The 2021/22 financial year was one of two distinct halves. Interest rates were held at historic lows in the first half of the financial year which provided strong support to the market. As the second half emerged interest rates were on the rise causing a significant fall in global equity markets.
Mirrabooka’s full-year results for the 2021-22 financial year, released on 13 July, announced a higher year-on-year profit and consistent dividends which including a special dividend. These results reflect the quality of holdings in our portfolio of small and mid-sized companies.
The full year profit was $6.7 million, up from $6.4 million in the corresponding period last year. This increase can be mostly attributed to an increased contribution from investment incomes as many companies increased or reinstated dividends, following reductions made during the pandemic.
We maintained a dividend of 6.5 cents per share, fully franked. We also declared a special fully franked dividend of 2.0 cents per share following strong realised capital gains for the year. This brings the total dividends for the year to 12.0 cents per share, fully franked, which is the same as last year, where a special 2.0 cent dividend was also paid.
Portfolio performance
The portfolio return over the twelve months to 30 June 2022 was -20.9%, compared to the combined S&P/ASX Small and Mid Cap 50 benchmark, including franking, of -13.5%. The rise in interest rates over the second half of the financial year, when combined with significant geopolitical events, resulted in a large divergence in sector performance. This short-term result is typical of many portfolios operating in an environment of market sell-offs, changing valuation multiples and geopolitical and economic pressures.
When these results are considered against the three-year relative performance of Mirrabooka – 8.5% per annum, outperforming the combined S&P/ASX Small and Mid Cap 50 benchmark return of 4.7% per annum, including franking credits – we believe this relative return provides reinforcement of our investment approach, given the fundamental delivery of good operating performance of the companies that we have invested in over these timeframes.
Importantly, our long-term performance is also very positive. Over 10 years to 30 June 2022, the return is 12.7% per annum, against the benchmark return of 9.8% per annum. These figures include the full benefit of franking with Mirrabooka’s returns after costs.
Companies in our portfolio
Computershare and Worley, new holdings we bought into during the period, have been two of the strongest performing stocks since our purchase.
As markets fluctuated during the year, we took advantage of a market sell off and materially added to existing positions in Domino’s Pizza Enterprises, Nanosonics, Peet, REA Group, Temple and Webster, IRESS and Corporate Travel Management. Many of these have since sold off further, highlighting the challenge of identifying share price lows in a falling market.
Our process in these situations remains consistent: assess the relative long-term prospects of each investment opportunity and look to add to positions as prices fall, where our long-term conviction remains strong.
Much of our selling over the year reflected our concerns about extreme pricing across several highly rated growth stocks. We exited Xero on this basis, as well as reducing positions in Seek, Objective Corporation, ARB Corporation and Reece at very high prices that have since fallen materially. These sales were the largest contributors to the significant realised capital gain of $36.4 million recorded for the financial year.
Thirteen stocks were exited from the portfolio, many of which had performed well for us historically, but where we had re-assessed our outlook about their long-term performance. Others were sold as our expectations were not being met.
We participated in two smaller company IPOs, IPD Group which has performed well and Chrysos Corporation which has seen a meaningful share price fall since IPO. We believe both remain interesting companies for the long term that fit with our investment process as small, earlier stage investments.
FY23 market outlook
Leading indicators suggest a significant slowing in global economic growth in the coming months due to the abrupt shift in monetary policy settings and an increase in cost-of-living pressures on consumers. In this environment, we expect higher quality companies to drive growth independently from economic cycles and perform in line with their forecasts.
While the outlook for equity markets remains volatile, this volatility can provide opportunity for an investor such as Mirrabooka as we continue to take a long-term view in a very dynamic environment.