The ASX 200 Accumulated Index was down 1.6% for the month of April, and Luke's Fund achieved a return of -2.1% over the same period, bringing the Fund’s returns for FY2022 to 7.3% to date, compared to the ASX 200 Accumulated Index return for year to date of 3.6%.
The breakdown of our holding’s contribution to performance over the April is outlined in Figure 1 below:
Figure 1 – Contribution Breakdown Bar Chart
The top two contributors over the month were Graincorp and Elders, both benefitting from upgrades to earnings guidance. A breakdown of contributions, according to Macro segment, is outlined in Figure 2, shows there were declines across the board, primarily impacted by company specific news over the month.
Figure 2 – Macro Segment Contribution Breakdown Bar Chart
The breakdown of the portfolio as a the end of the month is outlined in Figure 3 below. Over the month, our exposure to investments that perform well in Goldilocks / Reflationary macro reduced to 17%.
We note, the majority of our deflationary assets will be within Luke’s Global Fund, given the ‘risk on’ characteristics of the Australian dollar.
Figure 3 – Portfolio Macro Segment Pie Chart
The magnitude and duration of the inflationary environment will possibly be higher/longer than we anticipated, and we have adjusted out portfolio to address this development, noting our deflation assets will underperform in the current environment.
We made the following portfolio changes over March:
We sold out of Electro Optic Systems, following adverse news on the contracts front, and further delays in signing offtake agreements for the satellite business.
We sold out of Dusk Group, given discretionary retail will underperform in a deflationary environment, which 42Macro analysis indicates will most likely be the dominant macro regime over the next 6-12 months.
We added exposure to oil / natural gas producers through a position in Santos as part of our Inflation macro holdings.
We added exposure to industrial metals, through Metals X Ltd as part of our inflationary macro holdings. We discuss this decision in our Key Learnings section.
We held 24% cash at the end of April.
COMPANY NEWS & REPORTS
Notable news from our holdings included:
Electro Optics Systems
We exited out of our remaining position in EOS, due to confirmation of a break in the investing thesis. The thesis break was confirmed in the following business units:
The CEO always claimed their remote weapons system was the class leader, however, their failure to win the RWS contract for the recently awarded Abrams tank contract contradicts this claim.
Inability to sign offtake agreements for Spacelink, within their guided timeframe.
The downgrade to the constellation indicates funding challenges for the project.
CFO resigned without notice or explanation.
Rumours that Rheinmetall is the preferred IFV contractor, with the award delay consistent with Defence using the IFV contract as leverage on Rheinmetall to rectify the underperforming Boxer contract.
Strategic review indicates significant challenges ahead for the business.
Graincorp released an upgrade to earnings guidance for FY 2022. Underlying NPAT was upgraded from $235-280 M to $310-370 M. That is about a 30% upgrade. The upgrade is attributable to increased demand for Australian grain and oilseeds, and favourable planting conditions for winter crops.
CEO, Mr Spurway said of the results:
“The conflict in Ukraine and resulting trade disruptions in the Black Sea region have created uncertainty in global grain markets, with buyers looking for alternate sources of supply. This has further increased both the demand for Australian grain and oilseeds and export supply chain margins.”
“Recent weather patterns and continued La Nina conditions have provided excellent planting conditions for the 2022 winter crop to date, building confidence in grain supplies from ECA and further supporting export sales and supply chain margins.”
“Despite recent weather-related supply chain disruptions across the ECA, we are continuing to operate our ports at close to full capacity, exporting as much grain as possible to international markets. Our supply chain resilience demonstrates the value of our infrastructure assets and is testament to the capability of our operations and
KEY LEARNINGS FROM THIS MONTH
We made an error in our portfolio allocation this month, adding an industrial metals producer to our inflation regime portfolio. This was a mistake, as industrial metals are typically the first commodities to decline during a transition to a deflationary environment. We purchased our Metals X position too late into the cycle, and have possibly invested close to its near term valuation peak. We plan to exit our position in May.
If you have any opinions on the companies we hold, or what like to know more, we would love to hear your feedback.