The June quarter saw markets and economics continue to diverge, with share markets rebounding strongly off their March lows, in the strongest quarter since the aftermath of the GFC, whilst the economic outlook actually showed little improvement.
Share markets were buoyed by extraordinary government and central bank stimulus, and signs that virus contraction rates looked like they were beginning to peak in most developed nations, providing some hope for the reopening of economies and the beginning of an economic recovery. Optimism regarding the early development and availability of a vaccine also assisted in boosting investor confidence and sentiment.
Governments around the world continued to inject unprecedented amounts of stimulus into their economies, in an attempt to offset the weakness of the Coronavirus inspired economic shutdowns. The most significant of these measures involved supporting businesses to keep paying their staff, as well as more generous support for those workers that have seen their hours reduced or lost their jobs. These stimulus measures, while temporary, have so far been significant enough to keep money in the pockets of consumers, and helped to deliver somewhat better economic data than the dire predictions being made by most economists back in March. Central banks also kept interest rates at exceptionally low levels, while continuing to engage in additional measures to ensure the availability, and smooth flow of money through the financial system.
Investors were also pleased to finally see improved co-operation between European countries, as they banded together in their attempts to deal with the effects of the Coronavirus and its associated economic impact. But events in the US were less positive, with the political environment becoming even more toxic as a result of nationwide protests over the death of George Floyd, as well as concerns about a second wave of the Coronavirus, driven by a divergence in views around the merits of lockdowns. In the wake of these events, polls for the November US Presidential election swung firmly in favour of Joe Biden and the Democrats.
A key concern for many towards the end of the period, was the potential government reaction to future virus waves and the ‘fiscal cliff’ whereby most of the government stimulus measures put in place in March are set to expire in the next quarter. While the enormous support provided by governments and central banks around the world have been extraordinarily successful to date, it’s important to also recognise their limits if the virus isn’t brought under control shortly.
Investment markets generally performed strongly in the quarter, with Australian Equities leading the way with a 16.5% return on the back of a rebound in Consumer Discretionary and Energy companies in particular. International investments were a case of strong returns in their local currency, but far weaker in Australian Dollar terms, as the Australian Dollar rallied sharply. International Equities still delivered solid returns in the order of 6% for the period, while currency movements saw reasonably strong local currency results for Property & Infrastructure dragged down into slight negatives in Australian Dollar terms. Bond returns were reasonable in the period, as normality returned to bond markets, with corporate bonds delivering significantly stronger returns than government bonds.
Pleasingly, all our portfolios continued to perform very strongly both in the June quarter, and since inception. As might be expected, it was the more growth oriented Elevate and Accelerate models that fell the hardest in the March quarter selloff, but their higher allocation to Australian Equities in particular also helped them to rebound most strongly in the June quarter. For the full financial year there wasn’t much separating the models in terms of performance, but it was great to see positive returns from all our models, especially given the fact that the median manager of similar strategies saw losses in almost every category in the same period! As we look out to two years and beyond we can see the higher long term returns on offer from the more significant allocation to growth assets, the trade-off for which is of course a bumpier ride along the way. We’re also delighted to see that all our portfolios continue to perform exceptionally strongly when compared against their universe of comparable funds over all timeframes.
For the June quarter though, the strongest performers were our Australian Equities holdings. The Bellmont Consolidated Equities Portfolio generated a very strong 25% return in the period, compared with a 16.5% return for the index, driven by strong returns from our largest holding - Mineral Resources, as well as rapid recoveries from some of the retailers that we own. The Flinders Emerging Companies fund generated an even more impressive 29% return, as small companies broadly performed strongly, albeit with the Flinders fund still outperforming the strong benchmark by a very significant 6% in the quarter.
Our International Equities holdings performed strongly as well, with the T Rowe Price Global Equity fund a standout, with a 17% return more than 10% ahead of the market. Property and Infrastructure were somewhat mixed, with Quay Global Real Estate suffering a modest fall and underperforming its benchmark, while 4D Global Infrastructure delivered a very strong 5.1% return in the period, despite a solid headwind from a rising Australian Dollar. Our Bond managers all performed strongly in the quarter, significantly outperforming meagre returns from cash and their respective benchmarks, with AB Dynamic Global Fixed Income the standout.
Overall, while we still see significant uncertainty in regards to the trajectory of the Coronavirus and the global economy, we are confident that our portfolio is well positioned to withstand any shocks, and continue to generate solid returns over time.
A more detailed review of the Bellmont Consolidated Equities Portfolio in the quarter is found
below, with an in-depth video covering the quarter from an Australian Equities perspective
Along with the market, our Bellmont Consolidated Equities portfolio recovered strongly from the March lows, delivering a total return of 25.2% for the quarter, easily outpacing the 16.5% return for the ASX200 Accumulation index, and impressively recovering around two thirds of our losses from the weak March quarter. This strong finish to the year wasn’t quite enough to see us into positive territory for the full financial year, with a loss of 1.1% definitely nothing to be excited about, but pretty impressive when compared with a 7.7% loss for the index. More importantly though, our longer term performance remains very strong, with our portfolio delivering average returns of 8.2% per annum since inception, compared with only 3.4% per annum for the broader market in the same period.
During the downturn in the March quarter we were delighted to be able to take advantage of the
pessimism in markets to deploy the ~11% cash we held as at the end of February, ending the
June quarter with only 2.5% of the portfolio in cash. So with our portfolio being back to close to
fully invested, does that mean that we think we’re out of the woods now? Not by a long shot.
There remains enormous uncertainty around the trajectory of the virus, the potential for vaccines
and treatments, and the resulting impact on economies around the globe. There is a real chance
that the relative success that many countries around the world have had in controlling the spread
of the virus could be undone by a ‘second wave’, and while government and central bank
support packages have so far provided an effective backstop for both businesses and
economies, there is a limit to how much support they can provide if the virus, and the challenging
economic conditions it brings with it, remain with us for an extended period.
Despite this, we feel comfortable with our existing portfolio positioning, with a number of companies that haven’t missed a beat, and continued to prosper despite the virus (eg MIN, FMG, RIO, BHP, DMP and JBH), some that have performed extremely well considering the substantial headwinds they’ve faced during this period (eg AX1, SUL, HVN, CBA and MFG), as well as a few that have been genuinely challenged, but that we feel are positioned to be able to survive through this challenging period, and then likely to perform extremely strongly when we do start to recover in earnest (eg CTD and FLT). If we do get a significant second sell-off on the market, we have a clear plan for which companies we would be willing to sell, and which we would like to add to, and we also remain very confident in our positioning should we see a strong recovery from these levels.
Looking in more detail at the portfolio in the period, and after our flurry of activity in the March
Quarter, the June Quarter brought only a single transaction - taking up the Flight Centre (FLT)
rights as part of their $700m emergency capital raising. While the business will no doubt face
enormous challenges in the next couple of years, we were sufficiently comfortable with the
management team and their long term strategy to take up our full rights, plus the additional 25%
available as part of the optional ‘Oversubscription Facility’, increasing the number of shares we
hold by over 70%. We view the $7.20 subscription price as excellent value, and although we
certainly aren’t seeking short term returns from this investment, we are quite happy with the 54%
return we were sitting on at the end of the quarter on this incremental investment.
Pleasingly, there was a battle royale for the top performer in the portfolio during the period. From a dollar return perspective though, the clear winner was Mineral Resources (MIN), which at a 10.6% weighting at the end of the quarter is easily our largest holding. As so often happens, after going nowhere in share price terms for what seemed like an age (it was actually about 2.5 years), enabling us ample opportunity to build up a very healthy position, the company's share price exploded in the June quarter, generating an impressive 52% return. This rally was far from unfounded, coming on the back of their exceptionally strong H1 2020 profit result (underlying EPS +263%, statutory EPS +6,700%!), as well as likelihood of another strong result for the full year, as a result of strong growth in their mining services business and buoyant iron-ore prices.
Impressively, these strong results are despite the company making no profit from their substantial
Lithium business in the period, with their major Lithium asset - ‘Wodgina', mothballed as a result
of the current low Lithium prices. With enormous growth opportunities for the company ahead as
a result of an ambitious development program, fuelled by an enormous amount of capital on the
balance sheet, and with the significant long term potential of their Lithium business, we remain
confident that there is a lot more yet to come, and remain very happy indeed with our current
Our retail stocks - Accent Group (AX1) and Super Retail Group (SUL) also performed exceptionally strongly, although perhaps ‘recovered strongly’ would be a better description, with much of their strong returns in the June quarter effectively a recovery of their weak performances in the March Quarter. One of our newest holdings, Accent Group (AX1) delivered an impressive 78% return for the quarter, but for the full financial year was a more modest 14.1% return, as the shares recovered strongly from their March lows. Impressively, right at the end of the period the company announced that their FY2020 profits would actually be around 10% higher than their previous record set in FY2019, despite their entire store network being closed for a month! The Coronavirus crisis has really reinforced our views around the quality of the company’s management, and the value of their impressive online business, the combination of which position the company very strongly for the future in our opinion.
Despite this, at the end of the
quarter the shares remained some 36% below their highs in February after announcing their H1
results, and in our opinion remain exceptionally good value at current prices. Not to be outdone,
our long-standing retail holding - Super Retail Group (SUL) generated a very solid 74% return in
the June quarter, and eked out a 2.8% return for the full financial year. Like Accent Group (AX1),
Super Retail Group (SUL) also delivered exceptionally strong results given the circumstances,
with total sales for the first 47 weeks of the financial year up by 1.9% - an exceptional feat if you
consider that the company had to deal not only with the Coronavirus, but also severe disruption
to their Leisure business as a result of the drought and the East Coast bushfires. We were
delighted as well to be able to participate in the company’s well structured capital raising,
enabling us to top up our holdings at an attractive $7.19 per share, some 11% below the close
price of the company’s shares at the end of the period. We remain very comfortable with both of
these extremely well managed retail companies, and expect to continue to achieve solid returns
in coming years from these levels.
On the negative side of the ledger we saw NIB Holdings (NHF) delivering a -10.1% return for the quarter, and -13.1% for the full financial year. Like many other companies, NIB has seen a range of conflicting influences on their businesses in the period. The company’s core Australian Resident Health Insurance (ARHI) business stands to be a substantial beneficiary in the short term, as the temporary cancellation of both elective surgeries and ‘extras’ such as dentistry, physiotherapy and massage massively reduces claims expense. The company has stated that they will return all ‘excess profits’ arising from the cancellation of services to members, but given the inherent degree of interpretation required in appropriately classifying these “excess” profits, we think it’s safe to assume that the company is unlikely to be disadvantaged.
businesses though - including International Students, International Workers and Travel Insurance,
are likely to suffer a far more substantial earnings hit in the short term at least. Given their relative
profit contribution to the business (around 20% of operating profit), and the likely temporary
nature of the impact, we think this is very manageable. With a first rate management team,
continued strong growth prospects, and an attractive price at current levels, we remain very
comfortable with the long term prospects for our 6.4% weighting in NIB Holdings (NHF).
While the trajectory of markets over the next 6 and 12 months remains highly uncertain, we
remain confident that our suite of high quality, reasonably priced businesses are well positioned
to continue to deliver strong returns into the future.
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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