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How Djerriwarrh’s portfolio weathered a volatile year

How Djerriwarrh’s portfolio weathered a volatile year

How Djerriwarrh’s portfolio weathered a volatile year

The Australian share market has held up quite well during the 2022 calendar year considering the impact of global factors such as inflation, rising interest rates, the war in Ukraine, and the continuing COVID pandemic. Portfolio Manager Brett McNeil looks at how Djerriwarrh’s portfolio weathered a volatile year.

The Australian market has held up

The broader share market, as measured by the ASX200 index, is slightly ahead for the calendar year to date. This is a surprisingly good result, especially given the negative media coverage of the share market throughout the year – in response to the first serious outbreak of inflation since the 1970s, which has driven rapid increases in interest rates. Despite this, the Australian share market was just 1.3% off its all-time high at the end of November.

Mining and energy stocks have been the big winners this year. These include the large-cap diversified miners BHP, Rio Tinto and Fortescue Metals; energy company Woodside; and lithium stocks Mineral Resources and Pilbara Metals.

Three of the big four major banks – Commonwealth Bank, National Australia Bank and Westpac – have performed very well, with ANZ the exception.

Djerriwarrh’s portfolio performed much as expected

The performance of the Djerriwarrh portfolio has been below that of the broader share market over the year. Strength amid mining and energy stocks drove market performance this year, and our “underweight” position in the mining sector has been the primary cause of underperformance.

Because we have a long-term investment focus, we are mindful of not chasing these stocks given their cyclical nature. We would only add to our positions in BHP, Rio Tinto, and Woodside if there was a significant pullback in their share prices.

We have had good performers in our portfolio, reflecting their quality and prospects over our preferred long-term investment horizon. Our holding in Westpac has been one of our best performing positions this year. Westpac’s turnaround under CEO Peter King is on track, and we benefitted from an increased share price and fully franked dividend this year.

Insurer IAG has also performed well for us, after rebounding from a low level 12 months ago. Our large position in toll roads operator Transurban has been good, with the stock a solid performer in 2022. We believe Transurban is well positioned to deliver strong dividend growth in coming years.

It’s been a good year to add to our portfolio

Djerriwarrh was a large buyer of stocks during July to September this year, as we saw good value in several stocks that we wanted to own more of. We added to BHP, Commonwealth Bank, conglomerate Wesfarmers, and electronics retailer JB Hi-Fi at attractive prices, providing the portfolio with capital growth and fully franked dividends.

We increased our holding in global financial services Macquarie Group, which offers a good mix of dividend yield and long-term growth prospects. We added to our positions in real estate trusts Mirvac and Region Group (formerly Shopping Centres Australasia Property Group). Both stocks were bought at a discount to their net asset backing and are offering attractive dividend yields.

We added two new stocks to the portfolio, primarily for long-term growth: REA Group, Australia’s leading online property portal, which has a dominant market position and a strong return profile; and Port of Tauranga, the owner of New Zealand’s largest port by market share, which is a highly valuable and strategic infrastructure asset that we think will only grow in value over the long term.

In terms of portfolio sales, packaging firm Amcor and pallets provider Brambles exited the portfolio because of option exercises, and we actively sold out of our holdings in Atlas Arteria, AUB Group, Endeavour Group, and InvoCare.

Active management of the option portfolio has again proven critical amid market volatility. Our option portfolio is tracking well. We had low call option coverage in March and April when the market was at a low point, and we subsequently increased our call option coverage in response to the market’s strong performance. This meant we were able to lock in a significant amount of option income, which leaves us well positioned for the remainder of this financial year.

Inflation and the cost of living are key for 2023

Inflation is still a real issue for markets, even if the market currently looks to have taken the view that inflation has peaked for now. A key issue to watch next year will be the impact of the higher cost of living on consumers. This may have implications for consumer spending, bad debts for the banks, and the economy in general.

We remain confident in the quality and diversity of our portfolio. We will continue to seek opportunities that add value to our portfolio and for our shareholders, including generating good option income from market volatility.

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