The Level 18 Fund increased by +0.11 per cent net of fees in August.

Commentary

The Level 18 Fund increased by +0.14 per cent gross in August and +0.11 per cent net of fees for the month.? In a month dominated by the FY23 reporting season, the market traded lower.? The Fund delivered a small positive return, outperforming the sell off.? ?The All Ordinaries Accumulation Index decreased -0.7 per cent compared to the S&P/ASX Small Ordinaries Accumulation Index at -1.3 per cent in the month.

At one stage in August, the local market was down by -3.5 per cent.? However, the last week delivered a strong recovery.?

Global markets sold off early in the month as investors priced the risks of further interest rate increases and poor economic data from China.? An increase in both short and long-term bond yields dragged on company valuations.? The US 10-year bond yield finished the month at 4.12 per cent, following an intra-month peak of 4.36 per cent due to stronger than expected US economic data.?

Local macro data sent some conflicting signals to investors in August.? For example, Australian retail sales grew more than expected in July, up +0.5 per cent compared to a consensus forecast of +0.3 per cent.? In contrast, the July headline CPI surprised to the downside slowing to +4.9 per cent versus consensus expectations for +5.2 per cent.?

The FY23 reporting season set the tone for August.? We would describe results as being marginally better than expected.? At a headline level, earnings growth was ahead of forecasts (+2.0 per cent vs +0.5 per cent).? While the full impact of interest rate increases are yet to be fully absorbed by the consumer, household spending appears to be in better shape than consensus expected.? In simple terms, many companies have been able to pass-on inflation to customers and operating margins have been preserved.? Earnings ‘beats’ outnumbered ‘misses’ but future guidance downgrades outnumbered upgrades.? Stock volatility was high during the month with share prices frequently moving more than 10 per cent post results.? ?

Reflecting the slowing economic backdrop, earnings outlook commentary was consistently cautious.? Strong balance sheets are again in focus for investors as the annualised impact of higher interest charges are incorporated into forecast earnings in the future.?

The small cap sector is more exposed to consumer demand compared to large caps which we see as a positive for the sector as unemployment remains low and interest rates stabilise.? We expect additional detail later in the year when companies update investors at scheduled Annual General Meetings prior to the important Christmas trading period.? Several consumer exposed companies, Baby Bunting (BBN), Nick Scali (NCK) and Breville (BRG) did deliver stronger results than expected.?

The strongest small cap sectors were energy (+4.6 per cent), consumer discretionary (+3.0 per cent) and communication Services (+1.8 per cent). ??Paladin Energy (PDN), Premier Investments (PMV), Johns Lyng Group (JLG) and Inghams Group (ING) were strong performers in the month.? Mesoblast (MSB), Chalice Mining (CHN), IRESS (IRE) and Fletcher Building (FBU) performed poorly in the month.?

Post the month end, the RBA decided to leave interest rates on hold at 4.1 per cent but indicated that additional increases may be necessary to control inflation.?

Positive contributors to the Fund in August include global diversified insurance broking services group PSC Insurance Group (PSI) post a strong FY23 result, gym and health club owner/operator Viva Leisure (VVA) following confirmation of an ongoing recovery in customer demand, surface engineering company Laserbond (LBL) post a strong earnings result and infrastructure construction and renewal group Duratec (DUR) following confirmation of ongoing earnings growth in FY24.?

Mining instrument and specialised chemical manufacturer XRF Scientific (SFX) specialty asset maintenance engineering group SRG Global (SRG) and medical technology and software company Impedimed (IPD) made negative contributions to performance in the month.

We learnt in the reporting season that listed corporates and consumers are navigating the inflationary environment reasonably well.? While top line growth is slowing, production costs appear to be peaking and labour pressures are moderating.? While transport and logistic costs remain elevated, operating margins appear stable.? The most recent macro data for the June quarter was solid, GDP growth was +2.1 per cent versus a year a go.? We continue to believe the likelihood of a recession during the next year is low.?

In an inflationary environment, owning businesses with pricing power and the ability to grow ahead of inflation normally delivers outperformance.? We continue to focus on investments with these characteristics.? As the economy slows, we expect demand for investments that deliver strong organic growth and or exposure to growing markets will become increasing popular.? ???

Post the reporting season, we continue to add a number of new investments to the portfolio as we cycle capital away from large cap stocks into small cap exposures.? We expect the recent outperformance of large caps to reverse during the next year.? ??

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