Australian Shares Fund
The Australian Shares Fund (Wholesale) (the ‘Fund’) climbed 10.3% net of fees in the quarter ended 30 September 2024, outperforming its benchmark which rose 7.5%. The Australian Shares Fund (Retail) advanced 9.9% net of fees, also outperforming the benchmark.
Renewed enthusiasm for equity markets pushed the broader market index to a record high, with the S&PASX 300 notching up its strongest quarterly start to a financial year since 2010. News of the first US interest rate cut in four years and economic stimulus measures in China helped sentiment, triggering some sector rotation out of defensive names and into economic sensitive sectors.
During the September quarter, Australian investors digested reporting season, which led to aggregate earnings downgrades across the market and a subdued outlook for FY25. Expectations for an interest rate cut in Australia have now been pushed out to early next calendar year and consensus forecasts are poised for an earnings recovery in FY26.
Stock selection was a key contributor to the Fund performance during the September quarter, with alpha generation in the Information Technology and Healthcare sectors, while the Financials sector was a drag on performance.
Software company Nuix was a stand-out performer, with the share price doubling in the quarter, following a positive financial update and inclusion in the S&P ASX300 index, alongside other portfolio names Opthea and Immutep. Australian Clinical Labs also performed well, after delivering margin improvement in the second half.
In the financials sector, NIB Holdings detracted from performance as higher than expected claims inflation led to a surprise decline in insurance margins. The Fund added to its position on the share price weakness, as the stock is trading at ~30% discount to the ASX200 compared to its historical premium.
The Fund benefited from takeover interest, with the receipt of proceeds from the Ansarada Scheme, while Orora and Bigtincan attracted takeover interest. The Fund participated in capital raisings for IPH and Fletcher Building and added new names to the portfolio - Hansen Technologies, Macquarie Group and QBE insurance.
During the quarter, the Australian Shares Fund celebrated its 30-year anniversary, a significant milestone for the fund and its investors The fund’s track record is a proof point for ethical and investment outperformance over the long-term.
Co-portfolio manager Deana Mitchell will take the reins as portfolio manager from Andy Gracey on October 1. Deana has been co-portfolio manager since October 1, 2023, focusing on larger-cap stocks. Nothing changes for Andy and his commitment to Australian Ethical; he will continue to be the portfolio manager for the Emerging Companies Fund, and he will continue to work closely with Deana around the management of smaller stocks within the portfolio. We couldn’t be happier for Deana who has proven herself as a highly capable and now well-regarded portfolio manager.
Outlook for the Fund
With the Australian share market now trading at record highs and valuations at elevated levels, we remain disciplined in our approach to stock selection. We have added names in the September quarter where we see fundamental upside, including Hansen Technologies, QBE Insurance and Macquarie.
Macro will continue to play a role in the broader volatility of markets, with continued focus on the inflation and interest rate trajectory. With the market poised for interest rate cuts, the current environment suggests growth sectors like technology and healthcare should be supported. We believe the portfolio is positioned to benefit from this thematic, given the sector tilts in our portfolio.
The Australian Shares Fund is an all-cap fund with active stock selection across our Ethical universe. Our investment process focuses on fundamental research and we seek opportunities to invest in sustainable companies, where the share price materially undervalues the long-term valuation.
Australian Shares (Wholesale) Fund Performance
As at 30 September 2024~
| fund | benchmark^ | |
|---|---|---|
| 3 months | 10.0% | 7.5% |
| 6 months | 9.4% | 5.2% |
| 1 year p.a. | 23.4% | 20.9% |
| 3 years p.a. | 2.7% | 7.9% |
| 5 years p.a. | 9.1% | 8.2% |
| 10 years p.a. | 11.1% | 9.1% |
| since inception p.a. | 13.1% | 10.2% |
^ Benchmark: 65% ASX 100 / 35% ASX Small Ordinaries.
Total Return Index & 35% ASX Small Ordinaries Total Return Index to better reflect the market cap weightings held in the fund . On 13 August 2019 the benchmark previously changed from S&P/ASX Small Industrials Index to S&P/ASX 300 Accumulation Index. The historical benchmark returns are calculated by linking these indices.
*Past performance is not a reliable indicator of future performance.
Inception date: 23/01/2012.
Australian Shares (Retail) Fund Performance
As at 30 September 2024~
| fund | benchmark^ | |
|---|---|---|
| 3 months | 9.9% | 7.5% |
| 6 months | 9.0% | 5.2% |
| 1 year p.a. | 22.7% | 20.9% |
| 3 years p.a. | 2.1% | 7.9% |
| 5 years p.a. | 8.3% | 8.2% |
| 10 years p.a. | 10.0% | 9.1% |
| since inception p.a. | 9.9% | 7.5% |
^ Benchmark: 65% ASX 100 / 35% ASX Small Ordinaries.
Note: Note: From 30 September 2023, the benchmark changed from S&P/ASX 300 Accumulation Index to 65% ASX 100 Total Return Index & 35% ASX Small Ordinaries Total Return Index to better reflect the market cap weightings held in the fund . On 13 August 2019 the benchmark previously changed from S&P/ASX Small Industrials Index to S&P/ASX 300 Accumulation Index. The historical benchmark returns are calculated by linking these indices.
* Past performance is not a reliable indicator of future performance.
Inception date: 19/09/1994.
Contributors and detractors
Top 3 contributors to Fund return
+113.0%
Nuix (NXL)
+41.4%
Orora (ORA)
+50.2%
Australian Clinical Labs (ACL)
Top 3 detractors to Fund return
-14.4%
Cochlear (COH)
-12.1%
Macquarie Technology (MAQ)
-17.3%
NIB Holdings (NHF)
Contributors
-
Nuix (NXL) was a key positive contributor to returns. Under this management team, there has been transformation of the business, particularly in evolving the product offering and engaging with customers, which has yielded positive results. The company posted a strong FY24 result which highlighted the company’s solid underlying cash flow and balance sheet, with FY25 guided ACV growth ahead of expectations. Nuix was added to the S&P/ASX 300 index in September.
-
Australian Clinical Labs (ACL) performed strongly alongside other listed diagnostics companies as patient volumes started to show some recovery. ACL delivered a solid FY24 result, with strong second half margins amplifying the valuation disparity compared to its peers. The growth profile and valuation remain supportive.
-
Orora (ORA) performed strongly following a sequence of positive news flow. The company delivered a better-than-expected FY24 result, received a take-over offer (subsequently rejected), and announced the sale of the North American packaging solutions business for better-than-expected A$1.77B, providing scope for significant debt reduction, growth investment and capital management.
Detractors
-
Macquarie Telecom (MAQ) declined 12% over the quarter, despite a strong FY24 result that delivered record earnings and free cash flow generation during a period with minimal capex. However, the earnings outlook for FY25 was moderately below our expectations, while MAQ is entering another multi-year period of elevated capex as they embark on their next data centre build.
-
NIB Holdings (NHF) – Higher than expected claims inflation in the Australian private health insurance division led to a surprise decline in insurance margins in 2H24. This follows a multi-year period of benign claims environment. The Fund added to its position on the share price weakness, as we see valuation appeal in NIB, with the stock now trading at a 30% discount to the ASX200, compared to its historical premium.
-
Cochlear (COH) has underperformed since it released its FY24 result. The weakness was primarily driven by weaker outlook commentary driven by its cloud, product and business investment requirements. We continue to hold the view that the investment offers long-term upside and near-term weakness offers an opportunity to buy a high margin, market leading medical device company at below recent historical averages.
Nuix: The management team has overseen significant transformation of the business which has yielded positive results.
Portfolio changes
Additions to the Fund
-
Hansen Technologies Limited (HSN) – Hansen is a global billing software business for the energy & utilities and communications & media sectors. HSN is trading at an undemanding valuation and we see an opportunity for margin recovery over the medium-term as the recently acquired Powercloud business undergoes a turnaround.
-
Macquarie Group, Ltd. (MQG) – Macquarie is a diversified financials business with a long-term track record of earnings growth. The stock was added, as we believe MQG offers attractive earnings growth given the improved market dynamics.
-
QBE Insurance Group Limited (QBE) – Global insurance company QBE was added to the portfolio. The new management team continues to de-risk its business and generate steady earnings. QBE is trading at an attractive valuation and has a strong balance sheet with capacity for capital management.
- Webjet Group Limited (WJL) – Webjet underwent a demerger in the September quarter, with Webjet separating the online travel agent to a separately listed entity (ASX code: WJL) on a 1 for 1 basis.
Reductions from the Fund
-
Ansarada Group Ltd. (AND) – The scheme of arrangement for Ansarada was implemented. We had held Ansarada since 2018 as an unlisted investment and are pleased that a profitable exit for investors had been finalized.
-
Super Retail Group Limited (SUL) – The Fund exited the small position in Super Retail after a strong share price reaction to the retailers results in August.
Australian Clinical Labs performed strongly alongside other listed diagnostics companies as patient volumes started to show some recovery.
With the market poised for interest rate cuts, the current environment suggests growth sectors like technology and healthcare should be supported. We believe the portfolio is positioned to benefit from this thematic, given the sector tilts in our portfolio.
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
^ 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.