Australian Shares SMA Portfolio
The Australian Shares Portfolio (the ‘Portfolio) increased 9.5% for the 12 months ended 31 December 2024, compared to the ASX 200 Accumulation Index’s return of +11.4%.
It was the second consecutive year of double digit returns for the Australian share market, as the broad-based S&P ASX300 index hit record highs, before softening in December. A more stable interest rate environment helped investor sentiment, although equity valuations now appear to be trading at elevated levels.
The main contributor to portfolio returns during the year was the Financials sector, as both banks and insurers performed strongly in an elevated interest rate environment, while general insurers benefited from pushing through healthy premium increases. Despite elevated valuation multiples across the sector, investors stuck with the relative safety of the sector, with capital flowing into the sector from underperforming areas of the market, notably the Resources sector, which was challenged by weak commodity prices during the year. This weakness in the carbon intensive Materials and Energy sectors contributed positively to relative performance versus the benchmark given the portfolio’s material underweight position to the sector. Pleasingly, the Healthcare sector contributed positively to performance with Resmed and Fisher & Paykel Healthcare delivering good earnings growth.
The portfolio’s underweight position to the Consumer Discretionary sector detracted from performance as consumer spending proved more resilient than expected, while some of the gambling stocks (not owned by the Portfolio under our Ethical screening process) also outperformed. The Portfolio’s main exposure in the sector to WEB Travel Group had a disappointing year despite the positive demerger of the B2C business, with short-term operating challenges impacting the B2B business. We expect a recovery in 2025 and continue to see a positive long-term growth trajectory in the business.
The Real Estate sector also detracted from performance during the year. Not owning Goodman Group detracted as the market reacted favourably to the announced move into data centres, while the Portfolio’s holdings in Dexus and Mirvac both declined as operating conditions remained soft and interest rate expectations remained elevated. However, with attractive valuations in both stocks and operating conditions likely to improve, we expect improved performance in 2025.
Australian Shares SMA Portfolio Performance
As at 31 December 2024*
| Portfolio | benchmark^ | |
|---|---|---|
| 3 months | -2.6% | -0.8% |
| 6 months | 2.8% | 6.9% |
| 1 year p.a. | 9.5% | 11.4% |
| 3 years p.a. | 2.3% | 7.4% |
| since inception p.a. | 11.5% | 13.0% |
Source: Praemium portal.
^Benchmark: S&P/ASX 200 Accumulation Index. Past performance is not a reliable indicator of future performance.
Inception date: 16/04/2020.
Contributors and detractors
Top 3 contributors to Portfolio return
+44.0%
Suncorp (SUN)
+55.4%
Insurance Australia Group (IAG)
+62.1%
Fisher & Paykel Healthcare (FPH)
Top 3 detractors from Portfolio return
-25.2%
Domain Holdings (DHG)
-43.7%
Pilbara Minerals (PLS)
-42.1%
Fletcher Building (FBU)Contributors
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Suncorp (SUN) performed well in 2024, with underlying earnings up 18% aided by favourable claims experience and a higher interest rate environment. Insurance margins are expected to remain strong into FY25 at the top end of the “through the cycle” insurance margin range of 10-12%. The sale of the bank was completed at the end of July and the return of capital proceeds are expected in early calendar 2025.
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Insurance Australia Group (IAG) had a strong FY24, with underlying margins within its target range. IAG announced a 5-year reinsurance transaction that provides significant protection from catastrophe risk. This downside protection to earnings volatility led to a PE multiple re-rate. The large domestic insurers continue to benefit from premium rate increases above claims inflation and a higher interest rate environment.
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Fisher & Paykel Healthcare (FPH) performed strongly this year as it benefitted from top line growth driven by expanding indications, continued gross margin improvement and controlled cost management. Whilst FPH trades at the upper end of the peer group, it remains a high quality, recurring consumable revenue business with substantial compounding growth on offer.
Detractors
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Domain (DHG) continued to underperform its competitor REA over the year, despite the slightly higher listings growth in the September quarter, with the controllable yield growth declining which was impacted by the win back of free or low yielding listings. We maintain our view that there is room for a no. 2 player in the Australian market and retain our position in DHG on the basis of relative valuation attractiveness, whilst its fundamentals, including earnings growth potential and cash flow, remain solid.
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Pilbara Minerals (PLS) detracted from performance driven weak spodumene pricing, down 38% over the year, as near-term supply outlook is greater than demand. As a result, production curtailments have been occurring across the industry, with prices up 12% over the last 3 months. The longer-term fundamentals and demand for lithium remain strong. Pilbara has a Tier 1 quality asset, a low-cost producer, net cash balance sheet, strongly positioned for improvement in the pricing outlook, and is trading at an attractive valuation, in our view.
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Fletcher Building (FBU NZ) underperformed over the year following a period of disappointing earnings updates, legacy issues and concerns around the building company’s balance sheet. In addition, there was significant management and board disruption. New management have undertaken a capital raising to address balance sheet concerns and made progress towards resolution of legacy issues. We also expect a strategic update in the 2Q of 2025. Looking forward, we see long term value in FBU, which has a strong market position in the NZ Building products industry and is strongly leveraged to an earnings improvement as and when residential building conditions improve.
Suncorp performed well in 2024, with underlying earnings up 18% aided by favourable claims experience and a higher interest rate environment.
Sector allocation
Sector overweights
Cash, Communication Services, Health Care, Industrials, Information Technology, Real Estate, Utilities (Renewables)
Sector underweights
Consumer Discretionary, Consumer Staples, Energy, Financials, Materials
The main contributor to portfolio returns during the year was the Financials sector, as both banks and insurers performed strongly in an elevated interest rate environment, while general insurers benefited from pushing through healthy premium increases.
The healthcare sector contributed positively to performance with Resmed and Fisher & Paykel Healthcare delivering good earnings growth.
Outlook for the Portfolio
While we were disappointed with the portfolio’s underperformance relative to its benchmark during 2024, we continue to believe the portfolio has the right mix of exposures to deliver strong returns for investors over the long-term. The portfolio maintains significant exposure to key growth sectors in Information Technology, Healthcare, and Renewables that we expect will outperform the rest of the market over the long-term. These sectors account for a ~35% weighting in the portfolio, compared to less than 15% in the ASX 200 index.
Equity markets are likely to remain volatile in 2025 with geopolitics causing uncertainty and fluctuating interest rate expectations again likely to be a significant influence. In addition, market valuations remain elevated, with the All Industrials index trading at a 20% P/E premium to its long-term average of 17x. In this environment we continue to focus on companies where we see fundamental valuation attractiveness.
* 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.
Disclaimer
Interests in the Australian Ethical Managed Funds are issued by Australian Ethical Investment Ltd (ABN 47 003 188 930, AFSL 229949), the Responsible Entity of the Australian Ethical Managed Funds.
All data is prepared in accordance with FSC Standard No. 6.
This is general information only and is not intended to provide you with financial advice or take into account your individual investment objectives, financial situation or needs. You should obtain and consider the relevant Financial Services Guide, Product Disclosure Statement and Target Market Determination relating to this product before making a decision. Our SMA portfolio is available for investment via Praemium, Netwealth and HUB24.
You may wish to seek financial advice from an authorised tax or financial adviser before making an investment decision. Past performance is not a reliable indicator of future performance.
This commentary may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, Australian Ethical accepts no responsibility for the accuracy or completeness of, nor does it endorse any such third party material. To the maximum extent permitted by law, we intend by this notice to exclude liability for this third party material.
The information contained in this document is believed to be accurate at the time of compilation.