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Focusing on high-quality stocks for the long term: Answering shareholder questions

Focusing on high-quality stocks for the long term: Answering shareholder questions

Focusing on high-quality stocks for the long term: Answering shareholder questions

Volatile market conditions are expected to continue for some time and, in this uncertain environment, Mirrabooka’s focus on small to medium-sized stocks that demonstrate the attributes of high-quality investments is even more important for our shareholders.

At our recent shareholders’ meeting in March, we discussed the current economic environment and market outlook, our approach to investing, and stocks that feature in Mirrabooka’s portfolio.

Pressures from inflation on the market

Rising inflation has meant an adjustment in the share prices of many companies as interest rates have been lifted to try to dampen growth. Although there are signs that inflation may be at or near its peak ̶ freight rates are easing and movements in the oil price have been weaker ̶ core inflation remains elevated. The market is hoping that there is a respite in rising interest rates, but the prolonged period of ultra-low interest rates appears to be finished.

Interest rates are returning to what are seen as historically normal levels and while economic activity has proven to be resilient in this environment, consumer sentiment surveys show confidence remains low.

Markets are still very volatile, with new challenges appearing frequently and we believe this will be the environment for some time.

The recent company reporting season showed that earnings have been solid, however the next 12 months are likely to be challenging. Companies have elevated levels of inventory and are finding it harder to increase their prices to cover higher costs because demand has softened. The result is likely to be a period of heightened earnings risk, but it will sort out the weaker business models from the stronger ones.

ARB delivering strong performance for the portfolio

Mirrabooka holds a diversified portfolio of companies across different sectors and our top 20 holdings have been in the portfolio for between two and almost 18 years, reflecting our approach of selecting high-quality companies that can deliver on our investment objectives in various market conditions over the long term.

Four-wheel-drive accessories business ARB is a prime example. We have held it for more than 12 years and its track record in Australia has put ARB in a good position to expand its presence in the US, Europe and Asia. The company has capitalised on the growth in popularity of 4WD vehicles and reinvested profits in innovation, making it a world leader in accessorising these vehicles.

Recently, Ford and Toyota have moved to increase the accessorisation on their vehicles in global markets and have sought out the best partners in the world to do this, including ARB. With those partnerships in place and ARB establishing an e-commerce site and its first pilot store in the US, we believe it has a long-growth runway in larger overseas markets.

The long term is always our preferred investment time frame

The Mirrabooka portfolio focuses on emerging companies that sit outside the top 50 companies on the Australian share market, as well as selected New Zealand stocks.

We seek to invest in companies that are in their early growth phase so can we capture the benefits of more years of elevated growth rates as the companies expand their businesses. We can also tap into the period when these companies have not been “discovered” by the general market. The total return from such an approach is attractive if stocks are well selected.

In a diversified portfolio of emerging companies, there are potentially higher rewards but also greater volatility, so in the short-term returns can be variable.

Our portfolio’s total returns including franking have outperformed the benchmark S&P/ASX Mid Cap 50 and Small Ordinaries Accumulation indices over the last three, five and 10 years.

Challenging markets have more impact on smaller companies, so caution is called for. Nonetheless, our objective is to enhance returns for the long term and to make long-term decisions.

We do not try to predict markets. We try to make sensible decisions on what we observe. Our top 20 holdings are businesses that we understand well and have the characteristics we desire.

We believe the quality of the businesses and the strength of their long-term future is what sets our portfolio apart.

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