Fund commentary

• At a sector level, Materials was the strongest performer for the portfolio after being a headwind for much of 2022. Outperformance in this sector was primarily driven by the portfolio’s exposure to lithium (via its holding in Pilbara Minerals), as sentiment strengthened over the quarter due to positive market conditions.

• Excluding this, the performance impact from the Resources/Energy sectors (which the portfolio is materially underweight due to our ethical stance on fossil fuel companies) was broadly neutral. The Information Technology and Healthcare sectors again detracted from performance, with specific stock-related issues driving underperformance in the Information Technology sector as Link’s takeover bid finally fell through and as EML Payments continued to be impacted by regulatory constraints. Nevertheless, we retain our bias towards these sectors as we see valuation appeal and attractive medium-term fundamentals.

Australian Shares SMA Portfolio Performance

As at 30 September 2022*

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.

Top 3 contributors to fund return

Top 3 detractors to fund return

• Pilbara Minerals (PLS) was the portfolio’s top contributor to performance, returning 99% over the September quarter. PLS has established itself as one of the largest independent global producers of hard-rock lithium (spodumene), a key component in the battery chemistry utilised in electric vehicles. Sentiment around the lithium sector is strengthening as demand for lithium raw materials continues to expand with automakers’ plans to roll out electric vehicles globally, while supply is constrained given the long lead times to bring on new sources of production. As a result, prices for lithium raw materials continue to push to new record highs. PLS’s auction platform, through which the company sells available spot tonnage of spodumene, recently produced another record price, equivalent to US$7,708/t on a 6.0% basis, ~10% higher than the previous record price. PLS’s FY22 annual result highlighted the significant cash generation from producing in a very favourable market, while the outlook for FY23 is particularly strong with revenue and earnings expected to more than double again vs FY22.

• Genworth Mortgage Insurance Australia (GMA) was the second-best contributor to the portfolio’s performance in the September quarter, returning 23% over the quarter. GMA is a major provider of lenders mortgage insurance, reported a strong set of results. The excess capital position of the company is attractive despite declining house prices and the company continues to return capital to shareholders via attractive dividends and buybacks.

• Link Administration (LNK) was the single biggest detractor from performance, declining 22% over the September quarter. LNK provides outsourced administration services to super funds, listed companies and others in Australia and the UK, while also holding an equity stake in the leading digital property settlements platform in Australia, Pexa Group (PXA). LNK has had a rollercoaster ride since Dye & Durham initially offered $5.50/share to acquire LNK in late 2021, which was reduced to $4.30/share in early July following the significant deterioration in equity markets, but finally agreed on $4.81/share after discussions between LNK and D&D. However, a late demand by the UK’s Financial Conduct Authority (FCA) to approve the deal, requiring D&D to commit to making funds available to cover potential penalties and redress payments related to the Woodford Investigation, was the straw that broke the camel’s back. With the scheme arrangement now terminated, LNK has committed to paying an 8c special dividend and exploring an in-specie distribution of its PEXA stake.

• EML Payments (EML) was the second biggest detractor from portfolio performance, declining 35% over the September quarter. EML is a fintech company, offering a broad range of global payment solutions. Following an earnings guidance downgrade in the prior quarter and the appointment of a new CEO in July, management indicated that more remediation work is required to satisfy concerns of the Irish regulator in relation to a subsidiary that EML previously acquired. This is likely to delay some of the earnings growth for the business until FY24. However, providing some offset is the benefit that EML will receive from increased cash rates in the UK, which could add up to $20m pa to EML’s earnings base. We continue to believe the stock is significantly undervalued on a fundamental valuation basis, however, we acknowledge that market sentiment may remain soft in the near term while the regulatory issues are being addressed. We are attracted to EML because it is a scalable and global platform with high gross margins and generates free cashflow.

Link Administration (LNK) was the single biggest detractor from performance, declining 22% over the September quarter.

Portfolio changes

Additions to the Fund

None

Reductions from the Fund

None

Sector allocation

• Sector overweights: Healthcare, Information Technology, Utilities (Renewables)

• Sector underweights: Materials, Energy, Consumer Discretionary