SUMMARY
The Fund demonstrated its defensive positioning in December, declining 0.9% for the month and preserving positive returns of 1.1% for the quarter. By way of comparison, the Australian Stock market declined 3.1% in December and 0.9% for the quarter. Our benchmark, the RBA Cash rate +6% equated to 0.9% and 2.5% respectively.
For the 12 months ended December 2024, the Fund generated a return of +11.1%, exceeding the benchmark return of RBA cash rate plus 6% of +10.4% whilst the Australian stock market returned +11.4% over the same period. This marks the Fund’s second consecutive year of double-digit returns, both exceeding its benchmark. The Fund’s approach has been particularly gratifying, as it participated in periods of market strength while showing resilience in weaker months, achieving these results with lower volatility than the broader market.
COMMENTARY
Notwithstanding recent challenges, we remain steadfastly focussed on our disciplined approach, which has, since inception outperformed both our benchmark and the ASX.
The current market is characterised by a bifurcation driven by excess liquidity and robust inflows into passive investing styles. At one extreme, market darlings continue to be bought with no regard or limit to the earnings multiples attributable to these good businesses. While we also covet these businesses, run by competent and honest management, we require a vital third element, namely acquirable at a fair price. Given the recent sharp increases in global interest rates to more sustainable levels, the uncertain outlook for consumers as well as the rapid rate of technological changes, we prefer higher margins of safety for our capital than many of the more exuberant valuations imply.
Conversely, the “unloved” camp also has many temptations, “attractively low” earnings multiples, “imminent” turnaround strategies, management revamps, etc…. However, our investment methodology focuses on the expected cash flows due to sustainable competitive advantages. Passive money based on the combination of market capitalization and momentum creates significant pockets of value and we currently have 15% in cash to take advantage of new opportunities.
Importantly the Fund has been able to generate the benchmark beating returns without owning expensive technology companies, without replicating market weights of the big 4 banks, by continuing to avoid commodity/mining based business models and definitely by not participating in the more speculative end of small caps.
It is worth noting that the windows of opportunity to identify, analyse and acquire out of favour companies has 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. Two examples of these had significant positive impacts on the Fund’s performance over the last year.
The growing popularity of GLP1’s as a weight loss facilitator has had a material impact on the Resmed share price over the last 18 months. The initial reaction was that the drugs efficiency would end obesity, sleep apnoea, and the need for related medical devices. Short sellers actively sold Resmed and any other medical device company related to obesity and sleep apnoea. Our counter hypothesis was that the large pharmaceutical companies selling the weight loss drugs would spend up on advertising, piquing the interest of consumers and driving them to their physicians in large numbers. Rather than just merely writing a prescription for Ozempic or other GLP-1 drugs, the physician would send them for a sleep test and end up prescribing both Sleep apnoea medical device and the weight loss drug prescription. We were able to channel check this hypothesis and “lean in” to our bet on Resmed, doubling our holding at very attractive prices. Resmed was up over 70% from it’s low in October 2023.
Our second example is SG Fleet. Most of our investors would recognize this company as a long term investment in the Fund. Supply chain shortages had a big impact on the industry’s ability to deliver vehicles into the market, crimping fleet under management growth and profitability for SG Fleet and its peers. Despite these challenges, SG Fleet’s management pursued strategic growth initiatives, including consolidating the industry by buying competitor LeasePlan and vertically integrating its funding model – i.e. creating optionality for funding novated leases by creating its own warehouse facility.
These efforts, combined with the strength of the underlying business model, supported its earnings. While share market liquidity depressed the stock’s valuation, the Fund benefited from an 8% fully franked dividend and a subsequent special dividend. In November, a private equity firm acquired SG Fleet at a 30% premium, providing a profitable exit for the Fund.
Other major positive contributors were Aristocrat, NAB, JB Hifi, CSR, CBA, Contact Energy, Accent 1, and Evolution Mining. Our larger detractors were BHP, NIB Holdings, Ryman, and Woolworths.
As we enter 2025, we have observed a wide range in outlook commentary – from those who believe the worst is now behind us, to those that believe the pain is only just beginning. Despite an elevated level of uncertainty in markets, we remain as focused as ever on our primary objectives of capital preservation and generating a reasonable real return for our investors. We continue to believe this is best served by a disciplined approach and consistent investment methodology. A variety of good businesses run by honest and competent management teams at the right price will create a well-diversified portfolio of ever-growing cash earnings streams.