The December quarter saw a continuation of conditions from the prior period with most markets delivering fairly strong returns, despite still high economic and political risks. Global economic data continued to weaken, as the impact of US tariﬀs took their toll, while both consumer and business confidence remained weak. Geopolitical concerns remained heightened as well, with flareups in the Middle East relating to both Iran and Syria particularly concerning. Oﬀsetting this broad based weakness was further stimulus from central banks, with the RBA, China and the US Federal Reserve all cutting rates, and the US also firing up the printing presses as well, in order to provide much needed liquidity in their interest rate market.
In positive news though, in the UK we saw a landslide victory for Boris Johnson’s Conservative party, which means greater certainty around Brexit, as well as more friendly market and economic policies than the radical alternative proposed by Jeremy Corben’s Labour Party. The Hong Kong protests also settled over the course of the quarter, although the underlying problems remain unresolved, with the economy now likely headed into recession. And right at the end of the period, we had a ‘phase 1’ trade deal between the US and China - which was undoubtedly fairly light on substance, with most of the thorny issues put oﬀ until later rounds of negotiations, but nonetheless this was a de-escalation of sorts, so definitely a positive regardless.
Closer to home, the Australian domestic economy continued to weaken, with soft retail sales readings, and both government and business investment remaining too weak to generate any sort of meaningful uptick in economic growth. Positively though, relaxed bank lending rules and lower home loan rates as a result of the RBA rate cuts appears to have spurred a recovery in the housing market, with both house prices and auction clearance rates improving in the key Sydney and Melbourne markets in particular. Although rising house prices have no direct benefit to the economy, if sustained they do tend to lead to improved consumer confidence and ultimately housing construction over time. While such a recovery reduces the short term risks around a disorderly fall in house prices that was a key concern 12 months ago, it also means that the structural issues of high house prices and highly leveraged households look set to persist for some time.
In markets, bond yields rose strongly on news of both the Conservatives victory in the UK election and the phase one trade deal between the US and China. This somewhat more positive outlook saw investors take a more aggressive positioning, selling out of defensive bond and fixed income investments, and putting more of their money to work in equities. As a result we saw good performance from Global Equities, with US tech stocks producing particularly strong returns, with returns from Europe, Japan and the broader US market also solid.
Australian equities were the exception however, with the domestic market remaining relatively flat after a sell-oﬀ in December that seems to have been the result of some weak economic readings released towards the end of the period. With bond yields rising, property and infrastructure were relatively weak, driven both by their lower yield relative to bonds, as well as higher borrowing costs implied by the upward movement in market interest rates in the period.
Pleasingly, all our portfolios continue to perform exceptionally well. Incredibly, over the last 2 years all but one of our portfolio models has been the number one performing portfolio or fund in its category nationally - from a field of over well over 100 comparable funds in each sector. And the one portfolio that was not ranked number one, was ranked number two! It’s important to note though, that we don’t expect to outperform both the market and our peers by this sort of margin on a consistent basis, but we are obviously delighted by this strong performance, and the validation it provides of our investment process.
In the December quarter our portfolios also performed very strongly, in absolute terms and relative to both benchmarks and peers, with investment selection and asset allocation settings both making meaningful contributions. Leading the way was our biggest holding - the Bellmont Consolidated Equities Portfolio, which had a stellar quarter, with returns in excess of 5% coming in well above the 0.7% return of the market. This was driven by a particularly strong performance from our biggest holding - Mineral Resources (MIN), which rallied 23% for the period. Importantly, this significant outperformance means that many investors will pay a performance fee in coming days - as our fees for this portfolio are comprised of a very low base fee, plus a performance fee of 20% of the amount by which your portfolio outperforms the broader Australian Stockmarket. Put simply, if you do well, then so do we. This is the only scenario where you should be cheering for higher fees, not lower - confident in the knowledge that whatever performance fee you pay represents only one fifth of the amount by which your portfolio exceeded the broader Australian market. A more detailed review of the Bellmont Consolidated Equities Portfolio in the quarter is found below.
Our small cap Australian Equities exposure - the Flinders Emerging Companies fund also generated extremely strong returns, with strong stock selection and portfolio discipline helping, along with their fairly healthy exposure to resources and resource related stocks. Within global equities, Magellan High Conviction was the standout performer, with their large weighting in technology stocks the main contributor. 4D Global Infrastructure produced a strong result versus its benchmark, assisted by their strong stock selection, lower weighting to the utility sector, and their large allocation to Asian and emerging market infrastructure stocks. Quay Global Real Estate produced a negative return for the quarter as the global listed property segment sold oﬀ in light of rising bond yields, however, they still managed to outperform their benchmark by close to 1%. And, the bond managers in the portfolio all performed well too, with Macquarie Income Opportunities and AB Dynamic Global Fixed Income preserving capital in a quarter when bond returns were negative, owing to their low and flexible interest rate (duration) exposure.
To view the Bellmont Consolidated Equities December quarter video review, please click here.
What a diﬀerence a year makes! While markets were languishing this time last year, after one of the weakest quarters since the GFC, and 2018 calendar year returns of -8%, today the market is back to pushing record highs, after delivering a solid 23% return in 2019. Of course experienced investors will know that any return calculation is enormously dependent on market levels at the start and end dates, so ‘zooming out’ to see longer term returns is often (almost always!) prudent. In this case, despite the wild fluctuations in both directions over shorter sub-periods, the market has delivered a reasonable, but unspectacular 9.5% p.a. return on average over the last 2 years. Overall, a result roughly in line with long term averages - despite the sometimes wild fluctuations in the interim, and the predictable periodic hysteria generated by the media.
Pleasingly, over both the past 12 months and since inception, the performance of our Bellmont Consolidated Equities Portfolio has been significantly stronger than the broader market. Since inception we have achieved an average annual return of 15.5% p.a., compared with 9.8% p.a. for the index over the same period. In the last 12 months we managed to achieve an outstanding 35.9% return, more than 12.5% ahead of the ASX200 Accumulation Index. And in the last quarter we managed to deliver a 5.1% return, compared with only 0.7% from the market. While we are delighted by both these results and the validation they provide of our investment process, we would caution that we don’t expect to outperform the market by such a wide margin on a consistent basis. Even the best investment strategies have periods where they experience negative returns, and times when they underperform the market, and ours is sure to prove no diﬀerent. We remain confident though that our patient, disciplined investment strategy should continue to deliver solid returns over time.
The biggest news of the quarter from a portfolio perspective was the completion of the annual rebalance of the core / systematic side of our portfolio in December. Our annual rebalance provides us with the opportunity to make adjustments to our portfolio holdings to ensure that we continue to hold those companies with the best investment prospects moving forward. This often means that we sell some of our best performers if the increase in share price has substantially exceeded earnings growth in the period - Stockland (SGP) and Telstra (TLS) were great examples of this, where we achieved calendar year returns of 45% and 39% respectively, despite their earnings actually falling in the 2019 financial year.
On the other hand, we trimmed our holding in Fortescue Metals Group (FMG), but retained it in the portfolio, despite it being our single best performer for the year with a 185% return - with it keeping its spot due to the fact that its earnings grew by an even more astronomical 286%!
Of course the rebalance also provides us with the opportunity to buy more of those companies that we already hold, but where better prices are now on oﬀer, and pick up holdings in companies that we didn’t previously own, but we deem to represent great value at current levels. We hope to be talking more about some of these companies as the top performers in 2020!
One of the only pockets of poor performance in the December quarter came from our bank holdings, with ANZ Bank (ANZ) delivering a -9.7% return for the quarter, and Westpac (WBC) falling by 10.9%. Interestingly, at our December rebalance we sold out of ANZ Bank (ANZ) completely, but actually topped up our Westpac (WBC) holding - leaving us with bank holdings in just Westpac (WBC) and Commonwealth Bank (CBA) at the end of the year, with a combined 6.5% weighting - far less than the almost 20% weighting that the big 4 banks garner in the ASX200 Index. There is no question that the banks continue to face challenges on many fronts, with their next 20 years unlikely to be such smooth sailing as their last 20. That said, at current levels they are also far from expensive, with much of this negativity priced in at current levels. Given the above, we remain quite comfortable with our modest banking exposure, despite its poor performance in the period.
On the positive side, we enjoyed a 31% return in the December quarter from our holding in Caltex (CTX), on the back of a potential takeover bid for the company, before selling it in our December rebalance. Also turning around and starting to deliver strongly for us in the period was our biggest holding - Mineral Resources (MIN), which delivered a solid 23% return. With no new meaningful news released by the company in the period, the positive movement appears likely to have been largely a result of an increasing iron-ore price, which should strongly bolster the company’s earnings this year, but will continue to fluctuate enormously over time. Also driving the share price was the fact that the company was nominated as the number one stock pick (from a global universe!) by 2 of the 12 fund managers presenting recently at the prestigious Sohn Hearts & Minds investment conference in Sydney. While we are no doubt suﬀering from confirmation bias, we felt that both presentations were excellent, with each covering oﬀ on diﬀerent components of our own thesis (if interested in a view of MIN other than our own, you can view the presentations here and here), and will no doubt have generated some additional investor interest in the company after their publication. At current levels we continue to believe that the shares look to be excellent value, so remain very happy indeed with our existing 7.5% weighting.
With low interest rates, strong investor sentiment, and markets pushing record highs once again, buying opportunities are currently few and far between. We will of course keep our eyes peeled for any opportunities that might arise, but in the meantime, we are very comfortable sitting back, and leaving our outstanding suite of managers to grow their businesses, and in turn, our profits.
Note that actual portfolio performance will diﬀer from model performance, based on entry and exit date, rebalance frequency and other factors. Performance numbers quoted are after IM fees, but before brokerage and performance fees.
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