Luke's Fund achieved the following returns over H1 2023:
FY Q1 2023: Fund return of 2.6% vs ASX 200 accumulated return of 0.7%
FY Q2 2023: Fund return of 1.5% vs ASX 200 accumulated return of 9.5%
For the six months, Luke’s Fund returned 3.8%, vs the ASX 200 accumulated return of 10.2%. Our portfolio as at December 31, 2022 is outlined in Figure 1 below:
Figure 1: Portfolio Breakdown
The breakdown of our holding’s contribution to performance over the Financial Year is outlined in Figure 2 below:
Figure 2 – Contribution Breakdown Bar Chart
Over the six months to December 31, the portfolio performance breakdown according to macro regimes is outlined in Figure 3 below:
Figure 3 – Macro Regime Contribution Breakdown Bar Chart
The deflationary regime holdings underperformed the market as inflation, and high commodity prices supported commodities heavy Australian equities. Of note, there appears to have been a regime change, with the ASX outperforming the US indices, and global equities as outlined in Table 1. Trend & Momentum are certainly in favour of the ASX 200.
Table 1 – Major Index Trend & Momentum - 1 Month to 12 Month
Trends & momentum have proven to be an effective indicator of future asset class performance, and we have incorporated a monthly trend and momentum review to guide our portfolio weightings across indices and asset classes. Trend reversals are inevitable, however, our monthly review across multiple timeframes will enable us to adjust our positioning according to short term trend reversals.
PORTFOLIO BREAKDOWN
The breakdown of the portfolio according to Macro regime as at December 31, is outlined in Figure 4 below. We sold down our deflation regime holdings, and increased out exposure to inflation & reflation regime holdings to account for the right tail risk of China re-opening its economy.
Figure 4 – Portfolio Macro Regime Breakdown
With to 3 month / 10 year US bond yield showing a sustained inversion, we retain our relatively defensive position. We expect there to be near term tailwinds driven by the post-COVID Chinese economic rebound, although the magnitude of economic stimulus remains to be seen. It may be a year of two halves, defined by China reopening, and the US falling into recession. Time will tell.
Our review of asset class trends is guiding us towards increasing our exposure to the ASX, and gold. We interpret the ASX as a proxy for commodities, and this sector of the ASX is where we will allocate additional capital.
TRADING ACTIVITY
We made the following portfolio changes over the six months to December 31:
We sold all our deflationary hedge positions.
We sold IntelliHR, as revenue growth slowed, and poor cost control left our remaining capital at too high a risk.
We sold out of Camplify, reduced our Pointerra position (with a view to closing out our position in early 2023), to reduce our exposure to high beta companies, which tend to underperform in recessionary environments.
We sold out of Santos, and brought Yancoal. Yancoal's valuation, and capital management policy were too attractive to us. We see Yancoal's dividend policy providing good downside protection (paying out +50% of cashflow), and inhibits managements ability to destroy shareholder capital, which occurs all too often in the resources sector.
We sold our remain Graincorp shares early in the half, on signs of flattening grain prices and an unfavourable harvesting environment.
We trimmed our Talga position to manage risk into an upcoming capital raise. However, we failed to benefit from the SPP, due to the premature closing of the SPP.
COMPANY NEWS & REPORTS
Notable news from our holdings included:
Talga Group Ltd
Over the 6 months to December 31, the following notable events occurred:
European Investment Bank begin due diligence into providing $300 million Euro in funding for Vittangi anode project.
mining permitting / court hearing date finalised for February 2023.
Non-binding offtake agreement with ACC (Mercedes) for 60 kT on anode supply.
Successful $32 million capital raise.
KEY LEARNINGS
We have found asset allocation during inflationary times, such as these, is hard. Damn hard. The current investing environment is unlike any we have experienced in our lifetime. We can only learn and improve through our mistakes, and one factor that impacted our performance was our short positioning during this period. It lacked sufficient rigour in terms of entry timing, where little more than macro risk regime portfolio balancing drove the decision making process. We closed out our shot positions this half, noting our positioning was based on our global fund hedging approach, which in not necessarily correlated to Australian equities.
Momentum investing has demonstrated significant relative outperformance in a number of research papers, including this one. We will incorporate a review of asset price momentum and trending into our asset weighting process, in combination with 42Macro macro regime guidance.
If you have any opinions on the companies we hold, or what like to know more, we would love to hear your feedback.
Regards,
Sean