IML investment update – October 2022

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IML Portfolio Managers, Daniel Moore and Tim Wood discusses how IML’s funds, and the markets, performed during October 2022.

Edited transcript

Daniel: So, global markets had a really strong month in October. The Aussie index was up about 6% which was sort of about average actually, some global markets were a little bit worse, some were a bit better. The Dow was up 14% in October, which was the strongest month since 1976. Incredible month. Tim: any thoughts for the month?

Tim: yeah, well as you know Dan I cover the resources space and the big move in my space this month was really iron ore. Iron ore fell from $95 a ton at the start of the month, to $80 at the end of the month. We really think that that’s because of global recession fears and a slowdown in China. The Covid zero policy that they’ve got.

Daniel: Absolutely. And then looking at our funds, how did our funds go for the month?

Tim: So our funds, the large cap funds were up between 4% and 6%, so slightly lagged the very strong market that we saw, and really that was down to our underweight position in the banking stocks. Were there any stocks that you found particularly interesting during October?

Daniel: Yeah. As always, Tim, we have some good performers and some poorer performers. So, on the positive side, Suncorp was a really good performer for us. It was up 14% for the month. Insurance in general had a pretty good month. As I guess people are appreciating the exposure they have to rising interest rates on the float they have from everybody’s premiums. They earn interest income, and that’s been, that income stream’s rising quite rapidly

Tim:  As interest rates go up. And they’re still looking to sell their bank aren’t they?

Daniel: They are, so they’re selling the bank for a really good price to ANZ, and that will really simplify the company. You know, they’ll be a pure play, insurance business, which we’re pretty excited about longer term. And then on the negative side, really Medibank, unfortunately. The cyber incident. It was a poor performer, it was down 19% for the month. Its market cap actually fell 1.8 billion dollars which we definitely feel is, while it’s a really unfortunate  incident, an over-reaction to sort of what the economic reality of this is.

Tim: Right, have they quantified what it’s going to cost them?

Daniel: Yeah. So the costs of the event will be around $20-30 million, one off. And we suspect there’ll be some ongoing increase in IT security costs, maybe 10 to 20 million dollars a year. Obviously, there’s some reputational damage. They might lose a little bit of share in the short term. But as investors, it’s really important, you know, for us to look longer term. And if you sort of look forward one to two years from now, from today, they’ll still be the biggest health insurer in the market. The reputational damages, I think, will subside over that period of time. And given this instance, they’ll probably have the strongest cybersecurity of all the health insurers.

So, we actually used this as an opportunity to increase our holding in the funds. We’re still excited about the long-term prospects of the business. Any other stocks Tim?

Tim: I guess, from my coverage, Brambles was a really interesting result for me. As you know, it’s a company that we’ve liked for a really long time –
really good management team, really good board, great industry structure. I think what they showed through the September quarter, they released the numbers in October, and they’ve been able to put up prices in the Americas by 18%. You know, we’re really looking for companies that can pass on these higher inflation costs and that really proved that to us. So, you know, US price is up 18% and a little bit of drop of volume. So overall revenue in the US was still up 16%.

And then the European business where we really haven’t seen significant price rises for quite some time, the inflation-linked contracts that they have though, have really kicked in this quarter. And we saw price increases in the European region up 10%, and also volumes up 4%, so 14% growth in their European revenues. Now, obviously offset by the euro’s falling a little bit. And so in US dollars, which is what they report in, it wasn’t quite so strong.

Daniel: I must say pricing power is just such an important thing for a company to have at the moment, with inflation where it is.

Tim: Definitely. The quality of the management teams being able to pass through those higher prices is really, really important.

Daniel: So I guess now just looking at the outlook, moving forward, I think it’s fair to say we still see the twin risks are still present, you know, rising interest rates and rising inflation, which impact both the consumer and corporates. But what what are your thoughts, Tim?

Tim: Well, obviously, volatile environments like this create good opportunities for us as active investors. And, you know, the stocks that I’m looking at, I’m finding them more attractively valued than we’ve seen for a long time, and as you know, we’re doing a lot of work to add new names to the portfolios at the moment.

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