How did IML’s large cap funds finish the financial year?

Featuring Daniel Moore and Michael O'Neill

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In this podcast IML large cap portfolio managers Daniel Moore and Michael O’Neill talk to Mark Williams from Natixis Investment Managers about:

How IML’s large cap funds performed to round out the financial year
The big turnaround in June as resources faltered and industrials surged
What they have been buying and selling lately
Their outlook for reporting season and the rest of 2026

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Lightly edited transcript – Recorded on 6 July 2026

Mark: Plenty going on as always. There seemed to be quite a lot of change during the June quarter. Can you talk us through this and how it impacted IML’s portfolios?

Daniel: Sure, it certainly was a busy quarter and we really started the quarter out in the middle of the Iran war. I think oil prices were around $120 and we saw the oil stocks and resource stocks perform extremely strongly through April and May, which was a pretty tough time for our funds because industrial stocks, not only did they not go up, they were actually sold off quite heavily as people were worried about higher energy costs and the impact that will have on business margins.

But fortunately for us, we saw a big turnaround in June with some resolutions looking more likely. And we saw the oil price fall all the way back to around $71. We saw the resource stocks come off, particularly the more speculative ones, and industrials caught a bid. We saw a number of our high-quality industrial businesses bounce pretty strongly — in some cases, over 20% in the month of June. So, all in all, the market was up roughly 4% for the quarter and our funds were up around 3 to 3.5%.

Mark: Turning now to the financial year, a tough year for IML’s large cap funds and many active managers. What drove this relative underperformance and what do you think investors need to be aware of from the past year in markets?

Mike: Yeah, so Mark, if you look at what happened last financial year, resources were actually accountable for more than 100% of the index’s gains. We saw resource stocks up 50% and industrial businesses were, as a group, left behind. They were down 4.5% in aggregate. So, missing out on this momentum in resources really was a drag on portfolios. Even some of our quality holdings in industrial businesses that were actually growing earnings got left behind in this rally.

Now, we do actually hold sizable positions in BHP, particularly in our Australian Share Fund, but it was our lack of exposure to some of the more speculative parts of the mining sector where we saw the greatest momentum, particularly when you look at the lithium and rare earth stocks, that meant we were left behind.

Mark: Thanks, Mike. And as for individual stocks, which companies had the biggest influence on IML’s funds over the June quarter, both positive and negative?

Mike: Steadfast was a big contributor. It was up 20% for the quarter. They own Australia’s largest insurance broking network and underwriting agency businesses. Their share price had been sold off over 30% financial year to date at the start of June, despite delivering earnings growth of 7%. The main reason was fears of AI disruption to insurance broking and underwriting agencies.

Now, this is a business we’ve owned since IPO in 2013 as a high-conviction position. It’s delivered 13% compound earnings growth over time during that period, and they do have enviable client retention rates of 95%. In fact, they are investing ahead of competitors in technology and AI.

So, on the 18th of June, fortunately our view that the AI risks were overblown was validated when they received a takeover bid at a 52% premium to the share price.

Daniel: Yeah, Orica was also up 20% for the quarter, which was pleasing. They released a result in May, similar to Steadfast, growing high single-digit. It is the market leader in explosives doing a good job, so that was a good performer for us.

Suncorp was also up 20% as well, which was positive. And then on the negative side, CSL was down 18% for the quarter. They had another downgrade earnings update, but I will say the downgrade was relatively small — it was only a few percent — but the stock got sold off heavily.

Since its lows in the early part of June, the stock is now up 40% off the lows. It unbelievably got down to a PE of around 10 times earnings. So, yeah, pretty aggressive selling, but pleasing to see we are well off the lows now.

Mark: Fantastic, and that’s probably a good segue for you to talk us through what you have been buying and selling over the past few months.

Mike: Well, as you’d appreciate, the volatility in the markets with the Iran conflict, amongst other things, has presented opportunities. Often we find when stocks sell off on short-term pressures, some of these can provide the best opportunities to get set in stocks where we think the fundamentals are intact.

One of these was Cleanaway. Fuel costs are a big impost and part of their cost base as the largest player in the waste industry in Australia. They do own irreplaceable assets like transfer stations and landfills, so we like the business, and their earnings are predictable and recurring. We also like their program of investment in transformation and digitisation to optimise their routes and grow their earnings.

The fact is Cleanaway actually have pass-through arrangements for fuel prices, so the impact of higher prices of fuel does get passed through with a lag. It means we can buy a company where the earnings outlook is still double-digit at quite a reasonable price. Another example is Sigma, Daniel.

Daniel: Yeah, Sigma was sort of similar. It really sold off with the other industrials, particularly the retailers, as people were worried about the impact of higher petrol prices on consumer spending. It’s a business we already own in the portfolio, but after our channel checks, talking to suppliers, we discovered that as a discounter, they were actually winning a lot of market share during that period and their sales growth was actually accelerating, not slowing.

So, we used the share price weakness as an opportunity to top up our position at favourable prices, which was good. And then on the other side of the coin, what were we selling? We’re really just selling the companies where their share prices had been quite strong and reducing our positions. So, probably wouldn’t surprise you, we were selling our oil stock holding Santos as it got to around $8, and we were also reducing our bank positions.

Mike: Yeah, I mean, so I guess we’ve talked in the past about our concerns around banks, particularly around valuation. We see banks as stretched, but we’re also seeing emerging risks. The concern today is that loan growth is going to be harder to achieve in future, and particularly with the added concern of investors pulling out of property markets post the May federal budget changes to CGT and to negative gearing.

So, we’ve seen already clearance rates fall below 50% in New South Wales and Victoria. The other one is the risk of higher bad debts, because bad debts have been quite low for a long time, but we’re now seeing early signs of some stresses recently with Judo Bank’s announcement of a few problematic exposures it has as an SME-focused lender.

Mark: Thanks for those detailed insights. Just to close out, looking ahead to reporting season and the rest of the calendar year, what are the main things you are keeping an eye on? And do you think that this market rotation that we discussed earlier is likely to continue?

Mike: Yeah, so in reporting season, we’re keeping a close eye on property market weakness, on cost of living pressures, and on the impacts that the consumer faces. We’re sort of asking ourselves how companies might manage cost inflation with wages rising and other input costs rising, and for the companies we look at, just being sure of their pricing power to pass on higher costs. At an industry level, I think it’s a good time to be doing channel checks, looking at competitive behaviour, and just making sure that the industries behave rationally and don’t chase market share.

Daniel: Yeah, and I think from a portfolio level, we feel pretty well placed. The majority of our businesses are industry leaders. Their revenues are quite predictable and recurring. By and large, most of them have really good pricing power or even contracted CPI increases like Cleanaway, which we just talked about — Orica is another one, DBI, you know, I could keep going.

So, we think they’re well placed to really weather any storms if they do eventuate, whether that’s cost inflation or economic weakness related to property and the consumer.

Mark: Thanks, Dan and Mike. Great to get an update on how IML’s large cap funds and holdings have been going. And thank you to all our listeners for tuning in. Please click follow on your favourite podcast platform to hear more from the team at IML, as well as others in our global collective of experts.

This podcast has been prepared and distributed by Natixis Investment Managers Australia Proprietary Limited, ABN 60 088 786 289, AFSL 246830 and includes information provided by third parties, including Investors Mutual Limited (“IML”) AFSL 229988, the responsible entity and investment manager for the IML Funds.

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