The ASX 200 Accumulated Index was up 6.9% for the month of March, and Luke's Fund achieved a return of 9.1% over the same period, bringing the Fund’s returns for FY2022 to 8.6% as at the end of March 2022, compared to the ASX 200 Accumulated Index return of 6.2% over the same period.
The breakdown of our holding’s contribution to performance over the past month is outlined in Figure 1 below:
Figure 1 – Contribution Breakdown Bar Chart
The top contributor over the month was Talga Group, which reported the successful commissioning and subsequent operation of their EV anode pilot plant (the first of its kind in Europe). A breakdown of contributions, according to Macro segment, is outlined in Figure 2, shows inflation regime holdings continue to outperform, with Goldilocks / Reflation regime holdings enjoying a rebound following the February declines.
Figure 2 – Macro Segment Contribution Breakdown Bar Chart
PORTFOLIO BREAKDOWN
The breakdown of the portfolio as a the end of the month is outlined in Figure 2 below. Over the month, our exposure to investments that perform well in Goldilocks / Reflationary macro remained relatively steady at 32%, we will continue to reduce our Goldilocks / Reflationary exposure until we are below an overall weighting of 30% across our portfolios.
We note, the majority of our deflationary assets will be within Luke’s Global Fund, given the ‘risk on’ characteristics of the Australian dollar.
Figure 3 – Portfolio Macro Segment Pie Chart
March saw a significant change in the Macro environment, with the war in Ukraine driving commodity prices higher, and accelerating the bifurcation / de-globalisation of the global economy. The magnitude and duration of the inflationary environment will possibly be higher/longer than we anticipated. We have adjusted out portfolio to address this development, noting our deflation assets will underperform in the current environment.
Notably, the Australian dollar has rallied on increasing commodity prices, and increasing Japanese demand for Australian LNG, following Russian sanctions and the recent earthquake in Japan. Our conversion of Australian Dollars to US Dollars in January/February, was a particularly bad call in the short term, which we have partially reversed. However, we anticipate this will the Australian dollar may come under pressure later this year under the weight of tightening financial conditions.
TRADING ACTIVITY
We made the following portfolio changes over March:
We continued trimming our exposure to Goldilocks / Reflationary assets, namely, Camplify Holdings, Cogsgate Ltd, and Dusk Group.
We sold out of some of our deflation hedge assets, namely Bapcor Ltd, DEXUS Industrial REIT, and our BEAR ETF hedge. We closed our hedge following US OPEX expiry, and US FOMC meeting, with indications a short term rally in risk assets may be sustained over the short term, in the absence of any near term catalysts.
We added exposure to food producers, through Graincorp Ltd, and Elders Ltd to bolster our inflation regime exposure.
We acquired gold bullion exposure via PM gold ETF, as part of our inflation regime exposure.
We held 11% cash at the end of March.
COMPANY NEWS & REPORTS
Notable news from our holdings included:
Calidus Resources Ltd
On March 8, Calidus Resources announced promising results from rock samples collected and tested as part of an initial survey from 50% owned Pirra Lithium. The results will be used to prepare a maiden drilling program.
On March 21, Calidus Resources reported the Definitive Feasibility Study for Blue Spec will be completed by June 30, and advised that stream sampling in Blue Spec West has yielded promising results, with follow up soil sampling and drilling being planned, in their quest to extend their Warrawoona Gold mine life, which is scheduled to begin production in May.
Elders Ltd
Elders Ltd announced on March 14, 2022, a trading update, upgrading FY22 underlying EBIT guidance to 20-30% above FY21 underlying EBIT, with high commodity prices and favourable seasonal conditions driving profit growth.
Electro Optic Systems
Electro Optic Systems announced conditional funding support of $80 million USD from Export Finance Australia for Spacelink. EOS requires $240 million to finance the initial satellite constellation.
Talga Group
Talga Group reported the successful completion and opening of their Electric Vehicle Anode Pilot Plant. The plant enables Talga group to produce coated anode for customer qualification, with more than 20 battery manufacturers engaged to receive samples as part of their procurement and qualification processes. However, mining permits are yet to be issued. Reportedly, the Talga Group Charman indicated they are expecting approvals by Q1 FY 22/23.
There is unprecedented pressure in Europe to address supply chain issues, and de-risking their local manufacturing supply chain appears to be a priority for European, and Swedish policy makers. We would be surprised mining permits are delayed or denied given the current political climate, and urgent need to shore up European battery supply chains.
KEY LEARNINGS FROM THIS MONTH
It currently is an incredibly difficult environment for investors. Although, Luke’s Fund enjoyed a good returns this month, the macro outlook is highly uncertain. Our inflation regime exposure has been beneficial for now, however, in time, inflation regimes typically sow the seeds of their own demise, which we will need to monitor closely.
If you have any opinions on the companies we hold, or what like to know more, we would love to hear your feedback.
Regards,
Sean
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