Australian Shares Fund
The Australian Shares Fund (Wholesale) (the ‘Fund’) fell by 17.1% net of fees in the year ended 31 December 2022, underperforming its benchmark which declined 1.8%. The Australian Shares Fund (Retail) fell 17.6% net of fees for the year, also underperforming the benchmark.
The Fund is an all-cap strategy with investments spread across small and large-cap Australian and New Zealand companies. There was a significant variance in 2022 between small and large company share price performances, with the Fund’s bias to small and micro-cap companies driving its poor relative performance against its benchmark.
At a sector level, the Fund’s stock selection in Information Technology and Healthcare detracted while significant underweight exposures towards the strongly performing Energy and Materials sectors also contributed to this underperformance.
Australian Shares (Wholesale) Fund Performance
As at 31 December 2022*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 3.5% | 9.1% |
| 1 year p.a. | -17.1% | -1.8% |
| 3 years p.a. | 4.9% | 5.5% |
| 5 years p.a. | 7.5% | 6.1% |
| 10 years p.a. | 11.5% | 8.8% |
| since inception p.a. | 12.4% | 9.6% |
^Benchmark is composite S&P/ASX Small Industrials Accumulations Index till 12 August 2019 and S&P/ASX 300 Accumulation Index thereafter. Past performance is not a reliable indicator of future performance.
Inception date: 23/01/2012.
Australian Shares (Retail) Fund Performance
As at 31 December 2022*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 3.3% | 9.1% |
| 1 year p.a. | -17.6% | -1.8% |
| 3 years p.a. | 4.1% | 5.5% |
| 5 years p.a. | 6.6% | 6.1% |
| 10 years p.a. | 10.2% | 8.8% |
| since inception p.a. | 9.5% | 7.2% |
^Benchmark is composite S&P/ASX Small Industrials Accumulations Index till 12 August 2019 and S&P/ASX 300 Accumulation Index thereafter. Past performance is not a reliable indicator of future performance.
Inception date: 19/09/1994.
Contributors and detractors
Top 3 contributors to Fund return
Top 3 detractors to Fund return
Contributors
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Helia Group (HLI), a major provider of lenders mortgage insurance, produced strong results during 2022. Despite rising interest rates, the company continues to experience low levels of claims. The strong capital position of the company has allowed it to return capital to shareholders via attractive dividends and buybacks.
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The second strongest contributor was lithium producer Pilbara Minerals (PLS) which benefited from much improved lithium pricing on the back of faster electrification of the automobile industry and the increased use of battery storage in electricity supply networks.
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Suncorp (SUN) outperformed the market despite ongoing weather events. The pricing environment for general insurance has been robust and the company received a favourable judgement from the High Court in relation to business interruption and COVID-19, which will allow it to release the majority of its provision for these claims.
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The Fund also benefited from some corporate activity in the last year with Australian Pharmaceutical Industries being acquired by Wesfarmers in March 2022.
Detractors
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EML Payments (EML), a fintech company offering a broad range of global payment solutions, fell -87.5%. Its problems intensified with their UK regulator now restricting new business while compliance issues are investigated. The Fund divested from EML in late 2022.
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Symbio (SYM), which provides software-based telecommunication services, was the second biggest detractor, declining -76.5% over the 12 months. It unexpectedly announced a significant fall in its installed base of digital phone numbers. This has been explained as global technology customers returning phone numbers that were acquired on anticipated growth in demand.
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Healius (HLS) is a significant provider of diagnostic services across pathology and imaging, which benefited initially from the significant increase in work associated with COVID-19. However, with COVID-19 pathology volumes now falling, the company has experienced negative operating leverage and near term earnings expectations have been reduced.
Helia Group (HLI), a major provider of lenders mortgage insurance, produced strong results during 2022.
Portfolio changes
Additions to the Fund
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Reliance Worldwide (RWC) – RWC manufactures and distributes behind the wall plumbing and heating products for a global customer base. It has new innovative products that replace more expensive copper products. We are attracted to RWC because of its strong management team, healthy cash flow and solid balance sheet.
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Orora (ORA) – We introduced packaging company ORA into the Fund on share price weakness. We see ORA as offering defensive business model characteristics and decent dividend yield.
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Dexus (DXS) – DXS, which is predominantly an office focused real-estate investment trust, was added to the Fund. We are attracted to the significant discount to NTA and decent yield.
Reductions from the Fund
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Link Administration (LNK) – LNK provides outsourced administration services to super funds, listed companies and others in Australia and the UK, while also holding an equity stake in the leading digital property settlements platform in Australia, Pexa Group (PXA). Disappointingly, the takeover proposal by Dye & Durham failed to succeed due to regulatory intervention and the earnings outlook now appears uncertain.
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API (API) – We sold into the takeover offer from conglomerate Wesfarmers for a 34.5% premium to the prevailing share price, with the deal completed in March 2022.
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EML Payments (EML) – EML was removed from the Fund following the emergence of a second regulator, the UK’s Financial Conduct Authority, raising concerns with EML’s processes and governance practices in one of its divisions. The timeline for EML satisfying all regulatory concerns has now been extended for an uncertain length of time.
Reliance Worldwide (RWC) manufactures and distributes behind the wall plumbing and heating products for a global customer base.
We continue to be a bottom-up investor, actively looking for attractive investment opportunities that meet our Ethical Charter.
Sector allocation
Sector overweights
Healthcare, Information Technology, Utilities (Renewables)
Sector underweights
Materials, Energy
Outlook for the Fund
Over the last 12 months, global inflation numbers have been higher than expected, resulting in central banks around the world aggressively raising shorter-term interest rates.
These conditions have been especially challenging for small and microcap companies. We are seeing some early signs that monetary policy is working with company revenue growth slowing, some job layoffs occurring and consumers tightening their belts.
We continue to be a bottom-up investor, actively looking for attractive investment opportunities that meet our Ethical Charter.
Our primary rationale for investing in small and microcap companies remains relevant, with emerging companies offering stronger growth attributes driven by being more innovative, nimble, and entrepreneurial. The Fund, however, pursues an all-cap investment strategy and has also identified attractive large cap opportunities and consequently has increased its Fund weighting in this part of the market.
*Total returns are calculated using the sell (exit) price, net of management fees and gross of tax as if distributions of income have been reinvested at the actual distribution reinvestment price. The actual returns received by an investor will depend on the timing, buy and exit prices of individual transactions. Return of capital and the performance of your investment in the fund are not guaranteed. Past performance is not a reliable indicator of future performance. Figures showing a period of less than one year have not been adjusted to show an annual total return. Figures for periods of greater than one year are on a per annum compound basis. The current benchmark may not have been the benchmark over all periods shown in the above chart and tables. The calculation of the benchmark performance links the performance of previous benchmarks and the current benchmark over the relevant time periods.
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