What a difference a few months makes. Markets took a hammering right at the end of the 2016 financial year thanks to the Brits’ decision to leave the European Union, but three months of mostly sober reflection have reassured investors that the world is not about to end.
The ‘flash crash’ in early October – where sterling fell 6% against the US dollar in a matter of minutes – shows that the UK isn’t out of the woods, but markets are taking the view that any damage is likely to be contained. Meanwhile, the greater threat to global stability – a Trump presidency – appears to be receding.
The All Ordinaries Index gained 5.3% for the three months to 30 September, but our Growth Portfolio came in well ahead of that, with a return of 13.1%. Since it opened its doors to investment in July 2015, it has generated an annualised return of 21.7%, compared to 5.9% for the All Ords; and since inception as a model portfolio 15 years ago it has returned 11.0% a year compared to 7.8% a year for the All Ords.
The portfolio’s top performer for the September quarter was South32, which returned 57% as investors anticipated and were delivered an excellent full-year result. Although the headline loss was a whopping US$1.6bn it was mostly due to asset writedowns and operating cash flow actually jumped more than 50% to over US1bn.
Nanosonics was also up strongly, gaining 55% after delivering its first annual profit. Management reported that sales of its ‘trophon’ probe sterilisers jumped 74% in the key North American market and noted that it is now being used in 48 of the top 50 hospitals in the US. The installed base is particularly important because it drives recurring sales of high-margin disinfection cartridges.
Hansen Technologies is another fast-grower, and it duly delivered a 40% rise in revenue for 2016 and a 43% rise in earnings per share. It was enough to push the stock up 39% for the quarter and it has now tripled since it was added to the (then model) portfolio two years ago.
Other notable performers were Monash IVF, which gained 38% and Amaysim, which is up 21% since we purchased it in June.
Set against these high-fliers was a horrible performance from iCar Asia. At the end of June it had been plodding along nicely towards its targeted breakeven in 2018, at what now looks like a very distant share price of 85 cents. Then receipts for the June quarter fell short of expectations, before the company warned on 2016 losses, abandoned its breakeven target and raised capital. All that knocked the stock down to 36 cents at the end of September, handing us a 66% loss.
The only good news is that we began all this with a weighting of only 3% in the stock, so the damage has been limited. With the path to profitability now much less clear, iCar has become decidedly more speculative and that’s discouraged us from buying more, although we’re content to hang onto what we have.
OFX Group (formerly OzForex) was another significant faller, losing 18% as investors fretted over increased competition in international payments – including an agreement between CBA and the UK’s Barclays Bank – and potential disruption from ‘blockchain’ technology. The stock looks cheap at current prices but, again, given the risks involved we’re content to sit on our hands.
The only disposal in the quarter was the one percentage point reduction of Trade Me on 1 September at $5.32; and the only purchase was the use of those funds to increase our holding in Amaysim at $2.04.
We remain very comfortable with Trade Me, but it’s weighting (at 8.5%) had moved well beyond our 6% recommended maximum and we were keen to increase our investment in Amaysim after an excellent full-year result showed subscribers growing and margins expanding.
GROWTH OF $10,000
PEFORMANCE SUMMARY TO 30 SEPTEMBER 2016
Source: Praemium, RBA. Returns are before expenses and fees. Returns are shown as annualised if the period is over 1 year. * Since Inception (SI) date is 1 July 2015.
In spite of the excitement around Brexit and Trump, the greatest short-term threatfor our portfolios – as for markets generally – is that interest rate expectations startto creep up. That would force investors to raise the ‘opportunity cost’ they put intotheir valuation models and knock down their valuations accordingly.
The good news is that any increase in rate expectations is likely to be accompaniedby improved prospects for growth. Both our portfolios are largely comprised ofstocks that add value and enjoy plenty of pricing power, and that should enablethem to take their share of any growth that eventuates.
As ever, the sharemarket could see some sharp movements in the short term asinvestors adjust their expectations for rates and growth. But that’s the penalty forbeing in an asset class that tends to outperform others over the long term. We seeno reason for that to change.
|PERFORMANCE TO 30 SEPTEMBER 2016||1 MONTH||3 MONTH||6 MONTH||1 year||SI* (P.A.)|
|Intelligent Investor Growth Portfolio||1.93%||13.10%||17.19%||28.33%||21.72%|
|ASX All Ordinaries Accumulation Index||0.40%||5.30%||9.51%||14.01%||5.86%|
|Excess to Benchmark||1.53%||7.80%||7.68%||14.32%||15.85%|
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