Investors Mutual All Industrials Share (IML0004AU) Report & Performance

The Fund was up +2.0%, though it lagged the very strong benchmark which rose +3.1%.

The Fund lagged the benchmark partly due to some holdings pulling back after strong recent performances, including Brambles, Aurizon and Telstra. Weaker relative performance was also due to a global rally in more speculative companies.

Orica was up strongly as investors grew more optimistic about its growth outlook amid a strong month for commodities. Nine also performed well, rising alongside other consumer-exposed companies. Aurizon had a poor month, falling -3% after an investor day in Darwin underwhelmed investors on short-term earnings, despite the company detailing a positive long-term growth strategy.

Despite euphoria around a possible ‘soft landing’, many companies face headwinds. Consumer demand is slowing but is still above pre-Covid trends. Inflation has reduced, but significant rises in electricity and gas, insurance premiums, and services wages mean inflation must still be contained. We continue to act cautiously, focusing on industry-leading companies with strong competitive advantages and recurring earnings that are likely to perform well in a range of economic conditions.

 The All Industrials Share Fund had a solid quarter, returning +2.3%, slightly ahead of the benchmark’s +2.2%. This took the Fund to a solid return for the full financial year of +11.0%, slightly behind the benchmark’s return of +11.7%.

 Global markets had a very strong quarter with the MSCI World Index up +6.7%, led by the Nasdaq, +13%. The gains were partly driven by optimism that the rate-rising cycle was near its end, as well as excitement about AI after US chipmaker Nvidia significantly upgraded its forward guidance. This caused a narrow-focused rally, driving markets higher.

 The ASX 300 lagged global markets, rising +1.0% for the quarter, as the strong lead from overseas markets was tempered by somewhat unexpected RBA rate hikes which made investors more cautious. Information Technology was by far the strongest sector, rising +18.4% as tech stocks rallied in line with overseas markets. Consumer-facing sectors also struggled as interest rates continue to bite.

 The Fund benefitted from strong performances from Aurizon, as explained below. IAG and Suncorp also were also up significantly amid continuing good trading conditions for the insurance sector. Premiums are increasing significantly, and investment income is benefitting from higher rates.

 Amcor was disappointing over the quarter, falling after it downgraded its outlook due to food and beverage companies destocking, as well as weakening demand from end customers.

 We used share price weakness to increase our positions in Charter Hall Retail REIT and Fletcher Building and heightened share prices to trim our position in IAG.

The Fund was down -1.6% in May, though ahead of the benchmark which dropped -2.0%.

Many of our key holdings performed well during the month. Our relative performance was buoyed by our low exposure to consumer discretionary retailers, which fell heavily due to the interest rate rise which took some investors by surprise. Aurizon performed strongly, up 4%, continuing its recent rise as haulage volumes improve. Tabcorp also performed well, up 9%, as confidence increased in its Victorian licence renewal.

Amcor had a poor month, falling 8% after it downgraded its outlook due to weakening packaging volumes.

Economies still face significant issues, setting a challenging backdrop for companies. Consumer demand has slowed but is still robust compared to pre-Covid trends. Inflation is proving persistent, with wage gains and house prices ticking up. Further interest rate rises are probable. We continue to act cautiously, focusing on industry-leading companies with strong competitive advantages and recurring earnings that are likely to perform well in a range of economic conditions.

The Fund performed well in April, up +2.9%, though behind the benchmark’s very strong return of +3.5%.

Many of our key holdings performed well including Brambles, which was up 6% in April, after improving its pricing and margins and so upgrading guidance. Virgin Money also rose, bouncing back well after dropping last month on concerns around the banking crisis. Medibank Private, TPG, Orica and Tabcorp also performed strongly. The Lottery Corporation had a disappointing month, dropping slightly after smaller jackpots impacted revenue.

The continuing sharemarket strength implies a belief in a painless retreat from high inflation as well as an early easing of interest rates. There are risks to this scenario, with inflation only likely to fall with consumer belt tightening and a rise in unemployment. The companies in the fund are well-established with competitive advantages and recurring earnings, making them more resilient and likely to perform well in a range of different economic conditions

The All Industrials Share Fund performed well over the quarter, +2.0%, slightly lagging the benchmark’s +2.3%.

The MSCI World Index was up +7.2% for the quarter, similar to the prior quarter. However, it has been a more volatile ride. Markets rose strongly at the start of 2023, then fluctuated as investors’ fears about interest rates, inflation and a slowing global economy waxed and waned. Things came to a head in March as a US regional banking crisis unfolded and spread to Europe, then eased as regulators took steps to calm markets.

The ASX 300 lagged global markets, up +3.3%, with mixed performance at a sectoral level. Most sectors were up, with Consumer Discretionary strongest, up +10.8%, driven by investors’ willingness to take on more risk and some strong individual performances followed by Communication Services (up +9.5%) off the back of Telstra’s strong performance. Financial Services was the weakest, down -2.7%, on worries about the unfolding banking crisis and mortgage competition. Real Estate also was down slightly on concerns of falling commercial property values and rising interest rates.

The Fund benefitted from strong performances from Telstra, Brambles, Medibank and The Lottery Corporation after they announced strong first half FY23 results. Sonic Healthcare also performed well, rising as it reported strong underlying earnings despite its overall revenue dropping as the Covid testing bonanza faded.

Aurizon’s performance held the fund back over the quarter as it announced lower-than expected earnings due to poor weather. Amcor was also down as it reported declining packaging volumes in some categories. We believe the issues for both stocks are temporary and we are confident in their long-term prospects.

We used share price weakness to increase our positions in Sonic Healthcare and Tabcorp and heightened share prices to trim our positions in The Lottery Corporation and Newscorp.

The Fund was up slightly in February, +0.4%, ahead of its benchmark, which dropped -1.1%.

The main reason for the Fund’s better relative performance was resilient performances by many of our key holdings in a month dominated by reporting season.

Many of the Fund’s companies rose strongly after announcing positive results including Brambles, Medibank and The Lottery Corporation. Aurizon had a disappointing month, sold down after it reported a drop in earnings due to poor weather which affected the amount of coal transported during June to December 2022.

Global markets were weaker during February as inflationary concerns resurfaced and bond markets sold off. We continue to position the Fund in well-established, profitable companies that are well-positioned to perform well in these uncertain economic conditions, while staying alert to any opportunities that the current market volatility brings.