Australian Shares Fund
With equity markets rebounding in early 2023, the Australian Shares Fund (Wholesale) (the ‘Fund’) appreciated 1.2% net of fees in the quarter ended 31 March 2023, underperforming its benchmark which rose 3.3%. The Australian Shares Fund (Retail) rose 1.1% net of fees in the quarter, similarly underperforming the benchmark.
The Fund has an all-cap strategy with investments spread across small and large-cap names in Australia and New Zealand. With small and micro-cap companies disproportionately affected by rising global interest rates over the last year, their underperformance against large companies continues to be a drag on the Fund’s relative investment performance.
At a sector level, the Fund’s underweight allocation in Materials, Consumer Discretionary and Consumer Staples detracted from investment performance, while its overweight position in Information Technology proved to be a negative contributor.
The Fund’s cash position remains elevated and we are looking to opportunistically deploy this capital.
Australian Shares (Wholesale) Fund Performance
As at 31 March 2023*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 1.2% | 3.3% |
| 1 year p.a. | -12.4% | -0.6% |
| 3 years p.a. | 15.5% | 16.6% |
| 5 years p.a. | 8.1% | 7.3% |
| 10 years p.a. | 11.3% | 8.1% |
| since inception p.a. | 12.2% | 9.7% |
^Benchmark is composite S&P/ASX Small Industrials Accumulations Index till 12 August 2019 and S&P/ASX 300 Accumulation Index thereafter. Past performance is not a reliable indicator of future performance.
Inception date: 23/01/2012.
Australian Shares (Retail) Fund Performance
As at 31 March 2023*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 1.1% | 3.3% |
| 1 year p.a. | -13.0% | -0.6% |
| 3 years p.a. | 14.7% | 16.6% |
| 5 years p.a. | 7.2% | 7.3% |
| 10 years p.a. | 10.0% | 8.1% |
| since inception p.a. | 9.4% | 7.2% |
^Benchmark is composite S&P/ASX Small Industrials Accumulations Index till 12 August 2019 and S&P/ASX 300 Accumulation Index thereafter. Past performance is not a reliable indicator of future performance.
Inception date: 19/09/1994.
Contributors and detractors
Top 3 contributors to Fund return
Top 3 detractors to Fund return
Contributors
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Nuix (NXL) shares appreciated 112% during the quarter following a favourable Federal Court judgement in relation to the proceedings brought by former CEO Ed Sheehy. The court ruled that he is not entitled to monetary compensation, although he has appealed against the decision. The software company also reported progress on financial performance in February, delivering at the upper end of guidance. We see signs of progress under the new leadership team and continue to see value in the name.
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Domain (DHG) shares delivered 30% during the quarter. After a difficult December quarter driven by a 20% decline in property listing volumes, early signs of stabilisation in property markets began to appear in the current quarter. With cost reductions implemented by management, the 2H should be a record earnings result for DHG, a credible result in a difficult operating environment. With listing volumes expected to recover in FY24 and price rises also coming through, the outlook for DHG is positive.
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Cochlear (COH) shares delivered 17% during the quarter following a strong result, with NPAT 4% ahead of consensus and a reiteration of full-year guidance. The market also appears enamoured by the upside opportunity from the delayed launch of the Nucleus 8 (N8) upgrade and the announced $75m buy-back over the next 12 months. We continue to like the opportunity of the market leading, well-run business.
Detractors
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Bravura (BVS) fell 43% and undertook a dilutionary capital raise during the quarter to fund the business, replace a working capital debt facility and implement a restructuring programme. The technology company disclosed 1H23 results and is underperforming relative to expectations, reflecting continued headwinds in the UK and cost over-runs on existing project implementations. FY23 is a re-set year for the business, and we see a recovery pathway and have increased our position as we believe the stock is trading at a material discount to its fundamental value.
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OFX (OFX) shares declined 34% during the quarter as the lag effect of higher interest rates began to feed through into lower transaction volumes for OFX’s Consumer segment. At the investor day in March, management indicated that FY23 EBITDA will be at the lower end of the guidance range, implying a slowdown in earnings in Q4. We believe this impact will transitory and note that the Corporate division is continuing to perform well. We continue to believe OFX is an attractive stock to own over the long term given a highly regarded management team, strong free cash generation and solid balance sheet.
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Bigtincan (BTH) shares declined 25% during the quarter as technology companies with cashburn profiles remained out of favour with investors. The company reported their results in February and there was underlying cashburn in 1H, however, management has maintained its guide of moving into sustainable free cashflow break-even in 4Q23. They have sufficient cash on the balance sheet to get them to that point, after raising capital in December 2022. The discussions regarding a potential change in control transaction continue, with no material update. At ~2x EV/ARR, we see value in the name.
Domain (DHG) shares delivered 30% during the quarter.
Portfolio changes
Additions to the Fund
None.
Reductions from the Fund
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Link Securities (LNK) – We divested fund services and share registry services company Link Services. The company ultimately disappointed the market with its acquisitions.
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Nitro Software (NTO) – We divested PDF productivity and e-signature company into a private equity takeover offer.
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Graincorp (GNC) – We sold down our holding in Graincorp as the premium between the international and Australian wheat prices has largely closed, which reduces the core businesses profitability.
Bigtincan (BTH) shares declined 25% during the quarter as technology companies with cashburn profiles remained out of favour with investors.
We continue to be a bottom-up investor, actively looking for attractive investment opportunities that meet our Ethical Charter.
Sector allocation
Sector overweights
Healthcare, Renewables (Utilities), Information Technology
Sector underweights
Consumer Discretionary, Energy, Materials
Outlook for the Fund
Over the last quarter, global inflation numbers have broadly moderated resulting in forward-looking central bank interest rate expectations falling. This is a very positive development for investors, albeit the jury is still out on how long it will take to get inflation really under control.
We continue to be a bottom-up investor, actively looking for attractive investment opportunities that meet our Ethical Charter. We are particularly interested in larger cap names which have a better ability to manage the bumps on the recovery road.
*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.
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