High Conviction Fund
The High Conviction Fund (Wholesale) (the ‘Fund’) increased 4.6% net of fees in the quarter ended 31 March 2023, outperforming its benchmark which increased 3.3%.
The Financials sector was the top contributor to the Fund’s performance, benefiting from an overweight position in insurance companies and an underweight position in the banks. Bank stocks fell due to concerns over the near-term outlook for volume growth and margins, while the offshore collapse of Silicon Valley Bank and Credit Suisse also negatively impacted sentiment. Conversely, insurance companies added value with Medibank Private and QBE performing well. The Information Technology and Communication Services sectors, in which the Fund holds overweight positions, also contributed positively to performance during the quarter.
Detracting from performance was the Healthcare sector, with Ansell underperforming following a soft earnings result in February. Underweight positions in the Consumer Discretionary and Materials sectors (in line with our Ethical Charter) also negatively impacted due to outperformance of those sectors during the quarter.
When compared to the S&P/ASX 300 Industrials Accumulation index, which similarly excludes resource companies, the Fund was ahead on a relative basis by 2.3% during the quarter.
High Conviction (Wholesale) Fund Performance
As at 31 March 2023*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 4.6% | 3.3% |
| 6 months | 9.4% | 12.8% |
| 1 year p.a. | -3.9% | -0.6% |
| since inception p.a. | -2.8% | 2.5% |
Benchmark: S&P/ASX 300 Accumulation Index. Past performance is not a reliable indicator of future performance.
Inception date: 01/10/2021.
Contributors and detractors
Top 3 contributors to Fund return
Top 3 detractors to Fund return
Contributors
-
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.
-
Orora (ORA) shares appreciated 21.3% during the quarter following a stronger than expected 1H23 earnings result. While manufacturing volumes declined in line with industry activity, the distribution business grew ahead of expectations. The North American division grew solidly, while also benefiting from a stronger USD. Management confirmed guidance for FY23 earnings to be higher than FY22, with North America expected to grow and Australasia to be broadly flat.
-
QBE Insurance Group (QBE) shares appreciated 10.8% during the quarter. QBE’s FY22 result demonstrated strong gross written premium growth of 13% and slightly better than expected underwriting profitability. The company announced a reserve reinsurance transaction which should reduce volatility in earnings going forward which was well received by the market.
Detractors
-
Westpac (WBC) and Bank of Queensland (BOQ) were the two biggest detractors from portfolio returns in the March quarter. The sector was 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 while focusing on cost discipline. WBC has the potential to significantly reduce operating costs. BOQ is undergoing a transformation program that is expected to deliver over $100m per annum of annualised cost synergies over time.
-
Ansell (ANN) shares declined following its 1H23 result and reduction to its FY23 guidance range. Strength in surgical and industrial was offset by continued destocking (post-COVID-19) and currency headwinds. We continue to hold the view that the headwinds should dissipate over time, leading to a return to normalised growth levels driven by Ansell’s competitive advantage in surgical and industrial categories.
Orora (ORA) shares appreciated 21% during the quarter following a stronger than expected 1H23 earnings result.
Portfolio changes
Additions to the Fund
None.
Reductions from the Fund
-
Perpetual (PPT) – Perpetual is an Australian based investment fund manager and the Fund’s small holding was divested following the recent acquisition of Pendal.
We continue to hold the view that the headwinds should dissipate over time, leading to a return to normalised growth levels driven by Ansell’s competitive advantage in surgical and industrial categories.
Overall, the Fund remains focused on more mature profitable companies with established businesses and strong balance sheets.
Sector allocation
Sector overweights
Healthcare, Utilities (Renewables), Communication Services
Sector underweights
Materials, Energy, Consumer Discretionary
Outlook for the Fund
Overall, the Fund remains focused on more mature profitable companies with established businesses and strong balance sheets. Significant relative overweights in the Communications, Healthcare and Utilities sectors are aligned with our Ethical Charter and are expected to be able to grow their earnings somewhat independently of the economic cycle. Market volatility is presenting opportunities to add to some of our key holdings at more favourable prices.
*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.
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.