The portfolio recorded a gross return of +5.5% in the quarter ended 31 March 2023, outperforming the benchmark ASX 200 Accumulation Index’s return of +3.5%.

Some of the headwinds the portfolio has faced in prior periods have abated, with key sector overweights in Healthcare, Renewables and Technology contributing positively during the quarter. However, our limited exposure to the carbon-intensive Materials sector continued to be the main drag on performance due to the outperformance of BHP (which is excluded from our portfolios under our ethical assessment criteria).

Healthcare was the best performing sector during the March quarter, benefiting from positions in Cochlear (COH) and Fisher & Paykel Healthcare (FPH), while not owning CSL also assisted. The takeover approach by Australian Clinical Labs (ACL) for Healius (HCL) in March also sparked interest in the sector. Communication Services was another strong contributor as Domain (DHG) had a strong rebound following a reassuring update to the market in February.

Australian Shares SMA Portfolio Performance

As at 31 March 2023^*

^Benchmark: S&P/ASX 200 Accumulation Index. Past performance is not a reliable indicator of future performance.

Inception date: 16/04/2020. Source: Praemium portal.

Contributors and detractors

Contributors

• Domain (DHG) shares appreciated 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 second-half 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.

• Cochlear (COH) shares appreciated 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 this market leading, well-run business.

• Mercury (MCY) shares appreciated 18% during the quarter with record hydrology conditions in New Zealand’s north island and increased contribution from wind combining to deliver a 29% jump in MCY’s 1H23 generation. Earnings grew substantially as a result. The investor day in March also highlighted the positive long-term growth profile for the broader Utilities sector in New Zealand as the country continues its push to decarbonise the economy.

Detractors

• The banks – Bendigo & Adelaide Bank (BEN), National Australia Bank (NAB), and Westpac (WBC) – were the biggest detractors from portfolio returns in the March quarter. All of the banks were negatively impacted by news of the collapse of Silicon Valley Bank and Credit Suisse, which fed concerns of fragility in the global financial sector. Domestic sector concerns include slowing housing credit growth, the peak of net interest income margins and the potential for bad debts to increase as higher interest rates impact households. Nevertheless, Australian banks remain well-capitalised and are well placed to navigate the short-term challenges ahead. BEN is aiming to improve efficiencies by reducing their number of core banking systems, while also expanding into digital loans. NAB has the largest market share in business lending with business credit growth forecasts for 2023 at 5-6%, above housing credit growth forecasts. WBC also has the potential to significantly reduce operating costs.

Domain (DHG) shares delivered 30% during the quarter.

Portfolio changes

Additions to the portfolio

• Orora (ORA) – ORA is a manufacturer of sustainable packaging solutions for consumable and beverage products, operating mainly in Australia, NZ and the US. We are attracted to ORA for its market-leading position in its core products, consistent cash generation, and strong balance sheet. While possessing a number of defensive style characteristics, ORA also has opportunities for growth across its business.

• Medibank Private (MPL) – MPL is Australia’s largest private health insurer, with a market share of around 30%. We believe the outlook for health insurers is favourable and we are attracted to MPL because of its market leading position, strong balance sheet, and attractive valuation upside following the cyber attack towards the end of 2022.

• Australian Clinical Labs (ACL) – ACL is the third largest pathology services provider in Australia, benefiting from the spike in PCR testing during the Covid pandemic. While Covid-related revenues have subsequently declined, we believe ACL has done a credible job in managing its business in this environment compared to peers and offers attractive valuation upside.

Reductions from the portfolio

• Graincorp (GNC) – GNC is the leading bulk grain handling company in Australia, with a network of high-quality infrastructure assets utilised to store, handle, and connect grain to customers domestically and worldwide. After a highly favourable period of weather conditions that drove record earnings, the outlook for changing weather conditions suggests earnings will also normalise and we therefore decided to take profits. Since investment, GNC delivered a return of 53% for the portfolio.
  
  

The banks – Bendigo & Adelaide Bank (BEN), National Australia Bank (NAB), and Westpac (WBC) – were the biggest detractors from portfolio returns in the March quarter.

In the short-term, macro conditions may remain a headwind in certain sectors, however we believe the portfolio has the right exposures to deliver strong returns over the long-term.

Sector allocation

Sector overweights
Healthcare, Utilities (Renewables), Industrials

Sector underweights
Materials, Energy, Consumer Discretionary