by 2% (albeit with a different earnings mix). We were selling Stockland as it peaked in October and buying it and Mirvac back later in the quarter as the rate outlook evolved. On the sell side, we continued to trim Evolution Mining, Telstra and NAB into strength.
Positive attribution for the quarter was led by Evolution Mining and Maas Group as cyclicals ran. Detractors were dominated by defensive names including ResMed, CSL and Metcash.
Our disciplined focus on high-quality businesses, run by capable management teams and generating cashflows that offer a fair return, continues to serve investors well with 9.4% delivered in 2025. In these uncertain times it is more important than ever to resist the temptation to let index weightings or short-term earnings noise drive portfolio decisions. Instead, we will adhere to our absolute-return philosophy, deploying capital where we see compelling risk-adjusted returns.