December 2022 Quarterly Report

February 6, 2023
Investment Updates

Volatility continues to reign supreme, in the last two months alone we have seen the index +6.1% for November and -3.5% in December respectively. Furthermore, the market’s obsession with macro drivers continued as a key theme through to the end of CY22, the focus on the almost daily Central Bank speeches, coupled with over-analysed weekly and monthly economic data has endured. We note a recent insight from Charlie Munger, from mid-2022, that is appropriate: “I don’t pay much attention to macroeconomic trends…I just try to invest whatever capital I have as best I can and take the results as they fall. I just seize whatever opportunities I can and hope I get my share”.  

We remain steadfast in our process driven by bottom-up stock picking, with a focus on valuation and sound sustainability credentials, coupled with a history of cashflow generation, solid balance sheets and proven management. This iterative process is at the core of our investment philosophy in good times and bad, pandemics, bull markets, bear markets and everything in-between.  

Over the last 12 months the prevailing market narrative has been one of a looming economic downturn and of structurally higher inflation. Over the course of CY23 we expect this narrative to shift as inflationary pressures abate, meanwhile, we will continue to follow our bottom-up process and take advantage of material stock miss-pricing opportunities when they occur.

Specifically, we remain overweight Small Cap Industrials, as discussed in the last quarterly, we see a significant valuation gap to this sector of the market and have rotated into a number of key stocks over the last 12 months. We note that over CY22, the Small Ords Industrials Index lost almost a quarter of its value whereas the ASX20, the largest 20 stocks, only fell by less than 2%. The market has gravitated to large caps, perceived safety and earnings certainty. We view this as a once in a cycle opportunity.

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