The Level 18 Fund decreased by -1.3 per cent net of fees for the month.

Commentary

The Level 18 Fund decreased by -1.3 per cent net of fees for the month. 

During the month the S&P/ASX Small Ordinaries Accumulation Index and the  All Ordinaries Accumulation Index both decreased by -3.1 per cent.

The  Centennial Level 18 Fund delivered strong outperformance in the last year.  For the year to December 2024, the Fund returned +21.3 per cent net compared to the All Ordinaries Accumulation Index at +11.4 per cent and the S&P/ASX Small Ordinaries Accumulation Index at +8.4 per cent.  Since inception (2012), the Level 18 Fund has delivered a +12.7 per cent net return per annum. 

Post the “Trump” election rally in November, global markets sold off in December.  As investors considered in more detail the potential policy announcements the new administration is likely to deliver, equity markets retreated from the November highs.  While most commentators expect the new policy platform to boost US economic growth, uncertainty remains regarding the policy detail, particularly in the key areas of taxation, tariffs, immigration, and energy. 

Increased economic growth expectations delivered a sharp move in US 10-year bond rates.  Specifically, bond yields increased from 4.22 per cent to 4.52 per cent during December, partly contributing to the equity sell-off we saw during the month. 

In December, the Federal Reserve lowered official interest rates by a further 25 basis points to a target range of 4.25 to 4.5 per cent.  This is the third rate cut since September 2024.  However, the Central Bank noted, “recent indicators suggest that economic activity has continued to expand at a solid pace.”  While the Federal Reserve may elect to pause its rate cutting cycle in January, Jerome Powell reiterated that the rate policy direction in the future is likely to be lower.  Given the relative strength of the US economy, the pace of rate decline may well be slower than previously forecast.

The increase in US 10-year yields has boosted the appeal of the US dollar.  The strengthening US dollar has seen a devaluation of other major international currencies (Great British Pound, the Euro and the Japanese Yen).  During December the Australian dollar has fallen by almost 5.0% from 0.651 US cents to 0.618 US cents.  A weak Chinese economy and a poor outlook for Australia’s key exports has contributed to the weakness.

The weaker AUD is a positive for Australian companies with significant offshore earnings.  In contrast, a sustained appreciation in the USD could potentially eroded profit margins for the local retail sector (JB Hi-Fi, Super Group & Harvey Norman) in the future. 

The critical year-end retail trading period started in late November and continued into December.  The sales data associated with Black Friday suggests that local retail consumer demand remains robust.  According to JP Morgan research, “most indicators point to double-digit sales growth over the two-week period.” Further, “Westpac transaction data was up +10.5 per cent for the week of Black Friday.”  Initial retail channel checks suggest that the Christmas trading period has been positive.  However,  the official ABS Retail Sales data will not be published until the end of January. 

Calendar year 2024 was a big year for global equities.  Technology driven artificial intelligence (AI), moderating inflation and central bank interest rate cuts broadly drove the rally in global markets during the year.  Notwithstanding the strong market returns in 2024, our bullish outlook for the Australian market in the next year is unchanged.  As interest rates normalise, we expect corporate earnings to improve.  In the first phase of a rate cutting cycle, revenues tend to increase on reduced cost bases which combined deliver expanded operating margins and profitability.

Since inception in 2012, the Level 18 Fund has delivered annualised returns of +12.7 per cent after all fees.  We expect the fund’s performance track-record to continue in 2025 at a similar level.  We believe the Macro outlook for the next year remains constructive, recession fears have now receded, corporate earnings are forecast to grow, interest rates are set to moderate and the narrow rally we have seen in 2024 is set to broaden in 2025.  We expect 2025 to be a good year for equity investors.  We continue to see value in several sectors, including financials, software and USD earners. 

Positive contributors to the Fund in December include specialty asset maintenance engineering group SRG Global (SRG) following recent AGM outlook commentary.  Other contributors include, aftermarket commercial parts supplier Supply Network (SNL), power & communication installation, construction and maintenance group GenusPlus (GNP) and apparel store retail group Universal Store Holdings (UNI). 

Payments and finance provider Zip Co (ZIP), debt ledger purchase & collection group Credit Corp (CCP), financial platform technology & data solutions group HUB24 (HUB) and specialist alternative investment manager Regal Partners (RPL) 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.