SUMMARY
The Fund fell -9.7% in June, outperforming the Small Industrials Index by 0.4% and outperforming the Small Ordinaries Index by 3.4% as the Small Resources Index tumbled -22% on weaker commodity prices. For the 12 months to June, the Fund was down -15.9%, outperforming the Small Industrials Index by 8.1% and outperforming the Small Ordinaries Index by 3.6%.
Despite the negative absolute performance for the year, we are nevertheless pleased that the Fund was able to outperform its benchmarks in what was a very choppy year for equity markets.
COMMENTARY
Equity markets ended the year on a disappointing note with the ASX200 falling -8.8% in June (SP500 -8.3%) as central banks around the world pushed interest rates higher and concerns grew among investors that many Western economies will face a recession in late 2022 or 2023.
Over the year to June the ASX200 fell -6.5% as the decline in Industrials (down -9.2%) more than offset the small rise in Resources (+3.3%). Globally the S&P500 fell -10.6% over the financial year.
With inflation in Australia growing at its fastest pace in twenty years, the real risk that house prices could materially fall over the coming two years, and consumer confidence nose-diving to near record lows, we remain particularly wary of companies relying on a strong economy to grow earnings.
Our best performers in June included:
Hansen Technologies (+2%) as the market warms to the recurring nature of its earnings. Technology One (+2%) improved on the back of a better than expected profit result released in late May. IPH Limited (+3%) benefited from a falling $A as its revenue is denominated in $US. Ebos Group (+4%) and Propel Funeral Partners(+4%) were positively rerated for their defensive earning streams. Uniti Group (-1%) as the all cash takeover bid for the company underwrites the share price.
The key detractors for June were:
MA Financial Group (-27%), Aussie Broadband (-21%), and Charter Hall Group (-17%) slipped as rising interest rates saw analysts downgrade their valuations. Notwithstanding our broader concerns surrounding the economy, these companies have resilient earnings and now trade on very cheap valuations. Capitol Health (-18%) was impacted by restrictions imposed on elective surgery reducing demand for their radiology services and City Chic Collective (-23%) was hampered by a combination of earnings downgrades and concerns surrounding elevated inventory levels.
The uncertainties surrounding economic growth and the direction of interest rates has led to there being a larger degree of subjectivity than usual in attempting to forecast a company’s earnings prospects. In this environment our playbook is to be more defensive than usual until the haze passes; favouring companies with earning streams that are unlikely to be as buffeted by an economic downturn and seeking out companies with profit margins that are well protected from the damaging effects of inflation.