INVESTMENTS | FUND COMMENTARY
High Conviction Fund
The High Conviction Fund (Wholesale) (the ‘Fund’) commenced on 1 October 2021 and has delivered -9.9% since inception. This is -1.5% behind the S&P/ASX 300 Accumulation index benchmark and 3.6% ahead of the S&P/ASX 300 Industrials index (which excludes resources). The Fund fell -9.7% in the quarter ended 30 June 2022, which was ahead of the S&P/ASX 300 Accumulation Index benchmark return of -12.2%.
25 July 2022
Fund commentary
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The key influences on overall market returns were elevated inflation data, interest rate rises and concerns over future economic growth. Underperformance versus benchmark reflects the Fund’s material underweight to fossil fuel-oriented resource companies, consistent with our Ethical Charter.
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The Fund benefited from being relatively defensively positioned versus the benchmark, with large exposures to insurance, communications and consumer staples, sectors that are somewhat economically resilient. The Fund holds around 5% in cash.
Outlook for the Fund
Key company overweights in communications, staples, utilities and insurance are expected to be resilient to any slowdown in economic growth but also able to manage higher inflation due to strong market positions and pricing power. In general, the Fund continues to be relatively defensively positioned and oriented towards more mature companies with strong balance sheets.
Short-term volatility is expected to create opportunities for active management with a focus on long-term fundamentals. The Fund is oriented towards more mature companies in established industries that we believe are likely to be able to sustain their earnings independent of the economic cycle.
High Conviction (Wholesale) Fund Performance
As at 30 June 2022*
| fund | benchmark | |
|---|---|---|
| 1 month | -7.2% | -9.0% |
| 3 months | -9.7% | -12.2% |
| 6 months | -8.3% | -10.4% |
| since inception p.a. | -9.9% | -8.4% |
*Benchmark: S&P/ASX 300 Accumulation Index. Past performance is not a reliable indicator of future performance.
Inception date: 01/10/2021.
Australian agribusiness GrainCorp (GNC) was a large contributor to the Fund, returning 11.9% during the quarter ending 30 June 2022.
Contributors
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Graincorp (GNC) is a significant Australian agribusiness with 50-60% market share of east coast grain storage and export capacity. The company reported a solid set of results during the quarter and has benefited from favourable agricultural conditions and high grain prices globally. The company returned 11.9% during the quarter.
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Ramsay (RHC) is the largest private hospital operator in Australia and a significant player globally. While recent earnings have been impacted due to elective surgery cancellations from COVID-19, the company has also been the subject of corporate interest. As a result, the company returned 12.4% for the quarter.
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Brambles (BXB) is a global logistics company whose core business is the provision of re-usable pallets and containers to consumer goods, food, retail and manufacturing industries. During the quarter, Brambles was also the subject of corporate interest, leading the share price to rise 8.1% over the quarter. After quarter end, the company also announced it would not go ahead with a project with major customer Costco that could have seen a decrease or dilution in equity returns for existing shareholders.
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Graincorp (GNC) has returned 52% since Fund inception, benefiting from favourable agricultural conditions and high grain prices globally.
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Orora (ORA) is an Australian-based packaging company with significant market positions in glass bottles and aluminium cans. The stock has returned 20% since Fund inception, with their half year results demonstrating strong improvement in their North American business.
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Genworth (GMA) is an insurance business with a significant market share of the lenders mortgage insurance market in Australia. The stock has returned 9% since Fund inception and has been undertaking capital management in the form of a share buyback and a special dividend announced at its FY21 result.
Detractors
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Bank of Queensland (BOQ) and Westpac (WBC) fell 21% and 17.5% respectively over the quarter. While banks technically benefit from a rising interest rate environment, concerns have arisen that the pace of interest rate rises will lead to mortgage stress and increasing bad debts.
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Fletcher Building (FBU), a major building materials company based in New Zealand, also fell 23% over the quarter, with the market increasingly concerned about the impact of higher rates on demand for new housing and associated materials.
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Nuix (NXL) operates in the e-discovery and data processing software space. The Fund invested in the company following significant share price weakness, however the stock has continued to decline as a result of overall technology sector weakness but also several stock specific issues, leading to a performance of -70% since 1 October 2021.
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Fletcher Building (FBU) has seen its share price fall in response to housing market fears despite reporting robust results. The stock has returned -26% since Fund inception.
Portfolio changes
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The Fund added Domain Holdings (DHG) to the portfolio, a high-quality property franchise which has been under pressure due to housing concerns, but we saw as an attractive opportunity to acquire in the current market.
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The Fund increased weight in Ansell (ANN), a major global supplier of PPE that trades at a relatively low valuation compared to market, due to concerns over short term COVID related sales.
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The Fund also increased exposure to Contact Energy (CEN), a New Zealand-based renewable energy generator and retailer. Contact offers a stable and growing earnings profile, as it re-invests in renewable development opportunities.
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Bendigo Bank (BEN) and Graincorp (GNC) positions were reduced on relative strength in their share prices.
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The Fund added Downer (DOW), a leading provider of urban services in Australia and New Zealand with leading market positions in several categories, including utilities, where the requirement for energy transition is likely to increase the amount of work available.
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The Fund added QBE Insurance (QBE), a global insurance player that is likely to benefit in an environment of higher interest rates – it was added to the portfolio after the share price fell following a weak full year result.
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The Fund added Domain Holdings (DHG), a high-quality real estate franchise whose share price has weakened following concerns over the impact of higher interest rate settings on the housing market.
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The Fund divested NIB Health Insurance whose core business was a significant COVID beneficiary.
Fund strategy
The High Conviction Fund provides opportunity to invest in an actively managed and relatively concentrated share portfolio of companies predominantly drawn from the S&P ASX 300. Companies are selected on the basis of their social, environmental and financial credentials. The Fund utilises an active bottom up stock-picking and benchmark unaware management approach.
*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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