Why we're bullish on the ASX and staying long (and how to beat it with less volatility)

Outperformance over one, three and, five-year periods

The Centennial Level 18 Fund delivered another consistent year of growth to June 30, 2024, increasing by +14.9% net of fees.

Importantly, the three-year performance has also been strong. Over the last three years, the Fund delivered a net annualised return of +7.6%, outperforming the market. Over the same period, the All Ordinaries Accumulation Index increased by +6.1% and the S&P/ASX Small Ordinaries Accumulation Index declined by -1.5%, respectively.

The table below sets out the Fund's short and long-term performance.

The Fund’s long-term performance at +12.3% annum (net of fees) since inception over the last 12 years, also compares favourably to the annualised return of the All Ordinaries Accumulation Index, at +9.8% p.a. the S&P/ASX Small Ordinaries Accumulation Index at +6.0% p.a. The chart below outlines the net return of a $100K portfolio balance since inception.

Mandate flexibility is key

A flexible investment mandate has played a key role in the long-term track record of outperformance for the Level 18 Fund. The Fund has an index-unaware investment mandate with the ability to rotate capital between investments without reference to an index or sector weighting. 

We see this as a significant advantage for unit holders. 

Our stock selection technique hasn’t changed since day one. We prioritise investments with strong balance sheets, earnings growth, sustainable free-cash flow and discounted valuations.

No investment market cap restrictions

Since inception, most of the Fund’s performance has been generated by exposure to the small cap sector of the market. Historically, we find that small caps generally deliver higher earnings growth at cheaper valuations compared to large caps. 

However, when investor risk appetite is low and small cap valuations are under-pressure, the ability to rotate capital into less volatile, higher-quality large-cap stocks is an advantage for the Fund.

Occasional cash holdings permitted to protect capital

The ability to occasionally hold high levels of cash and selective short positions can also enhance performance when markets are trending lower. This is particularly true during rare but periods of significant uncertainty. The table below outlines the Fund's performance during periods of market volatility.

Low volatility

The Level 18 Fund’s flexible mandate has delivered investors consistent low volatility capital growth over almost 12 years. The performance table below compares the Fund’s performance with the market and confirms the portfolio’s lower volatility performance. The Fund’s Sharpe Ratio is 1.19 (net) over the life of the Fund.

Restricted Funds Under Management (FUM) enhances liquidity

The small size of the Level 18 Fund has also contributed to long-term performance. A modest FUM relative to the market improves the portfolio’s liquidity and the ability to respond quickly to macro-economic changes and company-specific news flow.

Level 18 FUM is currently approximately $200m. To prioritise ongoing portfolio outperformance, we plan to limit the size of the Fund in the future. Specifically, new applications will be restricted to existing investors (soft close) once FUM reaches $275m.

Navigating Covid

During periods of uncertainty and investor risk aversion, the Fund’s flexible mandate has protected capital and limited portfolio drawdowns.

During the early phase of the Covid pandemic, the small cap index (XSO) which peaked on February 20, 2020 fell by -41% over the next month. During the same period the Level 18 Fund drawdown was limited to -15% after all fees. The ability to quickly liquidate market positions and increase the Fund’s cash holdings limited the impact of the aggressive market sell off that took place at the time.

Importantly, once it became obvious that Central banks and governments were prepared to support markets with emergency policy initiatives, the capital was reinvested as markets rallied. In the following year (FY21), the Fund delivered a net performance of +33.6% for the year.

Over the two years FY20 and FY21, the Fund’s aggregate performance was +39%, compared to the All Ordinaries Accumulation Index, at +23%, and the S&P/ASX Small Ordinaries Accumulation Index, at +28%. The outperformance during the Covid period was primarily driven by the Fund’s flexible mandate to limit capital losses in a down market.

Outperforming in a rising rate environment

In the 12 months to November 2021, inflation in the US increased by +6.8%. US inflation increased further in 2022 reaching 9.1% - a high not seen since 1981.

As a result, US interest rates have increased 11 times from 0 to 0.25% to 5.25 to 5.5% since 2022. In Australia, the RBA has increases rates from 0.1% to 4.35% since mid-2022.

In response to the increase in rates, the All Ordinaries Accumulation Index declined by -7.4% and the S&P/ASX Small Ordinaries Accumulation Index by -19.5% the 12-months to June 30, 2022.

Again, similar to the Covid period, the Level 18 Fund’s flexible mandate protected unit holders’ capital as central banks increased interest rates. For the two-year period (FY22 & FY23), the Fund delivered an aggregate return of +8.8% after fees, compared to the All Ordinaries Accumulation Index at +7.4% and the S&P/ASX Small Ordinaries Accumulation Index of -11.1%.

Level 18 Fund - Bullish outlook

The Australian equity market (All Ordinaries Accumulation Index) has delivered an +18% rally since late October 2023. As a result, the market is currently trading close to all-time highs.

Notwithstanding the market’s performance in the last year, we can still see a universe of attractive investment opportunities. 

We believe the investment outlook remains positive and expect the market to continue rallying over the next 12-24 months. 

We are staying long this market and see the best opportunities outside the Top 50 stocks.

While there are always arguments on both sides, it is important to recall that markets go up in the long term. Since 1900, the Australian market has delivered a positive yearly return 81% of the time and returned an average of 13.2% per annum.

The investment mandate at Centennial Asset Management hasn’t changed over the almost 12 years we have managed the Level 18 Fund. We expect the Fund’s flexible mandate to deliver ongoing long-term outperformance. Our focus on capital preservation, bottom-up investment fundamentals and portfolio diversification is expected to deliver low volatility long-term capital growth and outperformance for unit holders.

Monthly Net Returns Since Inception

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. Access to the IM and application documents in available via this link.

Thank you as always for your continued support and please contact Michael Carmody (mcarmody@centennialfunds.com.au) if you would like any further details.

The Centennial Team

Managed Fund

The Level 18 Fund (Platform Class)

Australian Shares

View