IML Large Caps – Sept quarter 2025 update

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IML Portfolio managers Michael O’Neill and Daniel Moore discuss what happened in markets in the September quarter as well as the performance of IML’s large cap funds, key stocks in the portfolio including a new addition.

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Lightly edited transcript – Recorded on 2 October

Jason Guthrie: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers, where we bring you insights from our global collective of experts to help you make better investment decisions. I’m your host, Jason Guthrie, and today I’m joined by IML portfolio managers, Daniel Moore and Michael O’Neill. Now, Dan and Mike have been working together on the large cap funds for over 15 years at IML. They’ve built a great partnership, and today we’re going to discuss what’s been going on in markets during the September quarter, how the funds have performed, some of the main holdings, and the outlook from here. Dan and Mike, welcome back to the pod.

Hard to believe we’re already in October. Things are starting to warm up; summer is just around the corner. So, reflecting on the quarter overall, the ASX was up 5% in a pretty volatile quarter, mainly driven by some of the big moves over the August reporting season, which we’ve covered in previous discussions. I think it’s certainly one of the most interesting and somewhat brutal sessions we’ve seen, depending on your positions in the market. What are your main takeaways for our investors over the quarter?

Michael O’Neill: Well, Jason, what really drove the index return was strength in the financial sector, mainly driven by three of the big four banks, as well as materials. Not just the iron ore stocks, but also the lithium and gold miners, which were up significantly—something like 50%. The key takeaways? Reporting season really showed us that the Australian consumer is actually a bit healthier than we expected, and retail results have also been quite solid. This is in stark contrast to the US, where we’ve seen a weaker consumer and housing, in particular, soft. Part of this is due to the fact that in the US, they largely have fixed-rate mortgages, so the benefits of rate reductions don’t really flow straight through to the consumer.

Jason: And with the funds, more specifically, I think it was a more challenging quarter after a pretty strong first half of the year. What were some of the key themes that drove that result? Sectors and also some of the key names?

Michael: Yes it was a disappointing quarter for our large cap funds. While we did achieve a positive return in the funds, these were well below the benchmark return of about 5%, and the underperformance was largely due to the underweight holding in banks and resources. We don’t actually have any exposure to lithium. We do have caution around valuations in the sector, particularly iron ore stocks that are more exposed to cyclical commodity prices and a growing supply outlook for iron ore. But the performance of our key holdings was also a little bit mixed. In particular, one stock that was disappointing for us was CSL.

Jason: Sure. And I think we’ll come back to CSL. I know we’ve discussed that recently in other episodes, but maybe looking at some of the real standouts over the quarter. I think Brambles continued to extend some of the gains that we’ve been seeing for some time now. Do you see further upside there, and were there any other names that performed well for the team over the quarter?

Michael: Brambles certainly had a strong result. We saw 12% earnings growth coming through from margin improvements across the board in all their divisions. They’re seeing cash flows continue to improve. We should see this continue with the digitising of their pallet pool and reduced losses. So, they’re working towards optimising supply chains. They’ve announced a further USD400 million buyback with this result. We do expect continued strength in earnings, and their guidance again for FY26 is for 8 to 11% underlying earnings growth.

Another standout for us this reporting season was Lottery Corporation. They did have a solid result, but what really drove the share price up was the price increases they announced for Powerball. Following this, they’ve now got their two biggest games with mid-teens price increases. Powerball announced a price increase of close to 17% from November, so this just points to how much pricing power they have in the business and sets them up for another strong year.

Jason: Fantastic. Thanks for covering those, Mike. And maybe reflecting back on CSL now, it remains a key holding in the portfolios. Our clients are keen to hear about it. What are your thoughts, maybe Dan, on CSL now that the market has had some time to digest that result in August?

Daniel Moore: I think with any of our holdings, if they have a significant fall, we always do a big review. Really, the key questions we ask are: has the investment thesis changed? And has the quality of the business changed? Despite what we’d say was a slightly disappointing second half, I think we downgraded our earnings by two or three percent, but the investment thesis remains unchanged. It’s the number one player in what’s a very attractive sector, being plasma. The revenues of the business will continue to grow high single digits, and we see double-digit earnings growth into the medium term. So those things remain unchanged. And really, it’s again a question of valuation. When we look at the stock, it’s trading on roughly 18 times earnings, which is actually a discount to the market. I don’t think we’ve seen that before, actually. So it’s now cheaper than almost all the banks and many other companies. Our conviction remains the same, and we think it will provide good returns going forward.

Jason: Certainly been some heightened interest in it, with some of the other managers in the market taking positions over a more recent period as well. Were there any other holdings – obviously, it’s really the resources and banks that dragged on the performance over the quarter – anything else to point out on the downside?

Daniel: Probably the other one was Amcor. They had a slightly weak result, a bit exposed to the US consumer, where we saw packaging volumes down roughly 1 or 2% for the quarter. That was a little bit soft, but by and large, the results were pretty solid across the portfolio.

Jason: OK, thanks. If we maybe pivot to some of the trading over the quarter, what changes has the team been making across the large cap funds? Certainly keen to hear about any new names or positions that you’re excited about in the portfolio.

Daniel: The big one was Dalrymple Bay Infrastructure, which we’ve taken quite a large position across all portfolios. Dalrymple Bay Infrastructure owns the port at Dalrymple Bay in Queensland. It is one of the larger ports for exporting met coal and is actually the cheapest port in the state to export coal. It’s a fantastic monopoly asset. Their revenues are 100% contracted, 100% take-or-pay, which means if there’s bad weather or any disruption, they still get paid no matter what. Those port charges grow by CPI every year, and the demand for the port is roughly 40 to 50% in excess of the capacity of the port, because it is one of the cheaper ports in the state. What we really like is that we bought this company on a yield of 6.5%, and that yield should grow by 3 to 5% per annum, which is fantastic. Actually, there’s this opportunity in 2031 when there’s a price reset, where we see an opportunity for prices to rise somewhere between 20 to 50% because of that excess demand. So, yes, a real high-quality asset with good inflation-plus growth, trading on a yield of 6.5%.

Jason: Sounds like a compelling opportunity. Thanks, Dan. Now, maybe just in finishing up, reflecting on all of this news, obviously it’s been a volatile year to date. It seems like a lifetime ago that we had the volatility, that sharp sell-off in that February-March period with the Trump tariffs. We find ourselves at plus 10% year-to-date for the first three quarters for the ASX. Quarter four tends to be seasonally pretty strong. What are we thinking? Are we heading for another double-digit year?

Daniel: Always hard to know. Look, I mean markets have been really strong in pockets. The financials have been a big driver of markets, and tech as well. Retail stocks have been very strong. I think at an aggregate level, valuations are very stretched, but that doesn’t mean they can’t keep going, of course. But just from our perspective, we’re being really vigilant with the stocks we own in the portfolio, making sure the reasons we own them are based on fundamentals, and we’re not just owning the stocks because they have strong momentum. The good news is that despite valuations being pretty high at an aggregate level, we are finding really good opportunities like Dalrymple Bay, and that’s the focus of the team—to find really good high-quality businesses at attractive prices.

Jason: Right. Well, thank you, Dan. Thank you, Mike. Always a pleasure. We appreciate your insights, and thank you to our listeners today. Thank you, and if you enjoyed the episode, please click follow on your favourite podcast platform and tune in again very soon to hear more from our global collective of experts.

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