The High Conviction Fund (Wholesale) (the ‘Fund’) increased 11.7% net of fees (with performance fee) for the 12 months ended 31 December 2024, outperforming the benchmark ASX 300 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.

At a Fund level, our investments in the Information Technology and Healthcare sectors were the stand-out contributors to portfolio returns during 2024. Stock selection was a key driver of performance in these core portfolio sectors, with strong returns from a number of stocks, including Nuix, Resmed, and Fisher & Paykel Healthcare. With valuation multiples still quite reasonable across these sectors, we see opportunities for positive returns to continue in 2025.

The Fund also benefited during the year from the underweight exposure to the carbon intensive Materials and Energy sectors, which declined over the year amid a challenging commodity prices backdrop. The Fund has minimal exposure to these sectors due to our Ethical screening process.

Detracting from performance over the year was the Financials sector. With valuation multiples at or near record highs across much of the sector, the Fund shifted to an underweight position in Financials on the expectation that investor returns would be limited. This thesis proved to be too early in 2024, as investors sought out the relative safety haven of banks and insurers. This was driven by interest rate expectations remaining elevated across the year, and as the Resources sector proved a difficult place to invest in during 2024. However, with valuations remaining elevated and earnings growth minimal, we continue to hold the view that the sector is unlikely to outperform over the next 12 months. We therefore maintain an underweight position to this sector going into 2025.

The Consumer Discretionary and Communication Services sectors also detracted from performance during the year. Consumer spending was more resilient than we expected, while poor performance in a couple of specific stocks detracted from overall performance.

New additions to the Fund in the previous quarter include CSL and Macquarie Group. CSL has typically traded on lofty multiples in the past, however recent uncertainty around the stock has provided an attractive valuation opportunity. Macquarie Group has a long-term track record of earnings growth and we expect its ROE to improve from a cyclical low as activity picks up in the markets. The Fund also divested its small position in biotech company, Immutep, after softer than expected trial results.

High Conviction (Wholesale) Fund Performance (with performance fee)

As at 31 December 2024^*

^Benchmark is the S&P/ASX 300 Accumulation Index. Past performance is not a reliable indicator of future performance.

Inception date: 01/10/2021.

Contributors

• Nuix (NXL) has been a key positive contributor to returns in 2024. Under this management team, there has been transformation of the business, particularly in evolving the product offering and engaging with customers, which has yielded positive results. The company has re-rated significantly over the year, driven by earnings upgrades, a strong FY24 result which highlighted solid underlying cash flow and annualised contract value growth, as well as being added to the S&P/ASX 300 index in September.

• Resmed (RMD) performed strongly this year as it counteracted negative sentiment driven by GLP-1s with strong financial results. The market has been pleased with RMD’s top line growth and gross margin improvement over the year, especially considering headwinds from shipping. Outlook commentary was also well received. The stock continues to perform strongly amidst GLP-1 speculation and there remains valuation support.

• 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

• Ramsay Healthcare (RHC) detracted from performance this year as higher operating costs continued to impact margins. Additionally, industry-wide negative sentiment over smaller, less profitable private hospital participants has also weighed on the stock. Whilst management is yet to provide detailed guidance over the recovery to pre-covid levels of profitability, we remain positive on RHC given its market leading position, strategic land holdings and improved balance sheet.

• Domain (DHG) had 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.

• 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.

Macquarie Group, the global diversified financials business with a long-term track record of earnings growth, was added to the portfolio

Portfolio changes

Additions to the Fund

• CSL Limited (CSL) is a global biotech company that develops and manufactures blood therapies, vaccines and other pharmaceutical drugs. CSL has typically traded on lofty multiples in the past and we have remained cautious on valuation. Recent uncertainty provided an opportunity to enter CSL at below average historical valuation levels and we found the opportunity compelling.
• Macquarie Group (MQG) is a global diversified financials business with a long-term track record of earnings growth. Earnings have been impacted due to lower transactional activity as Macquarie typically earns significant profit and performance fees from selling assets. ROE is at a cyclical low that should improve when there is more mergers and acquisitions activity in markets.

Divestments from the Fund

• Immutep Ltd (IMM) was divested over the period due to a combination of weaker than anticipated topline results in TACTI-003 cohort A and Merck’s phase 3 subcutaneous Keytruda trial showing non-inferiority. We believe both of these factors could prolong Merck’s time horizon to the end of TACTI-004 and prefer to reassess closer to trial outcome.

Immutep was divested over the period due to a combination of weaker than anticipated topline trial results Merck’s phase 3 subcutaneous Keytruda trial showing non-inferiority.

Sector allocation

Sector overweights
Communication Services, Consumer Staples, Health Care, Industrials, Information Technology, Utilities (renewables)

Sector underweights
Consumer Discretionary, Energy, Financials, Materials, Real Estate

Stock selection was a key driver of performance in these core portfolio sectors, with strong returns from a number of stocks, including Nuix, Resmed, and Fisher & Paykel Healthcare.