The Level 18 Fund decreased by -2.8 per cent net of fees for the month.

Commentary

The Level 18 Fund decreased by -2.8 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 declined by -2.8 per cent and -4.0 per cent respectively.  In a difficult month, the Fund’s flexible mandate was able to moderate capital losses and delivered outperformance versus the market.

February reversed the strong performance in global equity markets that was delivered in January.  Much like the last two months, US headlines continued to drive market direction.  Changing US foreign and trade policy created uncertainty for investors.  The likely implementation of a new round of trade tariffs largely drove the month-end sell-off in the US and Australia.  Increased geopolitical risks and uncertainty regarding policy settings delivered the risk-off market decline.   

In addition, company reporting seasons in both the US and Australia delivered a wide range of both positive and negative results for investors.  Share price volatility around reported results has been elevated. 

In aggregate, the Australian market delivered a slightly better than expected set of 1H results.  According to research from Macquarie, “Australian companies posted another small earnings beat in the face of challenges from high rates and cost of living pressures. The key driver was better margins, reflecting an ongoing focus on cost control and lingering pricing power.”  However, investors looking for earning upgrades were generally disappointed with management outlook commentary.  Post the reporting season, market earnings growth expectations in FY25 have now declined by an estimated -1.0 to -2.5 per cent.  Consensus now expects earnings in FY25 to decline by -2.1 per cent.  In contrast, consensus earnings growth estimates are currently sitting at an estimated +6.0 to +8.0 percent in FY26. 

From a sector perspective, the Media and entertainment sector delivered the best results in terms of share price performance. Ooh!Media (OML), Nine Entertainment (NEC) and EVT (EVT) delivered better than expected results.  News Corporation (NWS) also delivered a better-than-expected result that was driven by material cost saving initiatives within the business.  Importantly, there are early signs the advertising cycle is close to the bottom and growth in the next 12 to 18 months now appears likely.

The largest earnings downgrades were delivered by the Mining/Materials, Staples and Discretionary retail sectors.  Within the small cap sector, ARB Corporation (ARB), Johns Lyng Group (JLG), Super Retail Group (SUL) and IDP Education (IEL) delivered downgrades to consensus expectations. 

In February the RBA elected to cut interest rates for the first time since November 2020.  The cash rate was lowered by 0.25 per cent to 4.10 per cent.  Post the cut, the Reserve Bank governor, Michelle Bullock commented that the “Board needs more data and evidence that inflation is continuing to decline before making decisions about the future path of interest rates. The Board is very alert to upside risks that could derail the deflationary process.”  Given the next Federal election is due to be held before May 17, 2025, another change in the cash rate is unlikely before the middle of 2024. 

During the month Level 18 Fund holding, PointsBet (PBH) entered a Scheme Implementation Deed with MIXI under which MIXI has agreed to acquire 100% of the company in an all-cash offer of $1.06 per share.  The bid price represents a 27.7 per cent premium to PointsBet’s previous close of $0.83 a share.  On the same day, BlueBet Holding (BBT) announced a competing scrip and cash bid to acquire PointsBet via a scheme of arrangement.  Competition between these two interested parties has the potential to create additional price tension which is positive for shareholders.

Given the unpredictable US policy backdrop and the associated short-term market volatility, we are continue to carefully manage market risk with portfolio diversification and stock specific exposure.  Post the reporting season, we have identified a range of potential new investments with forecast earnings growth at attractive valuations.   

Positive contributors to the Fund in February include investment bond and annuity product provider, Generation Development Group (GDG) post the release of its 1H FY25 result and the acquisition of Evidentia, branded milk group A2 Milk Company (A2M), sports betting group PointsBet (PBH), life insurance product provider ClearView Wealth (CVW) and construction and maintenance group GenusPlus (GNP).

Health care service & equipment supplier Fisher & Paykel (FPH), Audio-visual & electrical contractor SKS Technologies (SKS), pathology service provider Australian Clinical Laboratories (ACL) and wealth management digital platform group, Praemium (PPS).

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.