December 2025 Newsletter
The Level 18 Fund decreased by -0.5 per cent net of fees for the month.
Commentary
The Level 18 Fund deccreased by -0.5 per cent net of fees for the month.
US stocks lost ground towards the end of December delivering a small negative performance for the month. However, the stocks linked to the growth in artificial intelligence (AI), communication-services and technology drove a strong US equity performance in 2025. The S&P 500 and the Nasdaq Composite Index finished the year to December 31 up +16.4 per cent and 20.4% per cent respectively. Also contributing to the US market performance was the decision by the US Federal Reserve to cut interest rates by 0.25 per cent.
In Australia, the S&P/ASX Small Ordinaries Accumulation Index and the All-Ordinaries Accumulation Index increased by +1.4 per cent and +1.3 per cent in the month respectively.
During the year, the small cap sector outperformed large caps. Specifically, the S&P/ASX Small Ordinaries Accumulation Index and the All-Ordinaries Accumulation Index increased by +25.0 per cent and +10.6 per cent respectively.
Only 3 out of 11 Australian sectors were positive in the month. Materials and Financials were the strongest contributors. In December, the small cap resources sector was up +8.8 per cent versus the small cap industrial sector which was down -2.3 per cent. The Fund’s underweight exposure to resources (primarily gold) contributed to the underperformance versus the small cap index in the month.
December delivered a recovery for Australian equities following a negative performance in November. The turnaround was broadly led by Mining and Financials. The Industrial sector was flat in the month. Technology was the worst performing sector.
Following a decision from German lawmakers to approve a US$60B defence budget to improve national security capabilities, European defence stocks rallied during the month. Since the start of the year, the Stoxx Europe Aerospace and Defence index has increased by more than 50%.
In Australia, the RBA elected to leave interest rates at 3.6 per cent post the December board meeting. The October monthly inflation data was higher than expected and, as a result, some commentators are suggesting the next move in rates may be up in 2026. The December quarterly inflation data is due to be released in late January, ahead of the next RBA meeting in early February 2026. Our base case assumption is for interest rates to be unchanged for most of the next year.
We continue to have a ‘bullish’ outlook for Australian equities in 2026. The economy is expected to grow at a similar rate to last year. The labour market should remain robust, particularly given the backdrop of improving global growth. However, given the uncertainty regarding the interest rate outlook, some risks remain regarding consumer sentiment and discretionary spending.
Business investment should grow in 2026 on the back of forecast spending for the Brisbane Olympics, defence-related infrastructure, data centre construction, mining expansion and energy transmission projects. Importantly, corporate earnings are expected trend higher in the year 12 months. Commodity and Capex investment trends continue to support positive earnings upgrades for the market. Morgan Stanley estimates that aggregate consensus earnings growth in FY26 now sits at +7.0 per cent vs the long-term trend of +4.0 per cent. While valuations are somewhat elevated, the risk of a market multiple de-rate is low in an environment where earnings growth is forecast to be above the long-term trend.
Small cap valuations remain attractive and continue to trade at a discount to large caps. The 12 month forward small cap PER multiple is currently 15.0x versus large caps at 18.5x.
Since inception (2012), the Fund has delivered a +13.0 per cent net return per annum versus the All-Ordinaries Accumulation Index at +10.0 per cent and the S&P/ASX Small Ordinaries Accumulation Index at +7.5 per cent. The Fund’s flexible mandate has been designed to protect capital in correcting markets and deliver performance in rising markets.
Positive contributors to the Fund’s performance in December include specialty asset maintenance engineering group SRG Global (SRG), construction contracting, equipment hire and civil remediation services provider Symal (SYL), asset management, lending, advisory and equities group MA Financial (MAF) and banking, superannuation & advice services group AMP (AMP).
Investment bond and annuity product provider, Generation Development Group (GDG), non-bank lender and asset finance group Pepper Money (PPM) and motor vehicle retailing & services group Autosports Group (ASG) made negative contributions to performance in the month.
The following link (https://www.livewiremarkets.com/wires/matthew-kidman-the-two-best-times-to-make-money-in-markets-are-coming) to a recent interview with Matthew Kidman on the Livewire platform provides readers with additional detail regarding our ‘bullish’ outlook for Australian small cap equities.
The Level 18 Fund Information Memorandum (IM) and application form are available on the Centennial Asset Management website. Please note existing unit holders are only required to compete a one-page additional application form. The following link (https://www.centennialfunds.com.au/) provides access to the IM and application documents.
Thank you as always for your continued support and please contact Michael Carmody (mcarmody@centennialfunds.com.au or +61 2 8071-9215) if you would like any further details.
The Centennial Team
Monthly Net Returns Since Inception
About Centennial Asset Management
Centennial Asset Management is an independent Australian asset management business, and the manager of the Level 18 Fund, an index unaware fund, with asset allocation flexibility and a concentration of small capitalised companies. Further information on Centennial is available on our website - www.centennialfunds.com.au
Disclaimer
Strictly confidential: This report has been prepared by Centennial Asset Management ACN 605 827 745 & AFSL No. 515887 for Wholesale Clients only as an indicative record of the performance of an investment in the Level 18 Fund. No recommendation is made or advice given in respect of any entity in which the Level 18 Fund has, is or may in the future be, invested. The contents of this report are confidential, and the client may only disclose such contents to its officers, employees or advisers on a need to know basis, or with the prior written consent of Centennial Asset Management. Centennial Asset Management does not guarantee the performance of the Level 18 Fund or the return of any investor's capital in the Level 18 Fund. This investment report contains historical information, and does not imply any indication of future performance, recommendation or advice. Past performance is not a reliable indicator of future performance. Any investment needs to be made in accordance with and after reading any relevant offer document. This material has been prepared based on information believed to be accurate at the time of publication. Assumptions and estimates may have been made which may prove not to be accurate. Centennial Asset Management accepts no responsibility to correct any such inaccuracy. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information. To the full extent permitted by law, none of Centennial Asset Management, or any related body corporate or any officer or employee of any of them makes any warranty as to the accuracy or completeness of the information in this report and disclaims all liability that may arise due to any information contained in this newsletter being inaccurate, unreliable or incomplete. *Prior to launch of the Level 18 Fund on 1 September 2014, Centennial Asset Management had established a separately managed account (“SMA”) and performance prior to 1 September 2014 is illustrated on a gross pro-forma basis, that invests with the same mandate as the Level 18 Fund and is included in the tables above, for comparative purposes only. The returns assume reinvestment of distributions.