The Level 18 Fund decreased by -2.0 per cent net of fees in September.

Commentary

The Level 18 Fund decreased by -2.0 per cent gross in September and -2.0 per cent net of fees for the month.? Historically, September is the worst month of the year for equities.? While experts offer a range of reasons for the seasonal downturn in share prices, September 2023 delivered a consistently poor month.? ?While the Fund delivered a negative return, it did outperform the broader sell off in the market.? The All Ordinaries Accumulation Index decreased -2.8 per cent compared to the S&P/ASX Small Ordinaries Accumulation Index at -4.0 per cent in the month.

The Australian market outperformed the US market.? The Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite declined by -3.4, -4.8 and -5.8 per cent respectively for the month. A lower exposure to the technology sector contributed to the better relative performance in Australia.

Global markets sold off during the month as investors worried about further interest rate increases due to unexpected economic strength.? As a result, short and long-term bond yields moved significantly higher during September putting downward pressure on share prices.? The US 10-year bond yield increased from 4.11 per cent at the beginning of the month and finished at 4.54 per cent.? Post the end of the September the bond sell off has continued with yields increasing to a high of 4.82 per cent.?

The domestic economic data continues to be consistent with slowing demand.? Retail sales have been broadly flat so far this year with price inflation and population growth assisting the sector’s performance. ?The job market data is mixed.? While job vacancies point to increasing labour market spare capacity, in contrast, job ads and employment intentions have been more resilient recently.? The CPI increased to 5.2 per cent in the 12 months to August vs 4.9 per cent in July.? In addition, GDP in the 2nd quarter was +2.1 per cent versus consensus expectations of 1.8 per cent.?

Post the month end, the RBA elected to leave interest rates on hold at 4.1 per cent.? Not surprisingly, the new Governor, Michelle Bullock, maintained the tightening bias and suggested that “recent data are consistent with inflation returning to the 2-3 per cent target range over the forecast period".

The sell off in September was broad based with most sectors losing ground.? Healthcare, real estate, materials and financials performed poorly.? Energy was the only positive sector.? ?

Investor risk appetite remains low, and a lack of small cap liquidity has exacerbated many of the price moves in September.? In the current environment, the portfolio is predominantly exposed to companies with strong balance sheets, pricing power, free cash flow and modest valuations.? We expect these fundamental characteristics to performance well in the current environment.? ?

As an example, Lycopodium (LYL) remains a core portfolio holding within the fund. While the share price declined during September, we remain the confident the company is well positioned to outperform during the next year. ??The business is lead by a very experienced executive team.? The company recently delivered a strong FY23 profit result that was above guidance.? Importantly, cash flow and the balance sheet strength were stand out features of the result. ?

Positive contributors to the Fund in September include specialist provider of investment bond products Generation Development Group (GDG) post a strong FY23 result, uranium explorer and miner Paladin Energy (PDN) following a strong recovery in the underlying commodity, health club owner/operator Viva Leisure (VVA) following ongoing customer demand recovery and industrial services and investment group Seven Group Holdings (SVW) continued to deliver consistent earnings growth across its portfolio of assets.?

Global building materials group, James Hardie Industries (JHX), specialty asset maintenance engineering group SRG Global (SRG) and motor vehicle and truck dealership group Eagers Automotive (APE)?made negative contributions to performance in the month.

While September was a difficult month, the Fund did navigate the volatility and protect unit holders from the worst performers within the small cap sector.? The tension between bond and equity markets is expected to continue into the next month as the market assess the trajectory of interest rates and the strength of the economy.?

We continue to hold the view that the trajectory of rates is the key to the share market’s performance.? A scenario where rates stabilise at a higher level without a material adverse impact on economic growth remains our base case assumption for the US economy.? Provided inflation continues to decline and the US economy avoids a recession, our constructive view regarding the outlook for equities will not change.

The Level 18 Fund’s mandate prioritises capital preservation and the Fund’s current positioning reflects that conservative objective.? We will continue to monitor the equity valuation drivers and adjust the portfolio accordingly. ?The modest size of the Fund also provides the opportunity to quickly take advantage of changing market conditions. ?

The Level 18 Fund Information Memorandum (IM) and application form are available on the Centennial Asset Management website.? Please note existing unit holders are only required to compete a one-page additional application form.? The following link?www.centennialfunds.com.au provides access to the IM and application documents.

Thank you as always for your continued support and please contact Michael Carmody ([email protected]?or +61 2 8071-9215) if you would like any?further details.

The Centennial Team