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 and the All Ordinaries Accumulation Index increased by +2.8 per cent and +2.6 per cent respectively. 

The Fund has continued to outperform the market.  Since inception (2012), the Level 18 Fund has delivered a +12.7 per cent net return per annum versus the All Ordinaries Accumulation Index at +10.2 per cent.

July is traditionally a strong month for global markets. Both the US and the Australian market achieved all-time highs in the month.  Late in July, the S&P 500 recorded its sixth straight record high.  In Australia, increasing investor confidence, easing inflation, commodity demand and growing exposure to local equities from international investors contributed to the strong performance. 

In the US, robust earnings results, positive US trade negotiation news, easing inflation and investor confidence combined to deliver a strong equity market performance.  With the worst of the trade risks appearing to fade and investor enthusiasm for the potential impact of AI (artificial intelligence) growing, the US market rallied. 

In Australia, the RBA (Reserve Bank of Australia) left interest rates unchanged.  The decision surprised markets with consensus expecting a 25bp rate cut.  The RBA elected to wait for confirmation that inflation was in decline before moving rates lower.  Post the RBA decision, the June quarter underlying inflation (CPI) result confirmed that price rises decelerated to +2.7 per cent vs the +2.9 per cent in the March quarter. 

The next RBA meeting in August is now expected to deliver a further rate cut from 3.85 per cent to 3.6 per cent.  We expect several additional cut rates over the next 12 to 24 months.  Lower interest rates are positive for equity valuations as fresh momentum is injected into domestic household spending, consumer demand and GDP over the next 12 to 24 months. 

July saw a reversal of the sector rotation that took place in June.  The performance of the Bank sector faded in contrast to Resources and Healthcare which rallied.  The unwind in Banks started in late June and continued into July.  A +6.5 per cent increase in the iron ore price contributed to the resource sector outperformance during the month.  The large cap miners (BHP & FMG) were the primary beneficiaries.  Healthcare was a strong contributor with gains from CSL. 

We expect the upcoming reporting season to deliver a mixed set of results, reflecting a 12-month period that has been impacted by a range of operational challenges for corporate Australia.  In the last year, structurally higher interest rates and wages, modest GDP growth, lower consumer confidence and a Federal election have weighed on profitability.  We expect a number of companies, particularly those exposed to retail/consumer demand to deliver results that fail to meet market expectations. 

However, domestic business conditions are forecast to improve over the next year and we expect management commentary to deliver a number of ‘green shoots’ for investors.  As a result, our normal practice ahead of the reporting season is to build cash levels to allow for new portfolio investments opportunities. 

One investment theme that has made a positive contribution to performance over the last year has been the portfolio’s exposure to the increasing demand for data centre capacity within the economy.  The surge in capacity demand has been driven by the rapid adoption of Artificial Intelligence (AI) and cloud storage service requirements.  Australia's data centre capacity is set to more than double to an estimated 3,200 megawatts by 2030.  Australia's strategic position within Asia, combined with its extensive submarine cable network, also makes it an attractive regional location.

While Goodman Group (GMG), Nextdc Ltd (NXT) and DigiCo Infrastructure (DGT) provide direct exposure to data centre assets, the Level 18 Fund has elected to own a related company exposure, SKS Technologies (SKS).  The Fund has owned the stock for more than a year, and it has performed well during that period.  In last 18 months, the stock has rallied from $0.30 to $2.30. 

SKS provides electrical design, supply and installation services for communication and data centre construction projects within the domestic market.  The company has grown rapidly in the last three years.  Company revenues in FY23 were $83M.  In a recent trading update, SKS management estimated that company revenues in FY25 were expected to be $259.5M.  Importantly, the Profit before Tax estimate increased to $20.8M, above previous guidance of $18.0M.  The result in FY25 represents a threefold increase in profitability versus FY24 at $6.5M.   

Since inception, the majority of the Level 18 Fund’s outperformance has been generated through exposure to small cap companies.  Going forward, we expect our unchanged stock selection process to deliver ongoing outperformance.

Positive contributors to the Fund in July include internet service provider Superloop (SLC), Audio-visual & electrical contractor SKS Technologies (SKS), construction and maintenance group GenusPlus (GNP) and rural agricultural products and services provider Elders (ELD).

Integrated retirement village service provider Summerset Group (SUM), banking, superannuation & advice services group, AMP (AMP) and specialty asset maintenance engineering group SRG Global (SRG) made negative contributions to the 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.