The portfolio recorded a gross return of +5.5% for the September quarter, underperforming the benchmark ASX 200 Accumulation Index’s return of +7.8%.

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 interest rate cut in the US 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.

At a sector level, Energy and Materials were the two main contributors to performance during the quarter. The portfolio’s zero weight position in the Energy sector contributed positively to performance versus the benchmark as the sector declined over the quarter.

The Materials sector contributed positively to performance, despite the headwind from a resurgent Resources sector (which the portfolio has a material underweight position in) after stimulus measures were announced in China late in the quarter. The strong performance of Orora offset this impact, with a takeover approach reminding investors of the value within the business, followed by an earnings result that beat market expectations, and the announced sale of its US Distribution business that allayed balance sheet concerns.

Detracting from performance during the quarter was the Utilities and Financials sectors. The Utilities sector is where the portfolio holds its renewable energy investments – Contact Energy, Meridian Energy, and Mercury. The three New Zealand ‘Gen-tailers’ faced difficult operating conditions in the quarter due to a particularly dry period and gas supply issues in the market, while Contact Energy’s proposed acquisition of Manawa Energy during the quarter was met with a muted response from the market. We continue to believe all three companies are attractive long-term investments given the decarbonization trend.

While the Financials sector contributed to positive returns during the quarter, it detracted from performance versus the benchmark driven by weakness in some of the insurance names held in the portfolio. NIB Holdings (NHF) sold off following the release of its FY24 result, with claims inflation coming in higher than market expectations and impacting margins. We think the sell-off is overdone however, and have added to our position, with the stock now trading at a 30% P/E discount to the ASX200, compared to its historical premium.

During the quarter we added Ramsay Healthcare and Woolworths to the portfolio, while we divested Helia, Fletcher Building, and Webjet B2C (WJL) following its demerger from WEB Travel Group (WEB).

Outlook for the Portfolio

Market valuations remain elevated, with the All Industrials index trading at a 20% P/E premium to its long-term average of 17x. In this environment we continue to focus on companies where we see fundamental valuation attractiveness.

Macro will continue to play a role in the broader volatility of markets, with continued focus on inflation and interest rate trajectory. With central banks beginning a rate reduction cycle, the current environment suggests growth sectors like healthcare and technology should be supported. We believe the portfolio is well positioned to benefit from this thematic, with these sectors accounting for a ~35% weighting in the portfolio, compared to less than 15% in the ASX 200 index.

Australian Shares SMA Portfolio Performance

As at 30 September 2024^*

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. 

Contributors and detractors

Contributors

• 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$1.8B, providing scope for significant debt reduction, growth investment and capital management.

• Reliance Worldwide (RWC) delivered a better-than-expected FY24 result driven by cost reductions, resulting in an improved margin outcome despite a soft sales environment. Strong operating cash flows in the period and reduced gearing levels to the lower end of the target range provide capital management optionality.

• Resmed (RMD) performed strongly following the release of its fourth quarter FY24 results and outlook commentary. The market was pleased with RMD’s top line growth and gross margin improvement, especially considering headwinds from shipping. Outlook commentary was also well received, with FY25 margin guidance implying upgrades to consensus. The stock continues to perform strongly amidst GLP-1 speculation and there remains valuation support.

Detractors

• Cochlear (COH) 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.

• Contact Energy (CEN) underperformed during the period. In early July the company issued FY25 guidance, outlined its development plans and updated the dividend outlook over the next three years, which was below market expectations. However, if the proposed Manawa acquisition is successful, the dividend profile is expected to improve.

• NIB Holdings (NHF) reported higher than expected claims inflation in the Australian private health insurance division, which led to a surprise decline in insurance margins in 2H24. This follows a multi-year period of benign claims environment. The Portfolio added to its position on the share price weakness, as we see valuation appeal in NHF, with the stock now trading at a 30% P/E discount to the ASX200, compared to its historical premium.

Reliance Worldwide delivered a better-than-expected FY24 result driven by cost reductions, resulting in an improved margin outcome despite a soft sales environment.

Portfolio changes

Additions to the portfolio

• Ramsay Healthcare Worldwide (RMD) – RHC is the largest private hospital owner and operator in Australia with ~28% of private hospital beds in the country, as well as operations in France, the UK and Nordic regions. We continue to hold a favourable long-term view in investing for the future and the long-term margin benefits. Ramsay’s market leading position and land holdings provide us with long-term strategic investment upside.

• Woolworths Group Ltd. (WOW) – WOW is an iconic supermarket chain and operator of the Big W department stores across Australia and New Zealand. We expect improved sales momentum in FY25, under the stewardship of a new chief executive officer Amanda Bardwell. WOW is a strong franchise, with solid free cashflow generation and capacity for improvement after some execution issues in FY24.

Divestments from the portfolio

• Fletcher Building Limited (FBU) – Fletcher Building position was exited due to reduced liquidity, high gearing levels and a challenging earnings outlook as residential building conditions remain weak both in Australia and New Zealand. Uncertainty regarding legacy issues and future strategy as the new management team undertakes a review also remains.

• Webjet (WJL) – The Fund exited the small position in Webjet (WJL) following the demerger event from WEB. The portfolio retained its position in WebBeds (WEB), as we believe there is strong valuation upside in WebBeds.
  
  
• Helia Group Limited (HLI) – Helia position was exited on valuation grounds. HLI has recently been impacted by lower new business written, particularly due to the Federal Government scheme assisting first home buyers. More recently CBA, Helia’s largest client put their contract up for tender which has led to uncertainty regarding future earnings.

Resmed performed strongly following the release of its fourth quarter FY24 results and outlook commentary

Market valuations remain elevated, with the All Industrials index trading at a 20% P/E premium to its long-term average of 17x.

Sector allocation

Sector overweights
Cash, Consumer Staples, Health Care, Industrials, Information Technology, Real Estate, Utilities (Renewables)

Sector underweights
Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Materials