The portfolio recorded a gross return of 16.5% for the financial year ended 30 June 2023, outperforming the benchmark ASX 200 Accumulation Index’s return of 14.8%. The 1.7% outperformance relative to the benchmark was pleasing given the challenging start to the year. While sector positioning relative to the benchmark was a detractor, individual stock selection was a material contributor to performance and the main driver of the outperformance over the year.

The 2023 financial year was a tale of two halves, with a number of headwinds in the first-half driving underperformance relative to the benchmark by the end of December. This was followed by a strong recovery in the second-half as these headwinds subsided. The carbon-intensive Materials and Energy sectors (which the portfolio has minimal exposure to under the Ethical Charter), were a headwind in the first-half as the China re-opening thematic buoyed the major iron-ore producers. While this headwind dissipated somewhat in the second-half, the two sectors still detracted from performance over the year given the portfolio’s underweight position.

Financials was the portfolio’s best performing sector in FY23, with stock selection a key driver of performance. The portfolio is overweight insurers (Suncorp, IAG, Medibank Private, NIB, Helia), which performed strongly off the back of a favourable operating environment. Health insurers benefited from a low claims environment that is yet to normalise post-Covid, while general insurers were able to push through price increases to offset a high claims environment. The strong performance of the insurers compensated for the challenging year faced by the banks, which had to deal with heightened competition and declining net interest margins.

The Utilities sector was the portfolio’s second-best performing sector in FY23. This sector is where the portfolio holds its renewables exposure and it is a significant overweight position against the benchmark. The portfolio holds three NZ ‘Gen-tailers’ - Contact Energy, Meridian Energy, and Mercury. All three of these companies have ~90-100% renewable generation and are large, high quality companies with strong balance sheets, generating significant free cash flow, and with opportunities for growth as the NZ economy decarbonizes. All three companies delivered strong shareholder returns in FY23, with Meridian Energy the best-performing. Hydro conditions remained favourable throughout the year and the risk appears to be reducing that the New Zealand Aluminium Smelter will shutdown at the end of its current energy contract with Meridian.

While Information Technology continues to be a key sector of focus for investment in the portfolio, it was the main detractor from performance in FY23. EML Payments, Link Administration, and Pexa all underperformed during the year, with EML and Link both now divested from the portfolio. Conversely, some larger cap technology stocks (which the portfolio doesn’t own on valuation grounds) outperformed as they rallied in line with the performance of the mega-cap tech stocks in the US.

Australian Shares SMA Portfolio Performance

As at 30 June 2023^*

^Benchmark: S&P/ASX 200 Accumulation Index. Past performance is not a reliable indicator of future performance.

Inception date: 16/04/2020. Source: Praemium portal.

Contributors and detractors

Contributors

• Pilbara Minerals (PLS) returned 119% for the year as the demand for lithium raw materials accelerated alongside the increasing demand for electric vehicles. Spot prices for spodumene reached a record high of >US$8,000/t in Q2, and while prices retreated to <US$4,000/t by year end, this remains ~10x higher than pre-Covid levels and has resulted in PLS generating significant amounts of free cash flow. With a cash balance of approximately $3bn, PLS enters FY24 in a strong position to fund an expansion in production while also returning capital to shareholders.

• Helia Group (HLI) returned 79% for the year. During the year, Helia experienced an unusually low claims environment and announced new customer contract wins. Helia returned excess capital to shareholders through special dividends and share buybacks, with further capital returns are expected in the next 12 months.

• Meridian Energy (MEZ) returned 29% for the year as the backdrop for the New Zealand energy markets strengthened. Above average hydro inflows drove higher lake storage levels, contributing to another solid year of earnings growth. The major risk overhanging the sector regarding the potential shutdown of the New Zealand Aluminium Smelter at Tiwai appears to be lessening, with discussions ongoing with Rio regarding the execution of a long-term contract. The outlook for the sector is therefore positive in our view, and Meridian is in a strong position to continue delivering earnings growth.

Detractors

• EML Payments (EML) declined 56% and we ultimately divested our stake during the year due to a lack of progress made with the Central Bank of Ireland on regulatory issues, which has imposed growth restrictions on the Irish subsidiary. The divestment reflects concerns around timing of a resolution, significant management turnover and a reduction of growth expectations.

• Bank of Queensland (BOQ) declined 12% over the year. BOQ announced an Integrated Risk Program to improve operational resilience, risk culture and compliance. It has entered into voluntary enforceable undertakings with APRA and AUSTRAC. BOQ is targeting simplification and productivity benefits to reduce next financial year’s costs significantly.

• Healius (HLS) declined 12% over the year. HLS focused too intently on COVID-19 testing, which, combined with its weaker than anticipated recent acquisition performance, has meant a decline in its share price. However, we see a pathway forward and anticipate growth in FY24 and FY25 as GP volumes improve and the full impact of the cost-out benefits HLS.

Helia Group (HLI) returned 79% for the year.

Portfolio changes

Additions to the portfolio

• 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.

• Orora (ORA) – ORA is a manufacturer of packaging solutions for consumable and beverage products, operating mainly in Australia, NZ and the US. We are attracted to ORA for its market leading position in its core products, consistent cash generation, and strong balance sheet. While possessing a number of defensive style characteristics, ORA also has opportunities for growth across its business.

• Dexus (DXS) – DXS is a diversified property and real assets manager, with a portfolio of Australasian assets valued at over $40bn. Within that, DXS directly owns approximately $18bn of office and industrial properties, with a $16bn development pipeline to continue growing the business. While there has been concern over whether property values will hold up, particularly in the office space, we believe DXS has a high-quality portfolio of assets that will prove to be resilient.

Selldowns from the portfolio

• GrainCorp (GNC) – GNC is the leading bulk grain handling company in Australia, with a network of high-quality infrastructure assets utilised to store, handle, and connect grain to customers domestically and worldwide. After a highly favourable period of weather conditions that drove record earnings, the outlook for changing weather conditions suggests earnings will also normalise and we therefore decided to take profits.

• Link Administration (LNK) – LNK provides outsourced administration services to super funds, listed companies and others in Australia and the UK. We divested our stake following the failed takeover deal due to concerns on earnings risk and the Woodford issue.

• EML Payments (EML) – EML is a fintech company, offering a broad range of global payment solutions. EML was divested due to lack of progress made with the Central Bank of Ireland, which imposed growth restrictions on the Irish subsidiary. The divestment reflects concerns around timing of a resolution, significant management turnover and a reduction of growth expectations underpinning our valuation.
  
  
  

We divested our stake in EML Payments (EML) due to lack of progress made with the Central Bank of Ireland, which has imposed growth restrictions on the Irish subsidiary.

We believe the portfolio is well positioned to continue delivering on the strong performance recorded over the last six months.

Sector allocation

Sector overweights
Financials, Healthcare, Industrials, Utilities (Renewables)

Sector underweights
Materials, Energy, Consumer Discretionary