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Despite a flat market to October, the stock market witnessed an extraordinary rally in November and December, resulting in a solid overall return of 12.4% for the year. The Airlie Australian Share Fund returned 15.4%, net of fees for CY23. There were two key themes of note that drove the portfolio in 2023. Firstly, the likelihood of a global recession was overestimated, creating opportunities to invest in high-quality businesses at attractive valuations. Examples in the fund include James Hardie, the best-performing stock in the ASX 100, with a 118% increase, and Seven Group, up 75%. Secondly, the resilience of the Australian consumer, contrary to predictions of a mortgage cliff, played a crucial role. Low unemployment and pay rises, as well as built-up savings, contributed to a consumer that was able to weather the storm of higher interest rates.
Mineral Resources share price started the quarter at $53 and ended at $52 but experienced a dramatic drop to $29 due to a poor August result and a CapEx blowout. This was exacerbated by falling prices of iron ore and lithium. However, in the last two weeks of September, the share price surged over 70% due to China’s stimulus measures, ending the quarter at $52. Despite the increased risk, the company remains a core portfolio holding, though with a smaller position than in the past.
At the start of the September quarter, sentiment towards commodities and mining companies was bearish due to disappointing macro data from China and falling iron ore prices. However, two key events shifted market sentiment: CATL’s rational production adjustments in the lithium sector and China’s significant monetary and fiscal stimulus announcements. These developments boosted commodity prices, benefiting the portfolio’s overweight positions in companies like BHP, IGO Limited, BlueScope, and Seven Group.
BlueScope is a strong business with a net cash balance sheet, surplus property, and high-quality assets. It operates a vertically integrated steel building products business in Australia and a cost-efficient steelmaking business in North America. The company has a well-tenured management team with a great track record of capital allocation. From a valuation perspective, BlueScope trades at ten times mid-cycle earnings and offers about a 5% yield through dividends and buybacks.
[00:08:02] Oil seems to be the only commodity that hasn’t benefited from recent trends. Could you elaborate on why that might be?
Oil prices haven’t significantly reacted to Chinese stimulus news, partly due to concerns about Saudi Arabia’s production discipline. While the fund is overweight in Santos, it remains underweight in the oil and gas sector. Falling share prices have prompted a reassessment of the sector, as the overall energy fundamentals appear strong.
ResMed remains one of the larger positions in the fund due to its strong fundamentals, including a net cash balance sheet, a long-term track record of over 25% return on invested capital, and a great management team and is expected to grow earnings in double digits over the next five years. Medibank, Australia’s largest private health insurer, also stands out with a net cash position and a solid management team. Despite regulatory risks, its current valuation at 16 times earnings presents a significant opportunity, especially given its strong performance during the cost-of-living crisis.
Important Information: Units in the fund(s) referred to herein are issued by Magellan Asset Management Limited (ABN 31 120 593 946, AFS Licence No. 304 301) trading as Airlie Funds Management (‘Airlie’). This material is issued by Airlie and has been prepared for general information purposes only and must not be construed as investment advice or as an investment recommendation. This material does not take into account your investment objectives, financial situation or particular needs. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer documentation, offer or invitation to purchase, sell or subscribe for interests in any type of investment product or service. You should obtain and consider the relevant Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) and consider obtaining professional investment advice tailored to your specific circumstances before making a decision to acquire, or continue to hold, the relevant financial product. A copy of the relevant PDS and TMD relating to an Airlie financial product or service may be obtained by calling +61 2 9235 4760 or by visiting www.airliefundsmanagement.com.au.
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