AFIC’s stablemate Mirrabooka cautious on share valuations, stock picks beat benchmark

Stock picks of AFIC’s stablemate Mirrabooka outperformed, but the group warns buoyant market valuations are failing to reflect near-term earnings risks from higher rates.

Buying undervalued companies has paid off for Mirrabooka Investments over the past year, but the small cap specialist fund manager says buoyant market valuations are not reflecting the near term risk to earnings from higher rates.

Speaking to The Australian after handing down a healthy 17.9 per cent return for the year to June, managing director Mark Freeman said the fund was cautious about current valuations and had been surprised by the strength and resilience of markets.

“We are certainly weary that things might get tough,” he said.

“There’s been such a large move in interest rates globally that this has started to slow down economies, and it will impact businesses. So we’re a bit more cautious on markets for that reason.

“We don’t think things are hugely overpriced, but the market looks a bit full to us.”

Mr Freeman added, however, that despite its caution, the fund, which is part of the multibillion-dollar stable of listed investment companies that includes the nation’s largest LIC, Australian Foundation Investment Co, remained fully invested and was comfortable with its holdings in “high-quality” companies.

“Businesses don’t move in straight lines, and we accept there are ups and downs, but the core quality of the top positions in our portfolio are really good companies,” he said.

The performance, which beat the 14.2 per cent return posted by its benchmark – a combination of the small and medium cap index – was helped by investments in electrical components distributor IPD Group, and software provider Gentrack, both of which more than doubled over the year.

Its largest investments as of June 30 were on industrial companies (23 per cent), followed by consumer discretionary (18 per cent) and financials (15.7 per cent).

“Any of them might face some pressure. But on a relative basis, if you consider their very strong market position and balance sheets, they’ve shined through conditions that might potentially get a little bit tougher.”

Mirrabooka Investments has posted a healthy 17.9 per cent return for the year to June 30. Picture: Gaye Gerard/NCA Newswire

A large special distribution from Oz Minerals before BHP’s $9.6bn takeover of the copper company helped boost Mirrabooka’s full year profit 68 per cent higher to $11.3m.

It will pay a special dividend of 4.5 cents per share that is more than double last year’s special dividend of 2 cents, while its final dividend will remain unchanged at 6.5 cents per share.

Unlike many listed investment companies, Mirrabooka has traded at or above net tangible assets for most of the past year. Its $2.91 per share NTA as of June 30 matching its share price, which moved 1.39 per cent higher on Tuesday to $2.92 following the result.

The group has recorded annual returns over the past decade of 12.4 per cent as of June 30, compared to 10.6 per cent by the benchmark over the same 10-year period.

Mr Freeman said the fund’s outlook reflected the view that while interest rates have risen significantly over the past year, in the long term, they were actually

“If you look back to the 200-year history in interest rates, we are going back to more normal levels rather than too high,” he said.

Consistent with its bottom up stock picking strategy, it had bought large positions in theme parks company Ardent Leisure Group, New Zealand-based cinema software company Vista Group and foreign currency provider OFX.

The group was underweight in the more cyclical resources sector, which measured by the Mid Cap 50 Resources Accumulation index, returned 33.3 per cent over the financial year.