PM Capital Global Companies (PMC0100AU) Report & Performance

• Positive contributors to performance for the month of July included Bank of America, CNOOC Limited, ING Group, Apollo Global Management and Teck Resources.

• Detractors to monthly performance included CaxiaBank, Cairn Homes, Heineken Holdings, SPIE and Star Entertainment.

• Two new positions were initiated during July, Grupo Mexico and Arch Resources. Both positions add to the portfolio’s commodity position. Grupo Mexico is a holding company with two main businesses, a majority 90% stake in Southern Copper and a 70% stake in Grupo Mexico Transportes, the largest freight rail operator in Mexico. Arch Resources is a metallurgical coal producer operating in the Appalachian region of the United States.

• No positions were exited during the period however out of the money call options were sold on Freeport McMoRan reducing our effective position and providing an exit point in the event of a further increase in the share price.

• The gross invested position at month’s end closed at 106%, with a net equity position of 93%.

• Positive contributors to performance over the month of June included Apollo Global Management, Freeport McMoRan, Teck Resources, ING Group and CaxiaBank.

• Detractors to monthly performance included Apple (short), Lloyds Banking Group, McDonalds (short), Siemens and Aalberts.

• There were no new positions initiated during June, however the Fund completed the purchase of an initial position in European industrials company Aalberts, which was initiated in May. The Fund’s existing position Bank of America was increased.

• Oracle was exited during the period after the recent strong performance saw the share price reach our target. Weightings in Teck Resources and Siemens were reduced.

• The gross invested position at month’s end closed at 106%, with a net equity position of 94%

The portfolio returned -3.3% over the month whilst the MSCI Word Net Total Return Index (AUD) returned 1.1%.

• Positive contributors to monthly performance included Apollo Global Management, Applus Services, Glenveagh Properties, Oracle Corporation and ING Groep.

• Detractors to monthly performance included Teck Resources, Wynn Resorts, Shell, MGM China and CNOOC Limited.

• We added new positions in Intesa Sanpaolo, Charles Schwab Corp and a European industrials company which will be disclosed during the upcoming quarterly once completed.

• Positions in MGM China and Stanmore Resources were increased.

• No positions were exited during the period.

• The gross invested position at month’s end closed at 103%, with a net equity position of 96%.

Teck Resources, the portfolio’s largest commodities position, rose materially after disclosing the receipt of a merger proposal from Glencore. Interest in Teck Resources has been triggered by the company’s February announcement that it would look to separate its industrial metals and steelmaking coal businesses. We have been vocal in our opposition to Teck’s proposed separation, and we were pleased to see the shareholder vote was withdrawn from its recent AGM after it became clear the company did not have the requisite support.

We continue to believe Teck’s assets are being undervalued by the market and Glencore’s interest supports this view. Flutter Entertainment gained after the UK’s long-delayed Gaming Act Review was officially published. The review’s key recommendations were in line with what had been flagged in press reports in the weeks leading up to its release with no adverse recommendations taking investors by surprise.

The Gaming Act Review has acted as an overhang for the UK gaming sector since mid-2020 when it was initiated. It has also created an unlevel playing field between large operators like Flutter who have proactively self-regulated and smaller operators who have not. We think this benefits Flutter moving forward.

The portfolio returned 4.6% over the quarter. Our positions in European industrials and gaming were positive contributors while our US financials holdings detracted from performance.

US bank holdings were impacted by the collapse of Silicon Valley Bank and Signature Bank which sparked fear within the market and led to broad-based selling of the sector. Below we assess what happened to Silicon Valley Bank and the comparability (or lack thereof) to our US bank holdings. Silicon Valley Bank collapsed due to a mismatch in its assets and liabilities. Like at most banks (including the Australian banks), Silicon Valley’s liability book (deposits) was generally on-demand, meaning that deposit holders could withdraw their funds without notice. Their asset book was mostly longer dated fixed income securities including government-guaranteed mortgage-backed securities.

The securities carried low credit risk but were bought during the pandemic at a time of low interest rates, so were less valuable in today’s higher rate world and thus carried mark-to-market losses. The mark-tomarket losses on securities would only prove problematic if a run on deposits required Silicon Valley to liquidate the securities and realise the losses – which is what happened.

In late February diversified miner Teck Resources announced a transaction to spin-off its steelmaking coal assets into a separately listed company, leaving the core copper and zinc business in the to-be-renamed Teck Metals. Rumours circulated in the media the week before and the stock appreciated as much as 10 percent on the news. When the details were ultimately announced, the stock gave up all those gains and more. We agree with the concept of separating the assets but, like the market, not the details – for the next decade or so the newly created steelmaking coal entity will remit most of its free cash flow back to the base metals company via a complex royalty and preferred equity structure. In our view the transaction is a separation in name but not substance, and we have spoken to Teck’s management team on the issue. The transaction goes to a shareholder vote in April.

We maintain our holding in Teck Resources as its assets & earnings are strong, and its valuation remains compelling. We are conscious however that should the transaction go ahead it will be more difficult for Teck stock to achieve a full & fair valuation in the next three to five years.