Airlie Quarterly Update

Video Insights
16 Jan 2024

Airlie Quarterly Update

10

(Please find CPD Quiz below)

Key Takeaways 

[00:00:46] How the Australian equity market played out in 2023.

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.

[00:03:11] Movements within the Airlie Australian Share Fund

The bulk of the changes to the fund this year constituted trimming positions in businesses where strong performance had reduced the valuation upside. On the flip side, we added to positions in underperforming businesses such as Tabcorp, believing its recent license extension in Victoria is positive, and Orora which faced market disapproval for its acquisition of Saverglass. We see the current share price as offering compelling value on a long-term view. The notable addition to the portfolio in 2023 was ResMed, a high quality business that had been on our radar for some time, with the current valuation compelling amidst concerns about GLP-1 drugs impacting its sleep apnea treatment market. We also strategically exited Region Group, a neighborhood shopping centre business, reallocating the proceeds into Waypoint REIT, which we felt had better inflation-protection in its rent structure.

[00:07:25] The strategy behind position sizing of the Fund

The investment process looks at four key factors: balance sheet, business quality, management quality, and valuation. For us, a large or high conviction position is around 4-5%, and we take such a position if a stock screens positively across all the factors we look at. However, achieving such green lights across the board is rare. We establish smaller positions, typically 2-3%, in businesses where we consider some trade-offs between factors. Balance sheets must be a green light, however typically you are weighing valuation vs business or management quality. For example, Tabcorp is a turnaround idea in the fund where we believe business quality is not where it should be, however we can see a path to improvement not yet reflected in the valuation. Given the risks around executing turnaround, we have a smaller 2% position.

[00:8:53] The outlook for 2024

Our primary focus is always on identifying opportunities to uncover mispriced businesses. Over the last few years, the market's intense macro focus and resulting volatility provided numerous chances to invest in businesses overlooked due to widespread concerns about the economic cycle, leading to entire sectors being avoided (e.g. REITs and consumer discretionary businesses). However, the current landscape differs as the market has largely rebounded to all-time highs, making widespread sector-wide opportunities scarce. Instead, the market seems to be returning to a more typical period for stock pickers, where opportunities arise on a bottom-up basis. While the overall market may appear slightly overvalued, we are actively researching high-quality businesses that have experienced short-term setbacks that we believe may have been oversold and anticipate potential opportunities in the near future.

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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.

Past performance is not necessarily indicative of future results and no person guarantees the future performance of any fund, the amount or timing of any return from it, that asset allocations will be met, that it will be able to implement its investment strategy or that its investment objectives will be achieved. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of Airlie. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. This material may contain ‘forward-looking statements’. Actual events or results or the actual performance of an Airlie financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. This material may include data, research and other information from third party sources. Airlie makes no guarantee that such information is accurate, complete or timely and does not provide any warranties regarding results obtained from its use. This information is subject to change at any time and no person has any responsibility to update any of the information provided in this material. No representation or warranty is made with respect to the accuracy or completeness of any of the information contained in this material. Airlie will not be responsible or liable for any losses arising from your use or reliance upon any part of the information contained in this material.

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