In our June quarterly last year, we wrote about what we thought was a disconnect between the long-term investing we undertake and the focus in our monthly and quarterly reports on short-term price movements.
We have tried to do a lot less of that over the past year, instead focusing on the progress (or lack thereof) of the underlying businesses in both portfolios. Long-term performance is, of course, why you pay us and every 30 June, coinciding with our annual distributions, we want to include a supplement with our quarterly report, reflecting on our returns and where those returns have come from.
For the Australian Shares Fund, the past 12 months produced excellent returns. In a year where the tailwinds from equity markets were negligible — the ASX All Ordinaries Index rose just 2.0%, including dividends — the Australian Fund returned 18.1%.
It should be noted that the performance of the Australian Fund is flattered by a poor index return that wasn’t reflective of the overall market. Dragged down by high weightings to banks and large miners, this broad index dramatically underperformed the average stock listed on the ASX. A better barometer of average stock performance, the MVIS Australia Equal Weight Index, returned 8.9% for the year. Our return, 18.1% net of all fees, is still an outstanding result, but any fund manager with a mandate as broad as ours shouldn’t be slapping backs too hard just for beating the All Ords.
It was a difficult year for global equity indices too, with the benchmark MSCI World Index falling 3.4% in local currency and 0.8% when measured in Australian dollars. A week before the end of the financial year, the International Shares Fund was looking at meaningful outperformance of that index.
Our exposure to the UK and its Brexit vote, however, brought returns back to a level only marginally better than the index (+0.4% in Australian dollars).
The broader backdrop has been excellent for our style of investing. Meaningful global selloffs in August last year and January/February of this year provided the volatility we needed to put money to work at attractive prices. More so in Australia, where the index has only returned 6.5% p.a. since the Australian Fund’s inception in October 2009, but increasingly internationally, we are experiencing low overall market returns but dramatic variation within sectors. That variation is enabling us to find opportunities that meet our required return criteria despite an overall market that doesn’t look particularly cheap.
In the report you can read about every stock that has contributed more than 0.5% to performance either way. I’d love to hear your feedback and any further information you would like to be receiving from us, but also hope you find it enlightening. Before we jump into the detail, though, a word of caution. We currently live in a world where all asset classes are priced to deliver much lower future returns than what they have delivered historically. In the case of some – German government bonds and Australian residential property, for example – absurdly so. Our goal remains to outperform Australian and international equities but we are not immune to this environment. You should expect future returns to be lower than what have been seen in the past.
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