A good reporting season for our Equity Fund

With the February 2025 reporting season done and dusted, this article reflects on what happened and the opportunities that arose for our Allan Gray Australia Equity Fund (Class A) portfolio.

The S&P/ASX 300 Index was down 3.8% in February and our Equity Fund outperformed that by around 4%, net of fees, to finish up 0.2% for the month.

This is a great result for our investors, so what went right? Well, it’s often the stocks we don’t own that are responsible for returns, as much as, or more than, the stocks we do own.

Our biggest tailwind during reporting season was probably our extreme underweight to the Australian banks. The Equity Fund only owns ANZ, as we were reducing our Westpac holding towards the end of 2024 and fully exited the position at the beginning of February 2025.

Our outperformance was also helped by us missing many of the high-profile share price blowups, for example Mineral Resources Limited, WiseTech Global Limited, IDP Education Limited, Domino’s Pizza Enterprises Limited and Viva Energy Group Limited. We owned none of these in the lead-up to reporting season, thankfully, and that helped drive performance.

Which stocks performed well for the Fund?

One was Fletcher Building Limited. While the company’s result itself was uneventful, a couple of things have happened that we believe have given investors some room for optimism:

1. The new management team talking about improved prospects for the company
2. Interest rate cuts in New Zealand have given investors a little bit of hope for the future.

Sims Limited also performed well for us during February. The company’s North American turnaround seems to be on track, which is good news for shareholders. But more importantly Sims spoke about some of the large land holdings it has in its portfolio and which the market may not be fully appreciating yet. In other positive news, since reporting season a bid has emerged for Sims’ closest peer in the US, Radius Recycling. The bid was at a significant premium to Radius Recycling’s then share price and in turn this has reflected in a higher share price for Sims.

QBE was another stock that did quite well through reporting season. It’s been a stalwart of our Equity Fund portfolio for a number of years. The company’s result itself was actually somewhat uneventful; they were just doing what they always do and underwriting profits seemed to be quite good. The market, however, reacted positively to the result.

Woodside Energy Group Ltd (the Equity Fund’s largest position) had a good February and was a contributor through the month. This was refreshing for us, as the company has had a difficult 18-or-so months. We believe the market is probably getting a little bit excited about a potential selldown in its recently acquired Louisiana LNG project in the USA.

Finally, Ansell Limited, which is another of the Equity Fund’s larger holdings, also delivered a good result. Yet again the report itself was fairly uneventful, but we believe the market may finally be looking past the destocking impacts that have hit the company over the last couple of years.

Which stocks detracted from performance?

Unfortunately, there were a few companies that didn’t perform so well for us.

One was Newmont Corporation, the gold miner. The company had a great first quarter, but we see the weakness was more with the reception to its cost guidance for the remainder of 2025, which has risen significantly on the cost guidance it updated only fairly recently. That was quite disappointing and we believe it is one of the reasons that recent gold price increases are not flowing down to the bottom line in terms of Newmont’s profitability.

Orora Limited was another company that detracted. We wrote about the company in our June 2024 Quarterly Commentary if you would like some background on our investment thesis. Orora is a manufacturer and distributor in the packaging industry. It decided to close one of its furnaces at its South Australian Gawler facility. In February it updated the market as to the likely future earnings that will come from Gawler, which we believe were approximately half of what the market was expecting. Gawler is not the whole company, of course, but the earnings impact is 30-or-so million dollars below what we, and we believe the rest of the investment community, believed was likely. In our view that is most likely a permanent impairment to some part of Orora’s value, but not all of it.

The last company we want to mention is Woolworths Group Limited. The Equity Fund held a modest position leading into reporting season.  We see four things that seemed to conspire against Woolworths:

• Industrial action, which it flagged in the lead up to the December result and which had quite a significant impact on its profitability.
• More broadly, we believe the market didn’t like how poorly it’s executing on its strategy for food and grocery, certainly relative to Coles, which is holding back margins.
• New Zealand, to which it is quite heavily exposed, is undergoing some weakness.
• And the last one is Big W (which Woolworths owns), where we believe execution has been particularly poor.

Where have we positioned our portfolio?

With this mixture of results, a number of opportunities have arisen and we’ve positioned the portfolio accordingly.

As Woolworths’ share price has been so weak, we took the opportunity to increase our holding. We funded this by rotating out of the more strongly performing Coles almost entirely.

Another major move for us is adding to our Ramsay Health Care Limited holding and we’ve recently become a substantial holder in the company. We see a company that has a strong suite of assets, particularly in Australia. This stock will feature in our upcoming Q1 2025 Quarterly Commentary, so look out for that in early April if you would like to know more about the company and why we hold it.

One benefit of reporting season is that it can create new opportunities for contrarian investors, as underperforming stocks may become new buying opportunities for the future.

We’ve added six new positions to the Equity Fund portfolio during and since reporting season. We are building our positions in these companies and we plan to talk about some of them in our coming updates.

A word of caution

It’s important to mention that we might be wrong about these stocks. Underperforming stocks can potentially continue to perform poorly. Our research supports that the stocks we’ve bought show potential to turn around, but nothing is certain.

If you would like any further information about our Funds or portfolio positioning, please do not hesitate to contact our Client Services team.

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