August 2022 Investment Report

September 22, 2022
Investment Updates

Overall, 48% of our overweight positions beat forward expectations by more than 5%, while 11% of the broader market beat forward expectations by more than 5%.

Reported earnings in August were solid across the market with 35% of companies beating earnings per share and dividends forecasts. Consumer Discretionary, Real Estate and Energy had positive earnings surprises while Communications, Healthcare and Utilities came in lower than expectations. Over 90% of the overweight positions held in the Fund however, met or beat result expectations. In particular an overweight position in Qualitas (up 49.0%) contributed to performance as the company announced a significant mandate win during the month and beat prospectus forecasts by 17%.The company continues to grow strongly as a fund manager in the private credit market. Capital deployed is materially ahead of expectations and Qualitas has circa 40% of its market cap in net cash, which will assist in achieving further growth.

A2 Milk (overweight, up22.2%) had a strong result with second half revenue growth above market expectations, with the stock contributing to Fund outperformance. The company executed its growth strategy well amidst China lockdowns, using its strong financial position to increase inventory availability. A2 moved to broaden and diversify its distribution channels in the period and now has better visibility and control of channels and pricing. The company has circa 20% of its market cap in cash, providing growth optionality.

While company balance sheets in recent years (when the cost of money was low) have not been a particular investor focus, we are now seeing businesses in strong financial positions put the balance sheet to use through:

1. Building inventory positions (within reason) to hedge the risk of supply chain disruption; 2. Continuing to expand their store network; 3. Making acquisitions as asset prices come down; 4.Enabling capital and operational investment in organic growth opportunities; 5.Bringing in house external arrangements for margin accretion or to de-risk the business.

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