Mirrabooka has returned a higher half-year profit and maintained its interim dividend despite challenging conditions in the equity market affecting the share prices of the high-quality small and medium-sized companies in the portfolio.
Our profit for the half-year to 31 December 2022 was $5.7 million – up 36.3 per cent compared to the profit of $4.2 million a year earlier. Dividends and distributions received rose by 6.1 per cent, with the increased contribution from the trading portfolio the main driver of the lift in profit.
Importantly for our shareholders, we maintained our interim dividend at 3.5 cents per share, fully franked at 30 per cent.
Changing equity market conditions limited our portfolio activity to modest levels. We preferred to wait for value opportunities to emerge before adding to our holdings. We also reduced our sales activity following elevated trimming of positions in response to the buoyant market in 2021.
For the half-year, our portfolio return including the benefit of franking was 6.8 per cent, compared to the return from the combined Small and Mid Cap 50 sector benchmark of 10.4 per cent including franking. Our 12-month portfolio return including franking was negative 24 per cent, compared to the benchmark’s negative 11.6 per cent including franking. Mirrabooka’s returns are in contrast to the year to 31 December 2021 where our portfolio performed strongly and was well ahead of the benchmark.
Importantly over our preferred long-term investment horizon of three, five or 10 years, the portfolio return has delivered good positive returns and outperformed the benchmark.
Confidence remains in our core holdings
Over the past year, many core holdings in our portfolio experienced weaker share prices as rising interest rates prompted lower market valuations. However, we’re still confident in the quality of those businesses and their long-term prospects. Most strong performers in the benchmark index were in cyclical coal, energy, and battery mineral companies that are not included in our long-term, low-turnover portfolio.
The volatility in valuations affected significant holdings in our portfolio – Mainfreight, Macquarie Telecom Group, ARB Corporation, and Reece – despite their good long-term prospects. These stocks generated impressive returns over the three years to 31 December 2022 from 24% to 156%, but fell 19% to 51% over the 2022 calendar year.
We recognised the building valuation risks in our portfolio leading into and early in the 2022 calendar year, so realised significant capital gains from sales. This impacted portfolio returns in the short term but supports the future distribution of franked dividends to our shareholders.
As a long-term investor with a focus on high-quality stocks, we continued to view volatile markets as an opportunity to adjust our portfolio. We added Ardent Leisure Group, Tourism Holdings, and Vista Group.
We expanded our holdings in EQT Holdings, Seek, Fisher & Paykel Healthcare and EVT. Recent portfolio additions IPD Group and Gentrack generated strong earnings and share price results. We trimmed our holdings of IRESS, NEXTDC and Computershare.
Outlook: Long-term prospects of our preferred holdings are undiminished
As we enter the 2023 calendar year, slowing economic growth across major global economies resulting from central bank tightening through interest rates is likely to have a negative effect on company earnings. As such, earnings risk has replaced valuation risk as a key consideration in our portfolio.
That said, we believe the long-term prospects of our preferred portfolio holdings are relatively undiminished. These companies should be more resilient in generating attractive returns and market share gains despite challenging economic conditions. This has been and remains a key factor in the way we construct our portfolio.
Furthermore, the valuation reductions in many of our core holdings in 2022 provides a better platform for generating long-term returns than was available a year ago. Continued volatility in equity markets is likely to provide attractive long-term investment opportunities for our portfolio.