IML investment update – December 2022

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IML Portfolio Managers, Hugh Giddy and Michael O’Neill, discuss the market’s performance during final quarter of 2022 as well as the performance of the IML funds.

Edited transcript

Hugh: The final quarter of 2022 was a very strong quarter with the World Index up about 7.5% and the Australian market up over 9%, driven largely by a very strong resources quarter, resources were up 14% for the final quarter.

Michael: So, in this environment, IML funds have lagged a strong market, particularly when you look at what’s happened in iron ore markets, the iron ore prices were up 20% in the quarter. So, as you’d imagine, that drove strong performance of around 14% in the resources stocks. So, in that environment, it’s tough for IML funds to keep pace. But we did have a strong calendar year Hugh, we ended up with solid positive returns despite the fact that the index, the ASX 300 was actually down 2%.

Hugh: Yes, as mentioned we have been combating this very strong resources sector. We did have some other sort of weaker spots in the final quarter. For example, MediBank performed poorly. That was a company that was subject to a cyber attack, and they decided not to pay the ransom, the criminals released personal data, sensitive data about people’s medical conditions and the share price has fallen, and we believe it’s actually quite good value at this level. But we also had some good results for the quarter, didn’t we?

Michael: Yes we did actually Hugh, so a couple of results came out, Virgin Money and Orica. The Virgin Money results showed strong net interest margins, benign bad debts, but the company is also returning capital to shareholders via a buyback.

Orica was another strong one. Now if you look at the financial year 2022 for Orica and profits were up 50% that’s in part coming out of COVID and very low levels of activity. But what we’re also seeing is the explosive price today, which is considerably higher than historic contracts. So, as Orica rolls on to new contracts, we get confidence in the margin trajectory from here.

Hugh: Sure. So looking forward, I mean, it’s an interesting world we’re in. Everyone knows we’ve got inflation, interest rates are rising, some of the air has got to come out of the housing bubble and asset bubble, things like cryptocurrencies. And so you could say, oh well, we’re going into recession, federal banks raising interest rates, house prices down, consumers going to get less confident if their house is cheaper. But on the other hand, you are still seeing some economic data that’s really strong, like low unemployment. So it’s hard to be absolutely, sure what will happen, we never know for sure anyway, but we do think that there will be some sort of slide on and that’ll be a good time to stick to the knitting that we always stick to of quality, defensive companies, relatively cheaply valued compared to the market. And as the market comes down, we are finding better opportunities to invest in.

Michael: Funnily enough it is a time where a lot of high-quality companies that were, until now, on excessive valuations are starting to look reasonable. So if anything, our opportunity set’s getting more interesting.

Hugh: Let’s hope that continues.