INVESTMENTS  |  FUND COMMENTARY 

Australian Shares Portfolio (SMA)

The portfolio declined 3.0% (net) in the March quarter, underperforming the benchmark ASX 200 Accumulation Index’s return of +2.2%.

26 April 2022

Overfall fund commentary 

Underperformance vs the benchmark was primarily driven by the portfolio’s natural underweight position in the materials & energy sectors, which benefited from sustained increases in commodity prices. The portfolio has a 2% weighting to those sectors driven by our investment approach under our Ethical Charter, compared with the ASX 200 benchmark weighting of 30%. Those two sectors together accounted for 4.0% of the underperformance vs the benchmark.

Additional areas of underperformance came from key portfolio exposures in the healthcare and information technology sectors. Following periods of strong performance in these sectors, the portfolio has faced headwinds in recent months as inflationary concerns have driven share price weakness across high growth and interest rate sensitive sections of the market.

Partially offsetting this was a positive contribution from the financials sector, with the banks held in the portfolio (WBC, NAB, BOQ, BEN) benefiting from higher interest rate expectations.

SMA Performance

As at 31 March 2022*

3 months
Fund: -3.2%
Benchmark: 2.2%

6 months
Fund: -4.8%
Benchmark: 4.4%

1 year p.a.
Fund: 6.8%
Benchmark: 15.0%

Since inception p.a.
Fund: 22.3%
Benchmark: 21.7%

^*Source: Praemium portal. Benchmark is the S&P/ASX 200 Accumulation Index and portfolio inception is 16 April 2020. Past performance is not a reliable indicator of future performance.

Inception date: 16/04/2020.

Contributors over the past quarter

Genworth Mortgage Insurance Australia (GMA) was the portfolio’s top contributor to performance, returning 35% over the March quarter. GMA is a leading provider of lenders mortgage insurance in Australia. During the quarter, GMA announced that it has successfully renewed its contract with the Commonwealth Bank of Australia (CBA) for the exclusive provision of lenders mortgage insurance to the bank through until December 2025. The potential loss of CBA as GMA’s largest customer had been a material overhang on the stock since June 2021 when CBA issued an RFP to the market for its Lenders Mortgage Insurance (LMI) requirements. GMA also posted a better than expected earnings result in February, enabling GMA to announce a 12c fully franked special dividend in addition to the $100m buy-back previously announced. With excess capital still on balance sheet, there is the potential for further capital management initiatives going forward.

Cochlear (COH) was another strong contributor to the portfolio’s performance, returning 8% over the quarter. COH is the global leader in implantable hearing solutions with ~60% global market share, generating high margins and strong cash flow. COH reported stronger than expected revenue growth at its half year earnings result in February, as recovery in emerging markets drove overall implant unit growth of 7%. Cost control was also ahead of expectations, resulting in a strong uplift in margins. With >$500m in net cash, the balance sheet remains in good shape to support further growth.

Detractors over the past quarter

Healius (HLS) was the single biggest detractor from performance, declining 15% over the quarter. As the largest weighting in the portfolio, the decline had a meaningful impact on portfolio performance. While HLS has been the top contributor to portfolio performance since inception, HLS was negatively impacted in the quarter by the outbreak of the Omicron variant in Australia early in the year. While HLS has been a beneficiary of increased Covid testing rates, the significant increase in daily case numbers necessitated a shift towards rapid antigen testing (RAT). This therefore reduced the demand for PCR tests provided by HLS. While PCR testing remains the ‘gold standard’ for Covid testing, the use of RATs means PCR testing is unlikely to return to the peak levels experienced in 2021. It therefore reinforces the attraction of HLS’s recent acquisition of Agilex Biolabs, which will serve to diversify HLS’s revenue streams going forward. Trading on an FY23 PE of just 15x, we continue to see strong valuation appeal in HLS as one of the cheapest healthcare stocks in the sector.

Nitro Software (NTO) was the second largest detractor from the portfolio’s performance, declining 45% over the quarter. NTO is a global SaaS company providing document productivity tools and e-signing solutions to business customers. Despite NTO continuing to grow its revenue base strongly (+30-35% in FY22), NTO continued to experience share price pressure in the March quarter as early-stage technology companies were sold down in favour of more established companies. Global peer DocuSign also experienced share price weakness in the quarter from the broader selloff in the technology sector. Nitro was replaced during the quarter with a holding in EML, which has also been sold off to a level we think presents upside, but is currently profitable and offers better market liquidity.

Portfolio changes during the past quarter

Two stock changes were made to the portfolio during the March quarter, with EML Payments (EML) and Pexa Group (PXA) entering the portfolio. The two technology stocks replaced two of the portfolio’s previous technology holdings in Nitro Software (NTO) and Bravura Solutions (BVS).

EML Payments (EML) is a fintech company, offering a broad range of global payment solutions. The cloud first, scaleable platform is an end-to-end payment management solution operating in a large addressable TAM and is aiming to displace legacy models in the payments space. We are attracted to EML because it is capital light, has high gross margins, is free cashflow generative, and has a well-regarded management team.

Pexa Group (PXA) is the leading digital property settlements platform in Australia with more than 90% market share in NSW/Victoria and has largely replaced the previous title transfer system which was paper based. We are attracted to PXA because of its high margins, strong free cashflows, high level of predictability of property transaction volumes each year, and growth options in the UK market. During the quarter we also upgraded the portfolio’s weighting in Cochlear (COH) and Mercury (MCY), while reducing weightings in National Australia Bank (NAB) and NIB Holdings (NHF).

Outlook for the fund

The portfolio continues to have significant exposure to key growth thematics in information technology, healthcare, and renewables. These sectors account for more than 40% weighting in the portfolio, compared to ~15% in the ASX 200 index. In the short-term, commodity price strength and inflation concerns may remain a headwind in certain sectors, however we believe the portfolio has the right exposures to deliver strong returns over the long term.

Portfolio strategy

Leveraging the expertise and experience of our award-winning investment team, the Australian Ethical Australian Shares Portfolio is an actively managed portfolio with a mix of quality growth stocks and traditional yielding stocks shaped by our Australian Ethical Charter.

Past performance is not a reliable indicator of future performance.

This is general information only and is not intended to provide you with financial advice or take into account your individual investment objectives, financial situation or needs. You should obtain and consider the relevant Financial Services Guide, Product Disclosure Statement and Target Market Determination relating to this product before making a decision. Our SMA portfolio is available for investment via Praemium and Hub24.

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.