The ASX 200 Accumulated Index was down 0.6% for the month of November, and Luke's Fund achieved a return of -0.5% over the same period, bringing the Fund’s current returns for FY2022 to 14.0%, compared to the ASX 200 Accumulated Index return for year to date of 3.2%.
The breakdown of our holding’s contribution to performance over the past month is outlined in Figure 1 below:
Figure 1 – Contribution Breakdown
The top contributor over the month was:
1. Novonix Limited, which continued its October rally, with no material news announced during the month.
The top detractors over the month were:
1. Damstra Holdings, which continued to fall following its poor market update in October.
MACRO RISK OVERVIEW
We will be changing our reporting format going forward, incorporating macro economic risk into our portfolio profile. The portfolio will be divided into the following macro categories, with a description of the applicable investments:
1) Goldilocks / Reflation Holdings, consisting of:
High Beta
Small Cap
Technology
Consumer Discretionary
Crypto Industry
2) Inflation Holdings, consisting of:
Low Beta
Utilities
Consumer Staples
Real Estate
5-10 year TIPS
Gold
3) Deflation Holdings, consisting of:
Low Beta
High dividend yield
Healthcare
Long Bonds
The breakdown of the portfolio, as at November 30, 2021, is outlined in Figure 2 below. The portfolio is predominately exposed to a Goldilocks / Reflationary macro environment. Clearly, the portfolio is exposed to significant valuation reversion in an inflationary, and particularly, a deflationary regime. 42 Macro's current assessment indicates there is a 71% probability the global economy will be within the deflation regime come March 2022.
Figure 2 – Portfolio Macro Segment Pie Chart
To outline how the macro economic environment impacts company valuations, we have back tested Xero's (XRO) Earnings Valuation/ Sales Ratio over the recent macro regime cycles in Figure 3 below. Xero is considered a high quality software business, with recurring revenue, growing in excess of 20% per annum. During 2019, XRO traded within an EV/S ratio range of 12 to 16.
Figure 3 – XRO EV/S Ratio over Marco Regime
Figure 3 shows XRO's valuation increased from an EV/S ratio of 15 at June 30, 2020 at the beginning of the reflation regime, peaking at 25 shortly after the goldilocks regime ended. There is one certainty in macro regimes, and that is, deflation regimes ALWAYS follow inflation regimes, as the very act of inflation sows the seeds of its own demise (increasing costs stifles demand). This reality does not bode well for valuations of high beta assets such as XRO, in the near to medium term, irrespective of their quality. There may be an opportunity to buy XRO at EV/S ratio closer to 10 over the coming six months.
TRADING ACTIVITY
We made the following portfolio changes over November:
We continued trimmed our Novonix Holdings position over November to reduce its portfolio weighting, based on what we consider to be a stretched valuation.
We closed our position in Damstra Holdings.
We trimmed Cleanspace and Talga Group.
We opened a position in unlisted company MeldCX.
We added to our position in CRYP ETF.
We held 0.1% cash at the end of November.
COMPANY NEWS & REPORTS
Notable news from our holdings included:
Cettire
Cettire reported strong sales in in the first 4 months of FY2022, with Gross revenue up 184% on the previous corresponding period.
Talga Group
Talga announced its tripartite MOU with Mitsui and LKAB has ended without a deal being settled, with LKAB walking away, and Mitsui to continue negotiations into 2022.
KEY LEARNINGS FROM THIS MONTH
During November, as discussed in our Global Fund Update, we have flagged that our Macro risk management strategy is, well, non-existent as at the end of November. December will be a period where we will focus on adjusting the portfolio make-up to better reflect the macro risk environment for early 2022. Our portfolio make-up will be highly reliant on the macro quantitative analysis provided by 42 Macro through their "Around the Horn" service, which provides a 6-12 months macro risk outlook, updated weekly.
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