BRM – December 2023 Quarterly Newsletter

A volatile Q4 drove home the wisdom of the late and great Charlie
Munger’s comment that “The big money is not in the buying and selling,
but in the waiting.”
Barramundi’s +9.4% gross performance in Q4, and adjusted NAV
performance of +8.8%, was slightly ahead of the benchmark index return
of +8.7%. This capped a strong year for the portfolio which finished the
2023 calendar year with gross performance up +28.1%, well ahead of
the +13.6% benchmark index return.
Adding to Charlie Munger’s comment, the past few years have shown
how timing investment decisions based on short term market predictions
is an exercise fraught with regret.
In Q4 Barramundi’s gross performance first fell - 7% over October
before rebounding +18% over the last two months of the year. A lot of
the volatility was driven by gyrations in global interest rates as inflation
concerns rose, then ebbed.
Reacting to market pessimism in October could have proved costly. Rather
than investing based on short term predictions, we stay focussed on our
investment process. We cross check our long-term investment theses for
each company we hold in the portfolio to gauge whether something has
changed in order to warrant buying or selling shares in a company.
We don’t predict short term share price movements, but we will take
advantage when attractive share prices marry up with our investment
process of investing in high quality and growing companies. Q4 provided
us with some good opportunities in this regard (see below).
However, in the main, our research suggested that not much
fundamentally changed for many of our portfolio holdings during
Q4. The returns generated by particularly our larger holdings such as
WiseTech (+16% in A$ in Q4), CSL (+14%) and Carsales (+11%) lay more
in the ‘waiting’ rather than the ‘buying’ or ‘selling’.
Companies with economically cyclical
earnings benefitted from the improving
inflation and interest rate backdrop in Q4
James Hardie (+38% in Q4) delivered earnings guidance that exceeded
market expectations. It is outperforming the broader building products
market in the US. It has increased its selling prices and is benefitting
from falling input costs translating into record profit margins and cash
generation. It is well positioned to benefit from an improvement in US
and Australasian housing construction and renovation activity.
SEEK (+21%) and REA (+17%) were also beneficiaries of the improving
outlook which is deemed to be positive for employment activity and,
through falling interest rates, the housing market. oOH!Media, likewise
benefitted from easing concerns about the economic slowdown, rising
17% in Q4.
The profitability of these companies is partially tied to the economic cycle.
However, each of these businesses also benefits from an economic moat,
providing protection for profits in economic downturns. These businesses
also benefit from structural earnings growth tailwinds. This means that
even if their earnings have some cyclicality, their profits should continue
growing through time.
James Hardie benefits from a scale advantage as the largest fibre cement
siding manufacturer in the US and Australia. This provides it with a
cost advantage over smaller competitors. In addition, fibre cement as a
product is taking structural share from other house cladding products
such as vinyl.
SEEK and REA benefit from having strong network effect moats.
Employers and house vendors have to advertise through SEEK & REA
because that’s where all ‘the eyeballs’ of job seekers and house buyers
are. This provides both companies with pricing power which assists with
their earnings growth through the economic cycle.
Growing pains weighed on the
performance of some portfolio
companies
Credit Corp (-16%) and PWR Holdings (-11%), our worst performers in
Q4 were both impacted by disappointing market updates.
Credit Corp buys portfolios of bad debts incurred by consumers
(Purchased Debt Ledgers or “PDLs”) from the likes of banks and
utilities. Well established in Australia, Credit Corp has been expanding
into the US. In October it announced a A$64m impairment to the
carrying value of its US PDL assets. The share price initially fell 38%,
reducing its equity value by A$500m. We discussed the cause of the
impairment with management. The impairment was contained to US
PDLs purchased during 2022, prior to the deterioration in economic
conditions. Management has taken prudent steps since then to adapt to
the economic environment. As such, we think Credit Corp retains good
medium term growth prospects in the US market. We took advantage of
the fall in the share price to add to our position.
PWR Holdings withdrew from commercial negotiations with a European
customer after two years of discussions because commercial terms
acceptable to PWR could not be reached with the customer. While
disappointing, we think PWR has shown ironclad commercial discipline in
withdrawing from this contract. PWR has numerous other programmes at
various stages of negotiation in its growth pipeline and we expect these
contracts to underpin earnings growth in future years.
Portfolio changes
Share price volatility provided us with the opportunity to add PEXA to the
portfolio.
PEXA operates the only e-conveyancing property exchange in Australia.
The vast majority of property transactions (sales and mortgage
refinancing) are processed through PEXA’s platform. PEXA also has a
nascent presence in the UK market. The market was disappointed by the
slow pace of expansion in the UK evident in a Q4 trading update which
led to a sharp fall in its share price. We bought shares following this fall.
To help fund the PEXA purchases we exited our Westpac shareholding.
The investment opportunity in PEXA proved fleeting. The share price
rapidly rose circa 20% after we began buying shares, to a level that we
felt priced in a strong acceleration in UK growth prospects. We think this
earnings growth is likely to be harder won and will take time. Unusually
for us, we therefore banked the profits and exited the position after this
rebound.
Following the strong share price performance, we trimmed our
shareholdings in James Hardie, REA, Carsales and Audinate (+20%).
Conversely, we added to our Credit Corp and CSL shareholdings when
the equity market fell during October.
1
¹ Share price discount to NAV (including warrant price on a pro-rated basis and using the net asset value per share, after expenses, fees and tax, to four decimal places).
1 October 2023 – 31 December 2023
$
0.7 2
Share Price
as at 31 December 2023
QUARTERLY NEWSLETTER
BRM NAVDISCOUNT
1
$
0.7 52. 4
%
Robbie Urquhart
Senior Portfolio Manager
Fisher Funds Management Limited
19 January 2024
Warrant Price
$
0.0 6

PERFORMANCE
as at 31 December 2023
3 Months
3 Years
(annualised)
5 Years
(annualised)
Company Performance
Total Shareholder
Return
+4.4%(0.6%)+15.7%
Adjusted NAV Return +8.8%+8.0%+15.3%
Portfolio Performance
Gross Performance
Return
+9.4%+10.2%+18.1%
Benchmark Index¹+8.7%+9.8%+10.9%
1
Benchmark Index: S&P/ASX 200 Index (hedged 70% to NZD)
Non-GAAP Financial Information
Barramundi uses non-GAAP measures, including adjusted net asset value, adjusted NAV return, gross performance
return and total shareholder return. The rationale for using such non-GAAP measures is as follows:
»adjusted net asset value – the underlying value of the investment portfolio adjusted for capital allocation
decisions after expenses, fees and tax,
»adjusted NAV return – the percentage change in the adjusted NAV value,
»gross performance return – the Manager’s portfolio performance in terms of stock selection and currency
hedging before expenses, fees and tax, and
»total shareholder return – the return combines the share price performance, the warrant price
performance, the net value of converting any warrants into shares, and the dividends paid to
shareholders. It assumes all dividends are reinvested in the company’s dividend reinvestment plan, and
that shareholders exercise their warrants, (if they were in the money), at warrant expiry date..
All references to adjusted net asset value, adjusted NAV return, gross performance return and total shareholder
return in this newsletter are to such non-GAAP measures. The calculations applied to non-GAAP measures are
described in the Barramundi Non-GAAP Financial Information Policy. A copy of the policy is available at
barramundi.co.nz/about-barramundi/barramundi-policies.
Company% Holdings
Ansell1.8%
ANZ Banking Group2.2%
AUB Group4.4%
Audinate Group1.4%
Brambles3.3%
Carsales4.9%
Commonwealth Bank4.6%
Credit Corp4.6%
CSL10.1%
Domino's Pizza4.0%
Fineos Corporation Holdings2.8%
James Hardies Industries Plc3.1%
Johns Lyng Group2.5%
Macquarie Group4.7%
Nanosonics1.4%
National Australia Bank2.9%
NEXTDC3.7%
oOh! Media3.3%
PWR Holdings1.9%
REA Group3.8%
ResMed4.8%
SEEK5.6%
WiseTech Global7.0%
Woolworths Group1.8%
Xero Limited4.2%
Equity Total94.8%
Australian cash4.7%
New Zealand cash0.3%
Total cash5.0%
Forward foreign exchange contracts 0.2%
Total 100.0%
PORTFOLIO HOLDINGS
SUMMARY
a s a t 31 December 2023
COMPANY NEWS
Dividend Paid 15 December 2023
A dividend of 1.44 cents per share was paid to Barramundi
shareholders on 15 December 2023, under the quarterly
distribution policy. Interest in Barramundi’s dividend
reinvestment plan (DRP) remains high with 36% of
shareholders participating in the plan. Shares issued to DRP
participants are at a 3% discount to market price. If you
would like to participate in the DRP, please contact our share
registrar, Computershare on 09 488 8777.
Disclaimer: The information in this newsletter has been prepared as at the date noted on the front page. The information has been prepared as a general summary of the matters covered
only, and it is by necessity brief. The information and opinions are based upon sources which are believed to be reliable, but Barramundi Limited and its officers and directors make no
representation as to its accuracy or completeness. The newsletter is not intended to constitute professional or investment advice and should not be relied upon in making any investment
decisions. Professional financial advice from a financial adviser should be taken before making an investment. To the extent that the newsletter contains data relating to the historical
performance of Barramundi Limited or its portfolio companies, please note that fund performance can and will vary and that future results may have no correlation with results historically
achieved.
Barramundi Limited
Private Bag 93 502, Takapuna, Auckland 0740, New Zealand
Phone: +64 9 489 7074
Email: enquire@barramundi.co.nz | www.barramundi.co.nz
If you would like to receive future
newsletters electronically please email
us at enquire@barramundi.co.nz
FOREIGN TAX COMPLIANCE ACT (FATCA) AND COMMON
REPORTING STANDARD (CRS)
As a result of the New Zealand Government agreeing to participate in the exchange of information with other jurisdictions under
the Foreign Tax Compliance Act (FATCA) and Common Reporting Standard (CRS), Financial Institutions are required to undertake
due diligence to determine the account holders’ jurisdiction of tax residence. If shareholders have not previously self-certified,
they will receive a Tax Residency Self-Certification form from Computershare depending on when they first purchased their
securities. Please ensure you complete and return this important document if you have not already done so. For more information
please visit the IRD website: ird.govt.nz/international-tax/exchange-of-information/crs/registration-and-reporting or contact
Computershare if you are unsure of whether you have completed your form.
SIGNIFICANT RETURNS IMPACTING
THE PORTFOLIO DURING THE
QUARTER IN AUSTRALIAN DOLLARS
JAMES
HARDIE
+38
%
SEEK
+21
%
PEXA
+20
%
AUDINATE
GROUP
+20
%
REA GROUP
+17
%