SUMMARY
In summary, our discipline in retaining excess cash during a period of excessive valuations has provided the Fund with ample opportunities to deploy significant dollops of capital into attractively priced, highly cash generative companies over the last month. The Fund closed the month with 6% in cash maintaining a comfortable level of firepower. Note that when combined with a bid for one of our larger holdings, this takes our notional cash reserves into the low-teens.
Since month end and the subsequent Tariff tantrum from “Liberation Day”, the Fund has deployed material amounts of its cash reserves into additional investments.
COMMENTARY
The Fund’s focus on cashflow underpinned valuations and provided protection in a falling market, holding losses for both the month and the quarter to -2.1% and -0.9% respectively. By way of comparison, the market fell sharply for a second month, ending the month and quarter down -3.5% and -3.3% respectively. Our benchmark, the RBA Cash rate +6%, equated to +0.8% and 2.5% over the same periods. The Fund remains comfortably in positive territory for the 9 months/ Financial year at 5.7% (market at 3.4% and cash benchmark at 7.6%).
Global markets were sold off heavily in anticipation of Trump’s tariffs and the consequent increased risk of recession. While defensives provided some protection, there were scant hiding places with the S&P500 falling over 5% during March. The Fund owns several companies which benefitted from solid operational dynamics and their perception as an attractive port in stormy weather to generate positive returns. These included gold miner Evolution Mining, health insurers NIB & Medibank, and our old favourite/largest holding – Telstra. We took some profits in these stocks to maintain our exposure at appropriate levels.
Our worst performers were the two gaming stocks, Aristocrat and Light & Wonder, Resmed and Macquarie Bank. Ironically, all four generate the bulk of their earnings in US$, which should have provided an extra margin of safety as the AUDUSD exchange rate weakened significantly. After selling significant amounts of both Aristocrat and Resmed at significantly higher prices earlier in the year, we subsequently increased our holdings in all of these stocks other than Macquarie Bank. We sold our remaining holding in Kelsian.
The long awaited pull back in valuations created several meaningful opportunities to add both new holdings and increase existing holdings. Our positions in Amcor, IAG, Ramsay Healthcare, and James Hardie were all increased materially. The value destroying transaction by James Hardie management in buying Azek at a more than full price created an opportunity for the Fund to acquire a more diversified business and significanly lower price post the violent sell off (-40%) by disenchanted shareholders. While we recognise that the JHX board and management appear to have squandered their premium rating, we believe our entry price provides a healthy margin of safety for value.
In a similar vein, our acquisition of Ramsay Healthcare represents an opportunity to acquire exposure to Australia’s premium private hospital group at trough earnings. Its largest competitor is severely hamstrung by its “poor” balance sheet, private equity ownership and very unhappy landlords. We expect the industry to be on the cusp of restructuring, with one of the likely outcomes to be reduced operating capacity, benefitting Ramsay (a high fixed cost industry means high operating leverage from increased capacity utilisation).
Readers should please note that we remain focused on the proverbial “toilet paper and toothpaste” type business models where the combination of after tax cash earnings yields resilient business models, robust balance sheets, and competent management underpin valuations.
In summary, our discipline in retaining excess cash during a period of excessive valuations has provided the Fund with ample opportunities to deploy significant dollops of capital into attractively priced, highly cash generative companies. The Fund closed the month with 6% in cash, maintaining a comfortable level of firepower which, combined with a bid for one of our larger holdings, takes our notional cash reserves into the low-teens.
Importantly, since month end and the subsequent Tariff tantrum from “Liberation Day”, the Fund has deployed significant additional cash into additional investments. We believe that the windows of opportunity to identify, analyse and acquire out of favour companies have, in many cases, widened, allowing for extended analysis and cross checking of information. Higher conviction has facilitated “leaning in” to opportunities, particularly when non-fundamental issues cause further sell downs.