Featuring Hugh Giddy and Michael O'Neill



Portfolio Managers Hugh Giddy and Michael O’Neill discuss what drove markets over 2023 and how the IML large cap funds performed. They also discuss key holdings in the funds and provide an outlook for 2024.

Edited transcript

Michael: This quarter was a bit of a sprint to the finish, but you wouldn’t say it’s been a gold medal year for us, has it?

Hugh: No. To be honest,  it’s been a tough year. Happy new year to our viewers. 2024 is going to be a better year for our funds, I’m pretty sure because last year was really tough. The ASX was up 12.5%. Obviously everyone likes their market to go up, who is invested in the market. But it was a tough market because it was really quite speculative. You saw the world index up 22%, and the Nasdaq, very tech focused index, up 45%.

When you look at our market, it was highly-priced, market darlings that did really well. Some big companies that we just find them quite hard to own because they’re so expensive. Things like WiseTech, Cochlear, Realestate.com, James Hardie – up between 50% and over a 100% in a year. Which are extraordinary performances, often without any great earnings performance, just valuation. While steady much cheaper sort of stocks that we own, Telstra, Chorus, Metcash, Amcor, were flat to down. So it’s a tough environment for us, but we did have obviously some stocks of interest that we think worth highlighting.

Michael: Another disappointing stock for us was Tabcorp. So they, in their wagering divisions, they suffered weaker volumes because of cuts to discretionary spend. However, there was some positive news midway through last month. They finally announced the renewal of their Victorian wagering licence. In fact, securing a two decade exclusive licence. That’s positive news for shareholders. And there are some hints that they are, starting to execute well on their digital strategy and in fact, signs of regaining market share.

One other stock that was disappointing for us was Amcor. We saw weaker customer demand. We saw some impacts of destocking of customers. But things should get easier from here as they start to lap those weaker volumes of last year.  And the price increases now that we’re seeing moderation of inflation that they need in order to recover their input costs are not as high as they were. So the earnings margin trajectory should improve from here.
Now there were some bright spots in the portfolio. Medibank in particular, it was up 25% in the past year, shrugging off the cyber incident of October 2022 and actually showing some volume growth. As an insurer, they are a beneficiary of higher interest rates.

If you think about the investment earnings that they earn on the funds they put aside to pay future claims for policyholders, those investment earnings have returned.

Similarly, Suncorp did well for the portfolios up 20%. Again, higher interest rates benefit them through the investment earnings on their policyholder funds. But they’re also showing that they are able to not only grow some volume, but achieve some margin recovery, pushing through higher prices to recover higher claims inflation, higher weather costs, and also higher cost of reinsurance. So, some some real bright spots in the portfolios. Hugh, as we leave as we leave 2023 in the rearview mirror, what do you foresee for the year ahead?

Hugh:  Well, if you look at sentiment indicators,  you’d think it’s sort of to infinity and beyond Buzz Lightyear style. People are very optimistic. There’s been a lot of optimism around cryptocurrencies – they went up like crazy last year! A lot of people have really bought this market and the idea that interest rates are coming down, it’s all good. And they don’t seem to realise that one of the ingredients of lower interest rates is not just lower inflation, but it’s probably higher unemployment and weaker growth. So people often want their cake and to eat it, but it might not be possible. So I see the road ahead as unlikely to be completely smooth.  I think there’s some potholes, as most Australians would appreciate on our roads, but also for the market ahead.  I think we’re quite well positioned with stocks that will deliver in pretty much all environments.

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