High Conviction Fund
Fund commentary
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The Materials (underweight), Consumer Staples (overweight) and Healthcare (overweight) sectors detracted value. Meanwhile, REITS (underweight), Industrials (overweight) and Utilities (overweight) added value. Since its inception twelve months ago, the Fund is 4.2% behind the S&P/ASX 300 Accumulation Benchmark and 1.6% ahead of the S&P/ASX 300 Industrials Accumulation index (which excludes resource companies).
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Highlights for the quarter included robust results from Ansell, Brambles and Medibank. We remain attracted to all three companies which meet our strict Ethical Charter and also enjoy dominant positions in their respective industries.
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Some negative news included the end of takeover discussions in relation to Ramsay Healthcare, and a weaker-than-expected result from TPG telecom, which impacted on their respective share prices. However, our long-term attraction for both companies remains unchanged. They both operate in industries that are highly resilient to any potential economic downturn and have attractive entrenched assets that are difficult for any competitor to replicate. We see the current issues as short-term in nature, providing an opportunity for the patient investor.
High Conviction (Wholesale) Fund Performance
As at 30 September 2022*
| fund | benchmark^ | |
|---|---|---|
| 3 months | -2.6% | 0.5% |
| 6 months | -12.1% | -11.8% |
| 1 year p.a. | -12.4% | -8.0% |
| since inception p.a. | -12.4% | -8.0% |
^Benchmark: S&P/ASX 300 Accumulation Index. Past performance is not a reliable indicator of future performance.
Inception date: 01/10/2021.
Top 3 contributors to fund return
Ansell (ANN)
+15.2%
Genworth Mortgages Insurance Australia (GMA)
+23.4%
Brambles (BXB)
+8.1%
Top 3 detractors to fund return
Ramsay (RHC)
-21.3%
Orora (ORA)
-15.6%
TPG Telecom (TPG)
-17.3%
Contributors
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Ansell (ANN), a major global supplier of surgical and industrial gloves was the biggest individual positive contributor to performance. The stock returned 15.2% over the quarter after delivering a robust set of results that surprised the market. While COVID-related demand for commoditised gloves continues to decline, we think this is more than reflected in the current share price and that Ansell is less exposed to these trends than some other industry participants.
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Genworth Mortgage Insurance Australia (GMA), 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.
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Brambles (BXB) is a global logistics company whose core business is the provision of reusable pallets and containers to consumer goods, food, retail and manufacturing industries. Brambles results showed continuing evidence of the company’s ability to manage inflationary pressures, leading to earnings upgrades. We also believe the company is managing capital diligently, as reflected in its recent decision not to pursue a potentially returns-dilutive project in plastic pallets for a major customer.
Detractors
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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. In negative news, the company announced that takeover discussions had concluded, leading to a weaker share price. However, we remain confident in the underlying business fundamentals which are expected to recover as COVID-related pressures fade.
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Orora (ORA) is a major domestic packaging manufacturer with dominant positions in several categories as well as some exposure to North America. Despite reporting robust results, the share price has given up some performance due to concerns over a potential slowdown in the US economy and cost inflation in Australia. Despite this, we remain attracted to the defensive characteristics of the Australian business and believe that the company is managing its North American business well.
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TPG (TPG) is a major domestic telecommunications player alongside Telstra and Optus. Despite weakness following the company’s result, we continue to view industry fundamentals favourably following the combination of Vodafone and TPG. We are also attracted to the broadly defensive characteristics of the Telecommunications sector in an environment of higher interest rates.
Ansell (ANN), a major global supplier of surgical and industrial gloves was the biggest individual positive contributor to performance.
Portfolio changes
Additions to the Fund
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Opthea (OPT): Opthea is a clinical-stage biotech company undertaking two phase 3 clinical trials in age-related macular degeneration. There is an urgent clinical need for more efficacious treatments for this disease and we participated in the company’s recent capital raise, which will be used to fund their development programs.
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Equity Trustees (EQT): Equity Trustees is a leading specialist trustee services provider. During the quarter it announced the proposed acquisition of Australian Executor Trustees Ltd. The transaction is likely to be accretive for shareholders and we participated in the capital raising to fund this transaction.
Reductions from the Fund
None
Sector allocation
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Sector overweights: Communications, Healthcare, Utilities
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Sector underweights: Materials, Energy, Real Estate
Outlook for the Fund
Overall, the Fund is positioned relatively defensively and remains focused on more mature profitable companies with established businesses and strong balance sheets. Significant overweights in the Communications, Healthcare and Utilities sectors are aligned with our Ethical Charter and are expected to be able to grow their earnings somewhat independently of the economic cycle. Market volatility is presenting opportunities to add to some of our key holdings at more favourable prices.
Overall, the Fund is positioned relatively defensively and remains focused on more mature profitable companies with established businesses and strong balance sheets.
*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.
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.