Portfolio manager Kieran Kennedy reflects upon a good 2023 calendar year for Mirrabooka, some of the companies in the portfolio, and the outlook for 2024.
The share market has been broadly flat for the 2023 calendar year with the smaller end of the market, which Mirrabooka participates in, displaying a negative return. In addition, larger companies in the market outperformed the smaller part of the market.
That has been a consistent theme for a few years but, pleasingly, Mirrabooka has had a very strong year relative to both of these parts of the market.
Mirrabooka’s total return on a one-year basis to November this year, is 10.5 per cent, outperforming the benchmark indices, the S&P/ASX Mid Cap 50 and Small Ordinaries Accumulation, which was down 2.7per cent. Both of these figures include the benefit of franking. The ASX 200 Index was up 2.9% over this period when franking is included.
There were a couple of factors behind this performance. Most importantly, the companies in our portfolio are performing well, and there has been a rebound from some of their underperformance experienced in 2022 when interest rates were on the rise. Our decision to stick with companies that were under share price pressure last year has been vindicated because their businesses are in good shape and their share prices have recovered strongly.
Mirrabooka’s portfolio outperformance this year reflects our objectives as a company. We take a three-to-five-year view of the companies we invest in rather than trying to pick short term trends. Because Mirrabooka is a closed-end fund, we are able to look beyond the short-term, allowing really solid businesses to do what they need to do, produce good compound growth over time. The market’s mood and the valuation of those companies will change, but even during volatile times such as now, we can rely on the fact that we still own quality businesses.
Smaller companies have been under more pressure in 2023
Inflation and higher interest rates have put pressure on the market generally, but the smaller the company, the more investors are deserting them. Investors are retreating from perceived risk and prefer larger, more established companies that they believe to be safer.
As investors retreat from smaller businesses, liquidity has dried up and there is limited volume trading in those shares. As such, it has become a very challenging market, particularly for micro-caps.
The market has been volatile, with investors trying to work out at what level interest rates will peak and what’s next for the global economy.
Investors’ sentiment toward particular sectors continues to change regularly. A good example of this is the lithium sector which provides material for electric vehicle batteries. It was hot six-to-12 months ago but has since cooled considerably. The lithium price has fallen markedly and lithium-related share prices have dropped a long way from previous levels.
Mirrabooka’s high-quality companies are performing well
The AGM season provides a window on how companies are trading. Of the 20 companies in Mirrabooka’s portfolio that had held AGMs up to and through November and provided some sort of commentary on operating performance, two were mildly ‘soft’ and 18 were at least in line or better than hoped. It shows that our quality-first investment approach is resilient.
Companies like REA Group and SEEK both had good guidance updates. Both companies have good pricing power with their customers which stands them in good stead. The two companies are watching the impact of recent interest rate hikes from the RBA and what it means over the next three-to-six months but their performance to date has been very solid.
Breville Group is another company that continues to win market share and grow. Breville has experienced increased volatility from a valuation point of view over the last few years but despite the challenges, the coffee category and the company’s ability to expand globally continues to tick along really well.
Corporate Travel also faced challenges, both when flights were grounded during the COVID shutdown and during the period trying to recover from that. Its business is improving and the company provided a good, encouraging update.
Hub 24 is another that is showing positive signs. The financial planning software platform company endured a flat spot when poor sentiment in the retail market meant there wasn’t a lot of new money flowing into equities. But the company has recently seen a few green shoots, with some money coming in, which is a good sign for their growth prospects.
The surprising resilience of the Australian economy to date, despite numerous interest rate hikes and concerns over the outlook, has provided fair conditions for these companies to display growth and win in their respective markets - two of the key factors that we look for in all our investments.
More market volatility presents buying opportunities
The general outlook for companies is still uncertain as everyone awaits the impact of interest rate hikes on the economy over the next six-to-nine months.
The market has been volatile and, in October, was down on concerns that inflation is still sticky and the US Federal Reserve and Australia’s RBA aren’t finished raising interest rates. In November though, the market lifted as inflation data out of the US suggested that the Fed is not going to raise interest rates again. That may change, but for now it has provided some market support.
We’re also monitoring the rising Australian dollar which, if it continues to increase, would have some negative impact on companies that are earning offshore.
Overall, our portfolio is in good shape. The quality of the companies is shining through and we’re happy with what we hold. Even so, market volatility will bring opportunities to add to our holdings, which we believe will provide more value to our shareholders.