Monthly Report | AUGUST 2023 | L1 Long Short Fund Limited

As the global financial landscape faced headwinds in August 2023, L1 Long Short Fund Limited (ASX: LSF) stood steadfast, adapting to a complex environment of mixed corporate reports, bond market fluctuations, and concerns about Chinese economic growth. In this monthly report, we delve into the key market developments, portfolio performance, and the outlook that shaped our journey through this dynamic period. Amidst challenging conditions, we remain dedicated to identifying investment opportunities that promise attractive long-term returns for our valued investors. Join us as we dissect the nuances of August's financial landscape and explore our strategies for the road ahead.

Global Market Overview

In August 2023, global markets experienced a period of weakness marked by a combination of factors. The corporate reporting season presented a mixed bag, while bond market volatility and concerns surrounding Chinese economic growth added to the overall unease among investors. Notably, Fitch downgraded the U.S. Government's credit rating from AAA to AA+ due to 'fiscal deterioration' and rising debt levels. This downgrade, coupled with significant Treasury issuance, pushed U.S. 10-year bond yields to a 16-year high of 4.35%, settling at 4.11% by month-end.

Chinese Economic Concerns and Commodity Impact

Chinese economic data, spanning credit growth, retail sales, industrial output, and investment, fell below expectations, prompting a reduction in key policy rates to stimulate economic activity. Consequently, copper (-4.5%) and nickel (-9%) prices declined. Oil prices faced initial setbacks but rebounded amid concerns that Hurricane Idalia might disrupt Gulf of Mexico production.

Portfolio Performance

Following a robust July, the L1 Long Short Fund portfolio faced headwinds in August, primarily driven by the broader market downturn and the dip in commodity prices attributed to softer sentiment around China. Reporting season updates had a roughly neutral overall impact, with both positive and negative stock developments.

Key Performance Metrics

• 1-Month Return: L1 Long Short Portfolio: -4.9%, S&P ASX 200 AI: -0.7%
• 3-Month Return: L1 Long Short Portfolio: 1.8%, S&P ASX 200 AI: 3.9%
• 6-Month Return: L1 Long Short Portfolio: 0.7%, S&P ASX 200 AI: 3.0%
• 1-Year Return: L1 Long Short Portfolio: 11.6%, S&P ASX 200 AI: 9.6%

Key Contributors and Detractors

A standout performer in the portfolio was Seven Group Holdings (Long +7%), benefiting from robust FY23 results and a positive FY24 outlook with expectations of high-single-digit EBIT growth. WesTrac and Coates, part of Seven Group, showed strong performance.

In contrast, Imdex (Long -17%) faced setbacks due to results slightly below consensus expectations and subdued near-term outlook. However, it is expected to outperform the exploration drilling industry.

Outlook

The equity markets are navigating opposing forces, with potential positives from moderating inflation and potential policy stimulus in China counterbalanced by weak leading economic indicators, corporate earnings pressure, and geopolitical tensions. Rising market volatility is anticipated as investors reevaluate their economic, interest rate, and corporate profit expectations.

Conclusion

Despite market challenges, the L1 Long Short Fund remains committed to identifying mispriced stocks through extensive research, with a belief in delivering attractive long-term returns to investors.

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