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AGM Recap: Outperformance over the short and long term

AGM Recap: Outperformance over the short and long term

AGM Recap: Outperformance over the short and long term

The 2020-21 financial year has been staggering. After the biggest social, economic, and health shock in over 100 years, the market produced significant returns as investors responded to very low interest rates and better-than-expected company profit results.

The total portfolio return from our investments in small and mid-sized companies was 50.9 per cent, including franking. That compares favourably to the return of 35.2 per cent from the combined S&P/ASX Small and Mid Cap 50 Accumulation Index, including franking.

Our outperformance was driven by strong, consistent returns across many of the large holdings in our portfolio, such as ARB Corporation, Reece, Mainfreight and Netwealth. This is one of the advantages of investing in small and upcoming Australian companies in the Australian economy.

At the end of June, the value of our portfolio was $618 million. At the end of September, it had risen to $660 million. Ten years ago, the portfolio was worth $258 million, so growth has been extraordinary.

The share price return was ahead of the portfolio return by some margin at the end of June. This meant that the premium at the end of June was up three per cent, compared to a four per cent discount at the end of June 2020. At the end of September, the premium was seven per cent.

We were able to maintain the ordinary $0.10 dividend for the year and pay a special dividend of $0.02 whilst still maintaining reserves to set against future periods when income and gains may not be as forthcoming. This is one of the benefits of an LIC as opposed to the trust structure that many ETFs use. They require everything to be paid out as it is earned, leaving nothing to help smooth distributions in difficult years.

The management expense ratio (MER) was 0.5 per cent, which is just the cost of running Mirrabooka, including listing fees, shareholder communications, and salaries. There are no outperformance fees paid to an external management company.

The MER has more than halved as we have significantly grown the portfolio over our 22-year history. Our MER of $0.50 of cost for every $100 invested remains very competitive against others investing in emerging ASX-listed companies.

Our portfolio performance in the 2021 financial year was very strong. It is more typical for Mirrabooka to achieve stronger outperformance in weak rather than in buoyant markets. As such, we’ve been surprised and pleased by the strength of our one-year return in such a buoyant market. Importantly we focus more on ten year returns given our investment approach. These have also been ahead of our benchmark by six percent over this period (17.9 per cent per annum when including franking).

Returns across the portfolio were consistent, with only seven per cent of the portfolio declining in value over the year. We received a particularly strong benefit from 11 stocks representing 30 per cent of the portfolio, which remarkably returned more than 90 per cent in one year.

Market Outlook

In our view, market valuations have looked stretched by historical standards for some years, reflecting a prolonged period of very low interest rates. While rates remain low and liquidity continues to be injected into global markets, all asset classes are likely to remain supported as investors continue to seek out the best available returns.

In the longer run, elevated valuations seem much more likely to weigh on equity market returns.

In terms of our portfolio, we are cognisant that the strength of recent returns has the potential to cap our short-term portfolio performance from here.

In the long run however, we remain confident that our portfolio of high-quality equity investments with attractive growth prospects and a high return on capital generation will compare favourably to most other alternatives.

We are also confident in our investment process continuing to identify such opportunities.

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