Navigating 2014 – the winners and losers

Navigating 2014 – the winners and losers

A key requirement to generating long-term returns is minimising losses, or what we like to call avoiding the landmines. As the latest results demonstrate, The Montgomery Fund has done a superb job at navigating the minefield that was 2014.

There was a clear divergence in the sectoral performances of the S&P/ASX 200 in 2014. Let’s first examine the sectors that are trading below the levels from the start of the year.

For many years the team at Montgomery has been warning of a downturn in Australia’s mining sector, yet it was not until the second half of 2014 until the market started rushing for the exits. The performance of The Montgomery Fund has benefited greatly from having no exposure to companies in the Materials and Energy sectors.

The Consumer Staples sector has fallen in recent months, primarily due to the increasing pressure from foreign, discount supermarkets. Russell’s recent post on the industry is a must read.

Meanwhile, the Consumer Discretionary space has been declining due to a challenging retail outlook. We don’t expect conditions to improve anytime soon, given the dependence of Australia’s economy on resources and the determination of the Federal Government to return the budget to surplus.

Now for the winners.

The clear standout of 2014 was the health care sector, as companies across the health spectrum invested heavily in anticipation of the generational avalanche. The Financial sector, driven by the major banks, have enjoyed a buoyant property market, while considerable consolidation activity occurred in the Telecommunications space as players rushed to satisfy the demand of an increasingly data-hungry populace.

So how well has The Montgomery Fund managed to avoid the landmines? Below is a graph of the fund’s industry exposure as at 30 November 2014. Around 88.5 per cent of the portfolio was exposed to the winning sectors, while only 11.5 per cent was exposed to the sectors that underperformed.

Our focus on avoiding the landmines has translated to very pleasing returns for our clients. Over the last 12 months, The Montgomery Fund delivered a return of 10.49 per cent (after fees), outperforming the benchmark S&P/ASX 300 Accumulation Index by 6.45 per cent.

Remember, when your portfolio experiences losses, it must work even harder to get back to square one. In our opinion, the best way to avoid the landmines and generate returns over the long run is to focus your portfolio on quality companies with bright prospects and sufficient margins of safety.

To learn more about our funds, please click here, or contact David Buckland on 02 8046 5000 or at dbuckland@montinvest.com.