Ironbark Royal London ConcentratedGlbShr (MGL0004AU) Report & Performance

The Ironbark Royal London Concentrated Global Share Fund returned 6.18% (net) for the quarter, outperforming the MSCI World NR AUD by 2.11% which returned 4.07% over the period.

Steel Dynamics, Sumitomo Mitsui Financial Group and HCA Healthcare were strong contributors to performance during the quarter of 2022. Steel Dynamics, the US steel manufacturing and fabrication business in the ‘Accelerating’ category of the Corporate Life Cycle, performed strongly from an operational perspective. Facilities were running at high utilisation levels. Beyond the commodity steel business value add is generated through offering customers coatings and painting of the raw steel, and an increasingly significant fabrication business. The company has reinvested in a new steel mill in Texas and is planning an aluminium mill. The shares joined the US S&P 500 Index on 22 December. Japanese financial group Sumitomo Mitsui Financial Group (‘Mature) –posted earnings that exceeded expectations this year, helping to drive strong performance from the shares. There is a focus on improving returns on capital and managing costs. The company has several initiatives to execute on especially in overseas markets, though key is the consistency of the attractive returns in the domestic market. The company continues to offer an attractive valuation payoff. US hospital operator HCA (‘Compounding’) benefited from the additional healthcare spending during the pandemic and then from the catchup of procedures that were postponed due to the pandemic. Labour availability and costs were a challenge earlier on in the year though the company is managing this and passing costs on through higher fees, demonstrating its pricing power.

Amazon, Lithia Motors and Alphabet detracted from returns over the period. Online retail giant Amazon in the ‘Slowing & Maturing’ category underperformed as a slowdown in the AWS cloud business growth was a notable concern as was guidance for the quarter. The investment manager continues to view the business as having strong competitive advantages and an attractive valuation payoff. Lithia Motors in the ‘Slowing and Maturing’ category of the Life Cycle has faced concerns about declining second hand car values and the continued shortage of new cars associated with supply chain disruption. The North American car dealership network had a challenging quarter for earnings. Having enjoyed high prices for used cars in recent years, supply chains are normalising and putting downward pressure on sales and margins. The investment manager’s analysis suggests that the valuation pay-off remains attractive as while short term trends are negative, the shares are pricing in an excessively negative scenario. Alphabet Inc, the parent company of Google ‘Compounding’ has been impacted by falling advertising rates as competition for space from other online companies has reduced pricing. There are concerns over the impact of AI products such as OpenGPT and what impact they might have on the search business. This is unclear now though the investment manager believes that there is increasing financial discipline at the company and the valuation pay-off remains attractive.

The Ironbark Royal London Concentrated Global Share Fund returned 0.33% (net) for the quarter, leveling the MSCI World NR AUD which also returned 0.33% over the period.

Steel Dynamics, HCA Healthcare, Reliance Steel and Amazon were strong contributors to returns in the third quarter. Steel Dynamics, in the ‘Slowing and Maturing’ Life Cycle category, has gained on the back of elevated steel prices which persist well above the pre pandemic average. Margins in the business remain elevated, supported by the fabrication business. Excess cash is being used for a combination of buybacks and investment into a new aluminium rolling mill. HCA Healthcare, the hospital giant in the compounding phase, during the period has actively managed higher labour costs which have increased in recent quarters. However, HCA is ultimately a solid long-term ‘Compounder’ which benefits from unparalleled scale and high barriers to entry. There should be decent long-term growth opportunities with a focus on share buybacks between physical investments. Reliance Steel, in the ‘Slowing & Maturing’ Life Cycle category, has seen another quarter of record results with gross profit and cost control well ahead of targets. Cash generation meanwhile also continues to pick up. Reliance Steel has been ploughing cash into share buybacks over the last twelve months this has amounted to almost $600 million. The board has just given fresh authorisation for $1 billion of buybacks. Given the company’s attractive valuation, the investment manager believes this represents a good use of shareholders’ capital. Meanwhile, online retail giant Amazon in the ‘Slowing and Maturing’ category of the Life Cycle Framework announced a strong set of second quarter results – second quarter net sales were up 7% reported or up 10% at constant currency, which is a solid growth rate given the lockdown comparison. The cloud computing division, AWS, saw second quarter sales up 33% year-on-year and included the following comment in their results, “We believe we’re still in the early stages of enterprise and public sector adoption of the cloud.” The investment manager continues to see the valuation pay-off as attractive.

Lithia Motors, KB Financial and Tesla and Suncor Energy detracted from returns over the quarter. Lithia Motors in the ‘Slowing and Maturing’ category of the Life Cycle has faced concerns about declining second hand car values and the continued shortage of new cars associated with supply chain disruption. Competitor Carmax announced poor results and there are concerns that the environment could deteriorate further. The investment manager believes that the challenges are more than reflected in the current market price.

The Ironbark Royal London Concentrated Global Share Fund returned -6.82% (net) for the quarter, an outperformance of 1.65% when compared to the MSCI World NR AUD which returned -8.47%. Eli Lilly, Progressive, Ollie’s Bargain Outlet, United Health and Reliance Steel were strong contributors to returns in the second quarter.

Eli Lilly, the American pharmaceutical company in the ‘Compounding’ stage of the corporate Life Cycle, gained on the back of a positive reception to its recently FDA-approved drug Mounjaro, having demonstrated market leading efficacy in terms of weight loss. The drug has a strong ability to gain market share from the current GLP-1 drugs in obesity. Progressive, in the ‘Slowing & Maturing’ category of the Life Cycle, should continue to take share of the US auto insurance market.

The investment manager believes this will be driven by higher insurance premiums which help Progressive take market share. High prices are in part due to the cost of used cars and spare parts spurring higher claims costs. Higher interest rates should also improve returns on the investment side for Progressive. Ollie’s Bargain outlet, in the ‘Slowing & Maturing’ category of the corporate Life Cycle, gained in the aftermath of their first-quarter results – in particular, the market reacted well to the guidance the company offered. It is a highly scalable business model delivering consistently strong sales in the past. While there have been challenges, management has acted in a nimble way to ensure it can ride out the current era of uncertainty. United Health, in the ‘Slowing & Maturing’ category, amid defensive cash flows has held up well in a volatile market. The company also made a number of small acquisitions helping to continue to grow its network. Reliance Steel, in the ‘Slowing & Maturing’ category, has delivered strong stock performance over the year. Reliance Steel is reaping the benefits of strong demand across key end markets and a diverse product base. The investment manager is optimistic on the outlook of the company for the remainder of the year owing to robust demand in end markets amid continued strong demand in the nonresidential construction sector.

The Ironbark Royal London Concentrated Global Share Fund returned -3.07% (net) for the quarter, an outperformance of 5.10% when compared with the MSCI World NR AUD return of -8.17%.

Steel Dynamics, Anglo American and Suncor Energy were strong contributors to returns in the first quarter. Steel Dynamics, the US steel producer that is in the ‘Slowing & Maturing’ category of the Corporate Life Cycle, has performed strongly as steel prices remained elevated. End-market demand is strong, yet domestic US steel production remains constrained, and the company is benefitting from the upswing in pricing. While Steel Dynamics is currently valued like a ‘typical’ steel company, it has a far more interesting and resilient business model and has been gaining market share. Its latest results included record earnings for the quarter and calendar year. Anglo-American (‘Mature’ category of the Corporate Life Cycle) has gained from buoyant commodity prices. The standout divisional performance in the company’s latest results was its copper division. The company’s Quellaveco copper mine is scheduled to come online in the middle of the year and will further increase capacity at a time of strong demand. Calgarybased oil producer Suncor Energy announced during the period that its fourth quarter revenues surged on the back of soaring crude prices and refined product prices.

The Ironbark Royal London Concentrated Global Share Fund returned 8.06% (net) for the quarter, an outperformance of 0.99% when compared with the MSCI World NR AUD return of 7.07%.

UnitedHealthcare, Old Dominion Freight Line and Nvidia were strong contributors to returns in the fourth quarter. UnitedHealthcare in the ‘Slow & Maturing’ category of the Corporate Life Cycle gained during the period as the Optum healthcare arm of the business continued to grow at a fast trajectory.

The company’s third quarter results highlighted the continued evidence of the better integration of UnitedHealthcare (focused on health insurance) and Optum (focused on health services) to deliver superior outcomes at cheaper costs and an associated ability to share in that benefit. Old Dominion Freight Line the less than truck load freight delivery company that is in the ‘Accelerating’ category of the Corporate Life Cycle performed strongly amid the current shortage of truckers. The US has been grappling with a chronic lack of drivers for years, but the shortage reached crisis levels during the pandemic, which also sent demand for shipped goods soaring. In November, Old Dominion Freight Line’s revenue per day soared by 29.9% year-onyear, signalling ongoing strong demand. Old Dominion Freight Line’s premium service offering focusing on delivering on time and undamaged meant that the company announced in December a general rate increase of 4.9% for certain tariffs, effective January 3. Meanwhile, Nvidia ‘Accelerating’ contributed to returns amid strong third quarter results. The company had a strong quarter with milestones positive almost across the board. It is difficult to imagine how things could be going any better for Nvidia; it is benefiting from a refresh cycle in gaming & crypto as well as huge demand growth for its computer chips used in data centres

The Ironbark Royal London Concentrated Global Share Fund returned 8.12% (net) for the quarter, an outperformance of 2.27% when compared with the MSCI World NR AUD return of 5.85%.

Semiconductors stocks (Samsung, Micron and Taiwan Semiconductor), Safran and Anglo American contributed strongly to returns over the quarter. Samsung, which is in the ‘Turnaround’ category of the investment manager’s corporate Life Cycle classifications, and Micron (‘Slowing & Maturing’) are closely aligned as DRAM chips are a key component of their sales. Both companies benefitted from an upturn in the DRAM market, whilst this is not a perfect indication of the contract part of the market, spot prices for standard chips have increased 28% from their recent lows in August. Crucially, the manufacturers also stayed profitable across the cycle, which has not been the case in previous DRAM price cycles. As well as this structural boost, there is a long-term demand story as 5G phones require more RAM and the ongoing trend to digitisation, which has been boosted by increased remote working in the pandemic, is increasing the demand data centre servers. The strong performance of Taiwan Semiconductor (‘Compounding’) was related to the decline of Intel. Taiwan Semiconductor has achieved such an IP advantage in core and graphical processors that Intel has announced a strategic review and is considering outsourcing the manufacture of its processors to Taiwan Semiconductor. This transformative shift would be a major boost for Taiwan Semiconductor. As an example of its leadership, Taiwan Semiconductor is producing the M1 chip that is integral to the new Apple MacBooks. French aircraft engine manufacturer Safran (‘Slowing & Maturing’) performed well across the quarter. Following the lifting of some European travel restrictions in October, the broader hope of successful vaccine rollouts was very positive for travel-related companies. The company’s valuation remains attractive and it is well placed to benefit from a recovery in the airline industry. Anglo-American (‘Mature’) also benefitted from the general positive shift in sentiment. While metals have been more resilient than oil through the crisis, the possibility of a ‘return to normal’ next year, still boosted prices. As an example, copper rose 15.8% in the quarter to reach its highest level since early 2013.
Detractors from performance included Church & Dwight, Verizon Communications and Progressive Corporation. Having been an outstanding performer last quarter, US household products company Church & Dwight (‘Slowing & Maturing’) paused as the market shifted with the optimism around successful rollouts of vaccination programmes. The company’s defensive qualities had served it well through the recent challenging period with demand for its staple products holding up or even increasing despite the impact of the COVID 19 pandemic as well as the positive impact of a lower rate on its cashflows. It naturally underperformed as both factors reversed. The same applied to Progressive Corporation (‘Accelerating’). The US auto insurance specialist had performed particularly well earlier in the year as its revenue is particularly defensive, as insurance is a legal requirement and paid in advance, so is far less vulnerable to consumer discretion in a downturn. Given the early lockdown greatly reduced miles driven and accident claims, this led to a period of supernormal profit. As activity returned to more normal levels later in the year, this effect unwound. However, even with the quarter’s weaker performance, Church & Dwight and Progressive each returned roughly twice the level of the broad market over the full year. While the investment manager has taken some profits, both stocks remain key components of the Fund’s diversified portfolio approach. Verizon Communications (‘Mature’) was similarly affected by the rotation into ‘COVID 19 recovery’ stocks as the defensive cashflows of mobile telecommunications were less prized by investors. In addition, its revenues were impacted by lower international roaming activity (for which the charges are onerous for US consumers) and the launch of the new Apple iPhone 12, which delayed handset upgrades. Nonetheless, the investment manager remains positive on the rollout of 5G in the US, particularly as the company hopes to capitalise on this by offering 5G at home as a broadband connection.

Volatile market conditions and the rotation away from highly-rated growth companies to ‘COVID 19 recovery’ stocks provided opportunities to add to some holdings at attractive prices. In the run up to the US elections, the valuation of HCA Healthcare was attractive as its prospects as the largest-scale provider of hospitals across the US is compelling. Following a sector review, the investment manager added to South Korean bank KB Financial and separately added to Safran and Bridgestone. The investment manager felt the market’s reaction to Reliance Steel’s results provided an opportunity to add to this high-quality metal services company. Against these trades, the investment manager took some profits in a number of defensive stocks that have performed strongly through the crisis, including Taiwan Semiconductor, Church & Dwight, McCormick and car insurers Progressive Corporation and Admiral. The investment manager also reduced Japanese stationary supplier Kokuyu, feeling there are better opportunities elsewhere.