November performance (equities) in brief


Well, November wasn’t a fantastic month, performance wise.

Absolute performance for our flagship core Australian equity portfolio was solid (~+4.4%) but lagged the benchmark (~+6.5%) by quite a bit.

Resources shot the lights out, thanks to strong rallies in the iron ore price, driving FMG, RIO, BHP, which we either don’t own or don’t have enough of.

The performance for our much more concentrated portfolio (10-15 stocks) does have a lot more BHP and NCM in it, and thus will have done quite a bit better.

These numbers are preliminary mind you, and we will be calculating the official numbers, including the multi-asset funds, out of Morningstar and releasing them later in the week.

Below we look over what’s happening.


Not that anyone likes relative underperformance, but we have been in this same set of circumstances once or twice over the past decade(s), as resources go through periodic boom and bust sequences.

Firstly, our beta (portfolio sensitivity to market) is ~0.85, so in a month in which the market is up strongly we will likely be left behind a bit, reflecting our more defensive, lower volatility stance. In other words, ~0.85*6.50% is around where we “should” land based on beta, which is 5.25%. This still leaves 80bps of underperformance to discuss, mind you.

Another way of saying that point about beta; note the table above, and that Materials (resource stocks) and Utilities (driven entirely by ORG, the energy/LNG company) were up +16% and +20% respectively.

The only way to get anywhere near the benchmark was to have a lot of resources and utilities.

We’ve got some, but not as much as ‘the market’.

Teleco’s (communication services) were flat, and we’ve got a bit of exposure, which underperformed given the benchmark strength, as did our specific REIT exposures (DXS, a good quality REIT, owning some of the finest buildings in the city, has struggled given investor sentiment towards Office REITs).

Within Utilities, we think it is absolute madness, the premium being offered to a 2nd quartile LNG producer, with a wobbly base business in the form of energy retailing, at a time in which the Fed has largely set monetary policy to align with oil prices (e.g. rising inflationary pressures stemming from commodities like oil that cause the Fed to remain hawkish/tighten further), but still, at least one market participant disagreed enough to make the tilt.


We think the outlook for Australian shares is pretty challenged, given high household debt (e.g. lots of housing related leverage) and that monetary tightening will be particularly effective here (as the transmission of policy flows quite directly from the large proportion of variable or near variable rate loans).

We also think the cumulative prior tightening from central banks globally has a chance of generating a “hard landing” (which has to mean something like rates above 4% for a while, and unemployment above 4-4.5% for a while) which doesn’t seem like the kind of environment to go long commodities.

Commodities are very sensitive to changes in demand (usually with emerging markets leading the way, as rates impact demand, and EM’s are the main source of “marginal demand”, with developed markets being a more steady source of “base demand”) and that’s before we think of the China specific worries, such as imploding housing markets, a weak economy, or one in which COVID rips through a largely unvaccinated elderly population.

Second conclusion

In markets, we try to frame what “being wrong” looks like by imagining a conversation with a client (or fund manager) who holds the opposite view and says “don’t you know…..”.

For example, don’t you know that China is reopening, and that’ll support commodities?

Don’t you know they (China) are trying to re-invigorate property and infrastructure?

Don’t you know BHP is on a PE (insert number, whatever it is on the day, just call it 6x)?

And it is a very useful conversational lens to challenge one’s own thinking.

An even better frame is to say “everyone expects commodity prices to fall, so every day they don’t means an upside surprise, a better than expected outcome.

Third conclusion

So, what to make of it all.

Unsurprisingly, one tends to stick to their priors. Or guns, or however the phrase goes where you haven’t really changed your mind.

We have a good mix of commodities in the form of BHP, IPL, NCM, AWC.

So there’s certainly some exposure. Now AWC has really underperformed, indeed alumina (the commodity) is one of the few metals to underperform. Thanks to energy costs, some 40% of the alumina supply curve is underwater (alumina is very energy intensive, so it feels the margin impact of rising energy much more so than other commodities).

We believe that the best time to buy commodity producers is when PE’s are high and returns low.

In the long run, we think supply curves are elastic, they respond to price signals. Over human history, that supply response has always come, and, at the least, that high returns cause economic actors to line up to take those lovely returns, whether that’s the government (and the tax man) staff (labour) staff (executives) or your competitors (supply).

For most commodities, we think more supply will come, for alumina, we think less supply, and so we are inclined to sell stocks like BHP into strength, and buy more of those either out of favour, or in other sectors entirely where the risks and rewards seem better balanced.

No call to action from this note: Materials are likely to have cost us over 1% in relative terms, which is quite a bit, so we felt it worth outlining some of our thinking before the official performance numbers are calculated and released later in the week.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

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