The Level 18 Fund increased by +1.5 per cent net of fees for the month.

Commentary

The Level 18 Fund increased by +1.5 per cent net of fees for the month. 

During the month the S&P/ASX Small Ordinaries Accumulation Index decreased by -2.0 per cent and the All Ordinaries Accumulation Index was flat at 0.4 per cent.

Post a strong performance in July, the first week of August delivered a sharp sell-off in global equity prices.  In the first three days of the month, the All Ordinaries index was down -5.6 per cent.  Australian share prices declined in response to larger revisions in international markets, particularly Japan and the US.  In the same period, the Nikkei fell -20.7 per cent, the S&P 500 was down -6.2 per cent and Nasdaq Composite declined by -8.2 per cent.

The sell-off was driven by several key factors.  Firstly, an unexpected move by the Bank of Japan to increase rates led to a stronger yen and higher interest rates in that market.  Secondly, weaker economic data in the US raised concerns about a potential recession and several below consensus earnings reports from major tech companies (Amazon and Intel) compounded the negative US investor sentiment.  Combined, these factors triggered the sharp decline in markets. 

Despite the significant move lower in the first few days of August, the All Ordinaries Accumulation Index finished the month in positive territory.  

In Australia, the local reporting season dominated news flow during the month.  Economic headwinds from higher interest rates, cost of living pressures and softer demand were expected to subdue reported earnings growth.  While reported results are important, company trading updates and outlook statements typically set the tone for the reporting period.  According to Morgan Stanley, FY24 results season delivered marginally more misses than beats.  Interestingly, the misses were punished more than the beats were rewarded.  Specifically, on the day of the result, beats delivered an average share price lift of +2.8 per cent compared to a -3.9 percent decline for a miss.

While the consumer facing sectors (food, packaged goods, clothing, beverages, automobiles, and electronics) delivered mixed results, high quality retail business models including JB Hi-Fi (JBH) and Super Group (SUL) delivered solid numbers.  Other sectors, including Mining Services, Diversified Financials and Technology also delivered robust results. 

Reporting season provides us with the opportunity to meet with management teams, to update our view on the operating environment for the investments within the portfolio and to identify new investment opportunities for the Fund.  Our normal practice ahead of the reporting season is to build cash levels to allow for new portfolio investments opportunities. 

Post the reporting season, we have added new exposures that look well positioned to deliver a recovery in earning growth over the next 12-18 months.  We continue to identify good number of investment opportunities at attractive valuations.  The Fund’s fundamental stock selection and risk management parameters are unchanged. 

Post the 2024 Jackson Hole Symposium in the US, Jerome Powell commented that the FED’s restrictive monetary policy was working to bring inflation down to its 2% annual target.  He specifically stated that he was confident that, “after a pause earlier this year, progress toward our 2% objective has resumed.”  Importantly, Powell suggested that interest rate cuts are likely in the near future.  The next FED meeting on September 18 is expected to deliver the first interest rate cut of this cycle.

While the economic cycle in Australia currently appears to be approximately 9 to 12 months behind the US, equity market trends and US monetary policy remain strong lead-indicators for Australian investors.  A move down in US interest rates is a positive for Australian equity valuations.  Despite recent Australian CPI results delivering only a small decrease in annual inflation, we continue to believe that rates have peaked in Australia and wouldn’t be surprised to see the RBA cut rates before the end of CY24.  As a result, our outlook for domestic equities remains bullish.  Notwithstanding a strong market performance in the last two years, we can still see a universe of attractive investment opportunities. 

Positive contributors to the Fund in August include specialty asset maintenance engineering group SRG Global (SRG), integrated enterprise business software solutions provider Technology One Group (TNE), aftermarket commercial parts supplier Supply Network (SNL), technology development group Codan (CDA) and motor vehicle collision repair business AMA Group (AMA).

Audio-visual & electrical contractor SKS Technologies (SKS), specialist alternative investment manager Regal Partners (RPL), telecommunication, cloud computing, cybersecurity, and data centre service provider Macquarie Technology Group (MAQ) 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.