The Level 18 Fund increased by +3.5 per cent net of fees for the month.

Commentary

The Level 18 Fund increased by +3.5 per cent net of fees for the month. 

During the month the S&P/ASX Small Ordinaries Accumulation Index increased by +3.5 per cent and the All Ordinaries Accumulation Index was up +3.8 per cent.

Post a flat performance in June, the market rallied in July as investors priced the potential for rate cuts in late 2024 or early 2025.  The lift in equity valuations during the month reflected increased investor confidence regarding the outlook for earnings growth during the next year.  Driving optimism was cooling US inflation and building expectations of a Federal Reserve interest rate cut in September.  In addition, US corporate earnings during the last quarter were solid.  In Australia, the S&P/ASX 200 reached an all-time high in July as it traded through the 8,000 point level. 

US market rallied in the first half of the month but sold off towards the end of July.  The S&P 500 index reached a record in the month, trading above 5,600 for the first time.  The Australian market outperformed the US market during July.  Specifically, the S&P/ASX 200 was up 4.2 per cent compared to the S&P 500 at +1.1 per cent. 

We continue to believe the US equity market and economy and are good lead-indicators for Australian investors.  The economic cycle in the US appears to be approximately 9 to 12 months ahead of the cycle in Australia.  US small caps have started to outperform in the US.  In the three months to June 30, 2024 the Russell 2000 (US small caps) outperformed the S&P 500 by more than 7.0%.  During the next year, we expect small caps to outperform as investor risk appetite increases and valuations become increasing compelling.   

Recent comments from the Federal Reserve suggest that the first rate cut in the US is likely to take place at the upcoming September meeting.  During July, the yield on US 10-year bonds fell from 4.31 per cent to 4.14 per cent ahead of the anticipated rate cut. 

In Australia, while the June CPI result delivered little evidence of material deflation, the RBA elected to keep interest rates on hold at its most recent meeting.  The Governor conceded that the “pace of disinflation has slowed” and inflation was now not expected to return to the 2 per cent to 3 per cent target band until late 2025.  The RBA maintained its previous guidance that it was not “ruling anything in or out” when it came to interest rates. 

We recently noted that consumer demand has declined as “cost of living” pressures impact discretionary spending.  While elevated inflation weakens the argument for rate cuts, we believe the rate increasing cycle is close to a peak and the next move is likely to be lower towards the end of 2024 or early in 2025.  We suspect the timing of lower interest rates in Australia are likely to lag interest rate cuts in the US.    

Our bullish outlook for the equity market is unchanged.  Notwithstanding the market’s robust performance in the last year, we can still see a universe of attractive investment opportunities. 

The Level 18 Fund has now delivered 12 years of annualised outperformance.  The investment mandate hasn’t changed since day one.  We believe the Fund’s flexible investment mandate has played a key role in the long-term track record.  Our focus on capital preservation, bottom-up investment fundamentals and portfolio diversification is expected to deliver low volatility long-term capital growth and outperformance for unit holders.  Our stock selection process has delivered annualised returns of +12.6 per cent (after fees) since inception.    

Positive contributors to the Fund in July include audio-visual & electrical contractor SKS Technologies (SKS), specialty asset maintenance engineering group SRG Global (SRG), integrated enterprise business software solutions provider Technology One Group (TNE),  payments and finance provider Zip Co (ZIP), branded milk group A2 Milk Company (A2M) and specialist alternative investment manager Regal Partners (RPL).

Energy and essential service supplier AGL Energy (AGL), on-line travel booking service provider Webjet (WEB), fund management group Navigator Global Investments (NGI), Internet service provider Superloop (SLC) made negative contributions to performance in the month. 

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 (https://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 (mcarmody@centennialfunds.com.au or +61 2 8071-9215) if you would like any further details.

The Centennial Team

Monthly Net Returns Since Inception

About Centennial Asset Management
Centennial Asset Management is an independent Australian asset management business, and the manager of the Level 18 Fund, an index unaware fund, with asset allocation flexibility and a concentration of small capitalised companies.  Further information on Centennial is available on our website - www.centennialfunds.com.au

Disclaimer
Strictly confidential: This report has been prepared by Centennial Asset Management ACN 605 827 745 & AFSL No. 515887 for Wholesale Clients only as an indicative record of the performance of an investment in the Level 18 Fund. No recommendation is made or advice given in respect of any entity in which the Level 18 Fund has, is or may in the future be, invested. The contents of this report are confidential, and the client may only disclose such contents to its officers, employees or advisers on a need to know basis, or with the prior written consent of Centennial Asset Management. Centennial Asset Management does not guarantee the performance of the Level 18 Fund or the return of any investor's capital in the Level 18 Fund. This investment report contains historical information, and does not imply any indication of future performance, recommendation or advice. Past performance is not a reliable indicator of future performance. Any investment needs to be made in accordance with and after reading any relevant offer document. This material has been prepared based on information believed to be accurate at the time of publication. Assumptions and estimates may have been made which may prove not to be accurate. Centennial Asset Management accepts no responsibility to correct any such inaccuracy. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information. To the full extent permitted by law, none of Centennial Asset Management, or any related body corporate or any officer or employee of any of them makes any warranty as to the accuracy or completeness of the information in this report and disclaims all liability that may arise due to any information contained in this newsletter being inaccurate, unreliable or incomplete.  *Prior to launch of the Level 18 Fund on 1 September 2014, Centennial Asset Management had established a separately managed account (“SMA”) and performance prior to 1 September 2014 is illustrated on a gross pro-forma basis, that invests with the same mandate as the Level 18 Fund and is included in the tables above, for comparative purposes only. The returns assume reinvestment of distributions.