Australian Shares Fund
FY24 was another positive year for domestic equity markets, with the benchmark S&P ASX300 index gliding up to record highs during the fiscal year. Sentiment improved with the interest rate hiking cycle coming to a pause, after rapid interest rate hikes during FY23. The financials sector buoyed returns, while the resource sector languished against a backdrop of weaker commodity prices.
The Australian Shares Fund (Wholesale) (the ‘Fund’) delivered a second consecutive year of double-digit returns. The financial year net return was 11.5% net of fees, compared to its benchmark which rose 11.6%. The Australian Shares Fund (Retail) rose 10.9% net of fees for the fiscal year.
The Fund’s investments in the Technology sector were a stand-out during the year due to stock selection in software names such as Nuix, Gentrack and Bravura. The Financials sector also contributed to returns, due to strong performance from the general insurance sector and mortgage insurer, Helia.
The all-cap portfolio benefited from its positive tilt towards low carbon companies. The portfolio holds three major Gen-tailers in New Zealand (Contact Energy, Meridian Energy, and Mercury), which performed well in a backdrop of favourable operating conditions. Additionally, the portfolio’s underweight position to Resources and Energy stocks contributed to positive relative performance versus the benchmark, with two index heavy-weights, BHP and Woodside, underperforming the market.
The Healthcare sector detracted from performance due to stock specific issues. While our large-cap medical device holdings performed strongly, the fund was impacted by four existing holdings requiring capital raises priced at modest-to-steep discounts. Further weakness was seen in the healthcare services segment, where we made the decision to divest the underperforming Healius. We continue to hold a favourable outlook over the healthcare industry as many of our stocks are now well-funded and patients return to prioritising their health.
During the year, the Fund received proceeds from consummated takeovers of telco Symbio, vitamin company Blackmores and wellbeing software company Limeade. We also saw some of our names attract takeover interest, including technology names Ansarada, Bigtincan, EROAD, as well as healthcare company Capitol Health. The Fund participated in 7 equity capital raisings, mainly in the healthcare and technology space.
Australian Shares (Wholesale) Fund Performance
As at 30 June 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | -0.6% | -2.1% |
| 6 months | 8.0% | 3.8% |
| 1 year p.a. | 11.5% | 11.6% |
| 3 years p.a. | 1.5% | 6.0% |
| 5 years p.a. | 9.0% | 7.1% |
| 10 years p.a. | 11.1% | 8.8% |
| since inception p.a. | 12.4% | 9.7% |
^Benchmark is 65% ASX 100 / 35% ASX Small Ordinaries. Past performance is not a reliable indicator of future performance.
Inception date: 23/01/2012.
Australian Shares (Retail) Fund Performance
As at 30 June 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | -0.7% | -2.1% |
| 6 months | 7.7% | 3.8% |
| 1 year p.a. | 10.9% | 11.6% |
| 3 years p.a. | 0.9% | 6.0% |
| 5 years p.a. | 8.3% | 7.1% |
| 10 years p.a. | 9.9% | 8.8% |
| since inception p.a. | 9.6% | 7.3% |
^Benchmark is 65% ASX 100 / 35% ASX Small Ordinaries. Past performance is not a reliable indicator of future performance.
Inception date: 19/09/1994.
Contributors and detractors
Top 3 contributors to Fund return
+262.4%
Nuix Ltd. (NXL)
+141.9%
Gentrack Group Ltd (GTK)
+129.8%
Bravura Solutions Limited (BVS)
Top 3 detractors from Fund return
-58.4%
Healius Limited (HLS)
-78.9%
Bigtincan Holdings Ltd. (BTH)
-46.1%
Fletcher Building Limited (FBU)Contributors
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Nuix (NXL) was a key positive contributor to returns in FY24. Under this management team, the business has overseen significant transformation of the business, particularly in evolving the product offering and engaging with customers, which has yielded positive results. The technology company provided an update that it was likely to exceed its annual contract value (ACV) growth of ~10% in FY24 and upgraded its earnings guidance following a key multi-year deal win in May. Management is expecting to be underlying cashflow positive.
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Bravura Solutions (BVS) was a strong performer, as the revamped management team delivered on the company’s turn-around. Improved financial metrics, alongside a better-than-expected balance sheet were positively received by the market. We expect the business, which provides mission critical software for the financial services sector, to benefit from cash margin improvement in FY25, as the company has reset the cost base whilst shifting its attention towards renewing key contracts and winning new deals.
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Gentrack (GTK) shares rose during the year as the software billing company announced a significant upgrade to FY24 Revenue and operating earnings guidance driven by customer wins and upgrades. We believe they are well positioned for further growth and a beneficiary of the climate transition, as their sophisticated real-time software is used to process short-term energy pricing signals which enable demand responses from energy users, while keeping the grid stable and catering for the anticipated huge growth of intermittent renewable energy generation.
Detractors
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Fletcher Building (FBU) detracted from performance in the period following disappointing earnings updates, legacy issues and concerns around the building company’s balance sheet. In addition, there was significant management and board disruption. We do see long term value in FBU, which has a strong market position in the NZ Building products industry and expect that there will be progress towards resolution of their legacy issues by the end of the calendar year.
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Healius (HLS) shares fell throughout the period amid diminishing Covid-19 testing revenues combined with solvency concerns around its balance sheet. These factors resulted in an emergency capital raise required by lenders to pay down debt. The equity raise, which was priced at a 30% discount, was accompanied by full-year guidance that implied a material 1H vs 2H skew at the midpoint. We divested our shareholding during the period and did not participate in the capital raise.
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Bigtincan (BTH) shares fell over the period, tracking its weak underlying cash flow, which culminated in a dilutive capital raise in June to fund its investment in its artificial intelligence (AI) product suite, marketing and working capital. Post the capital raise, the company has more runway to balance growth and free cashflow whilst navigating higher levels of customer churn. The company rejected a non-binding bid in June and remains in a critical turnaround phase.
Our international holdings in the Information Technology sector were a key contributor to total returns over the year, rising +34%.
Portfolio changes
Additions to the Fund
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CAR Group Limited (CAR) is a global online marketplace and classifieds business which operates in the automotive, motorcycle, caravan, marine and equipment industries across Australia, the US, LatAm and South Korea. CAR has an attractive marketplace business model, dominant market position, strong cash generation and growth optionality in international markets which we view as a potential long-term compounder of earnings.
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SiteMinder Limited (SDR) is a global hotel commerce platform provider, which offers accommodation providers a range of products to manage the distribution of rooms, take bookings from and communicate with guests. We are attracted to the significant growth potential as it raises its take rate in the large global hotels addressable market, driven by the rollout of its key new products namely Channels Plus (C+) and Dynamic Revenue Plus (DR+) which are on track to accelerate growth from FY25.
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Super Retail Group Limited (SUL) is a Trans-Tasman retailer, which owns and operates a portfolio of retail brands including Supercheap Auto, Rebel, Macpac and BCF (Boating, Camping and Fishing Store). Although the consumer environment is challenged, we are attracted to the retailer’s portfolio of brands, strong balance sheet, cashflow generation and reasonable valuation.
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Woolworths Group Ltd. (WOW) is an iconic supermarket chain and operator of the Big W department stores across Australia and New Zealand. We added Woolworths to the Fund during the year as a valuation opportunity emerged. We like the defensive characteristics of the supermarket category, as well as the resilient cashflow generation and strong distribution / supply chain capabilities in the Group.
Reductions from the Fund
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Auswide Bank Ltd. (ABA) – Intense competition in the banking sector for mortgage market share has resulted in net margin income compression. We exited ABA due to funding disadvantages, lack of scale and an inability to compete with larger banks on pricing.
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McPherson's Limited (MCP) – The Fund exited the health, beauty and wellness product company, McPhersons during the period due to a refinement of portfolio positions.
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Straker Ltd (STG) – The Fund exited the position in the language translation technology company during the period due to a refinement of portfolio positions.
We continue to see long-term value with Impedimed benefitting from regulatory tailwinds, recurring style revenues and strong gross margins.
The all-cap portfolio benefited from its positive tilt towards low carbon companies.
Sector allocation
Sector overweights
Cash, Communication Services, Financials, Health Care, Industrials, Information Technology, Utilities (renewables)
Sector underweights
Consumer Discretionary, Consumer Staples, Energy, Materials, Real Estate
Outlook for the Fund
The Australian Shares Fund is an all-cap fund with active stock selection across our Ethical universe. Our process focuses on fundamental research and we seek opportunities to invest in attractive companies, where the share price materially undervalues the long-term valuation.
Leveraging an experienced team of sector analysts, we have a disciplined approach to investing. After two consecutive years of double-digit returns, we are being selective of opportunities however, the dispersion in returns provides an opportunity to selectively create, add or exit positions. Examples of recent additions to the Fund include Woolworths, Carsales, Siteminder and Nanosonics.
Macro will continue to play a role in the broader volatility of markets, with inflation and interest rates perched higher. Markets are poised for a rate cut in 2025, recognizing the backdrop of weak domestic economic data points, including consumer sentiment at its weakest since the 1990’s, however sticky inflation remains the challenge for central banks.
In this environment, we are attracted to companies with pricing power and strong balance sheets, although our small and microcap exposures are typically in an earlier stage of commercialisation and investing in growth initiatives. We believe there is an appropriate balance of growth and yield in the Fund, as well as a selection of stocks that are well placed to benefit from a cyclical recovery in the markets they operate.
*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.
The information in this summary is of a general nature and is not intended to provide you with financial advice or take into account your personal objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances and read the Financial Services Guide, relevant product disclosure statement and Target Market Determination available on our website.
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.