Global equity markets fell back in December upon weaker market sentiment, after making gains in October and November. The Fund fell by just 0.3% net of fees during the month, while the MSCI All Country World Index SMID Index saw steeper falls, dropping 4.2% in Australian dollar terms.
A challenging 2022 ended with the steepest equity market declines since 2008, which especially impacted smaller company stocks. In the US, the larger company S&P 500 index declined -14.5%, while the Russell 2000 Small Cap index fell -16.7% over the year.
Investors remain concerned about interest rate rises, continued inflationary pressures and ongoing geo-political risk. US inflation declined to 6.5% in December from 7.1% in November. However, share market sentiment weakened when the US Federal Reserve increased interest rates by 0.50% to a new target range of 4.25% – 4.50%. While this was expected, the Fed also indicated that it now expects rates to reach a peak above 5.0% and remain high throughout 2023.
The US dollar now appears to have passed its peak, having fallen significantly from its September highs. The DXY index, which tracks the value of the US dollar relative to a basket of its major trading partners’ currencies, declined 9% in December. It has now fallen 20% from the 20-year high it reached in October 2022. This is supporting the Fund’s relative performance as it retains an underweight exposure to US companies.
A weaker US dollar indicates that the fear level is now falling in financial markets and a more rational investment environment may be expected. The opportunity in smaller companies remains attractive, despite what may be a challenging year for earnings as the economy slows in 2023.
The Fund outperformed its benchmark index by 3.9% in December, due largely to strong stock picking. The Fund also outperformed its index by 4.5% over the fourth quarter. Recently established positions in UK financial technology company Integrafin and UK industrial group Melrose continued to contribute to outperformance.
On The Beach is the largest online package holiday business in the UK. It outperformed the market in December, contributing to relative returns. The company reported its full year earnings results, with revenue 3% ahead of pre-Covid levels. This accelerated in the second half of the year as the UK economy returned to normal. The company is expected to grow earnings further, reflecting a management team that is well aligned with shareholders’ long-term interests. It has demonstrated a willingness and ability to invest in its employees, customer service and marketing initiatives, which many of its competitors were financially unable to do during the travel market downturn.
Ray Co is a South Korean manufacturer and distributor of dental and medical equipment worldwide. It contributed to relative returns in December as investors grew more confident that the development of its joint venture in China will help the company grow earnings.
Concentrix is a US business services company that focusses on delivering outsourced customer service solutions. The company outperformed the market in December, reflecting the company’s ongoing organic growth and investor expectations that this will continue as the global economy recovers.
The Fund engaged in limited trading activity during December, with no new positions established or exited. The portfolio continues to be attractively valued at 12.8x 2023 estimated earnings. Overall, portfolio companies are expected to grow earnings before interest, tax, depreciation and amortisation (EBITDA) by 11% and deliver a 20% return on equity in 2023.
CIO and Portfolio Manager
The Fund invests principally in small and midcap listed (or soon to be listed) global equities. Its investment objective is to obtain returns greater than the MSCI All Country World Index SMID Cap unhedged in Australian dollars (‘Index’) over rolling 3 year periods after fees. The Fund’s investment manager, Lizard Investors LLC, uses a value oriented investment approach that seeks to identify and invest in quality businesses that create significant value but are mispriced, overlooked, or out-of-favour. The investment manager believes that unique opportunities exist due to limited available research, corporate actions, or unfavourable investor perception.
1. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. No allowance has been made for buy/sell spreads. Please refer to the PDS for information regarding risks. Past performance is not a reliable indicator of future performance, the value of investments can go up and down.
2. Inception 1st April 2015.
3. Annualised standard deviation since inception.
4. Relative to MSCI All Country World SMID Cap index unhedged in AUD.
* For further information regarding fees please see the PDS available on our website.
