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Mirrabooka 2022 Recap

Mirrabooka 2022 Recap

Mirrabooka 2022 Recap

The 2022 calendar year was tough for investors as inflation, rising interest rates and the war in Ukraine caused volatility across global markets. Mirrabooka Portfolio Manager Kieran Kennedy looks back on the year and the importance of investing over the long term.

2022 was challenging for nearly everyone

Throughout the 2022 calendar year, the outbreak of inflation and subsequent aggressive interest rate rises had a negative impact on global share markets, including Australia’s ASX200 index.

In Australia, there were some pockets of strength – mining and energy stocks and to a lesser extent banks – all of which have meaningful index weightings. This enabled the local market to hold most of its ground for the year, despite major falls in other markets. The weakest sectors in Australia were information technology and consumer discretionary sectors as inflation and interest rate rises kicked in, and investors started to reassess valuations and earnings risks.

Ongoing constraints on supply chains was another factor influencing the market over 2022. In the earliest part of the year, supply chains were still being impacted by the pandemic, and the Ukraine war and geopolitical tensions which followed. This added to supply shortages and difficulty in getting goods to market remained. Labour shortages arising from the impact of the pandemic also presented a challenge during the year for many companies.

Although supply chain constraints appear to have eased in the latter part of the year, there are questions now over the strength of economic demand going into 2023.

Mirrabooka’s portfolio is a solid long-term performer

The Mirrabooka portfolio performance over the 2022 calendar year was softer than the benchmark index. However, this performance needs to be considered in the context of the previous year, where the portfolio performance was particularly strong. Some companies in our portfolio performed particularly well over the 2021 calendar year but have experienced falls in their share prices this year as rising interest rates trimmed market valuations. These include companies such as ARB, Reece, and Mainfreight, which have the large weightings in our portfolio. These companies have generated broadly resilient profits and financial results this year, but their share prices have fallen. They have been very good long-term performers for the portfolio, and we remain comfortable with our investment in these companies.

The market in which Mirrabooka invests also experienced a significant difference in performance between various sectors. For example, cyclical sectors such as resources and energy had a good year as commodity prices rose. Because these sectors are very cyclical, we don’t believe companies in these sectors would sit comfortably in our portfolio as a long term, tax efficient investor.

We would rather invest in high-quality small emerging companies that can grow and generate consistent long term, attractive returns for our shareholders.

It’s in the context of this investment approach, despite the one-year underperformance, the portfolio is performing ahead of its benchmark over the last three, five and 10 years.

We’re buying more good performers and promising newcomers

During the year we rotated some capital away from holdings where valuations looked a bit extreme into new opportunities such as Computershare and Worley Parsons. As a beneficiary of rising interest rates, Computershare has been one of the best performers on the market since then.

In December 2021, we also participated in an IPO involving a small electrical equipment distributor called IPD Group. IPD has been a spectacular performer in the year since. Recently, we also bought into a small software business in New Zealand called Gentrack Group which has performed well since listing.

Interest rates the key in 2023

Next year will be about moving through the challenges that have arisen during 2022. Recent market performance has picked up as investors anticipate that interest rate rises may be close to peaking. That may be premature, but interest rates are the key. Central banks will keep raising interest rates until inflation is under control. It’s important because it’s hard to value equities until you know what the price of money is, and what impact inflation has on company earnings.

As interest rates drive the performance of the equities market in 2023, we will continue to invest in companies based upon the quality of their business within our preferred time horizons of three, five and 10 years. We have some cash available, and we will consider appropriate opportunities when they arise.

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