Australian Shares Fund
Outlook for the fund
The Australian Shares Fund is an all-cap fund with active stock selection across our Ethical universe, as defined by our Ethical Criteria. Our process focuses on fundamental research, and we seek opportunities to invest in attractive companies, where the share price materially undervalues the long-term valuation.
With equity markets marching to all-time highs, these long-term valuation opportunities are becoming more difficult to find. The S&P ASX300 index is now trading one standard deviation above its historical mean, which indicates that valuations are reasonably full.
However, we believe the current environment remains attractive for stock pickers given the elevated volatility in share prices and dispersion in stock returns.
The Fund is an actively managed portfolio. Examples of active management include an overweight position in Webjet, which had been sold down on concerns of slowing global travel, although a trading update and strategy day saw the stock bounce back. We also actioned a material reduction in our HLI position in the March quarter, which had been one of our prior period top performers.
The volatility in the March quarter provided an opportunity for the Fund to add Nanosnics, a new name to the portfolio. Nanosonics is an Australian infection prevention company that has unique technology for high level disinfection. We see good optionality with the new product (Coris), which expands the addressable market.
There continues to be takeover interest in some of our portfolio holdings. A deal between Symbio and Aussie Broadband was consummated in the March quarter, and Ansarada attracted a bid from a global competitor and entered a Scheme of Arrangement, which has been supported by the Board.
Macro-economic conditions will continue to play a role in the broader volatility of markets, as persistent inflation may see interest rates stay higher for longer.
We are a bottom-up investor, actively looking for attractive investment opportunities. We seek out investments which provide for and support the ethical principles set out in the Australian Ethical Charter across a broad market cap universe. We are attracted to companies with pricing power and strong balance sheets, although our small and microcap exposures are typically in an earlier stage of commercialisation and investing in growth initiatives.
Commentary for the quarter ended March 2024
The Australian Shares Fund (Wholesale) (the ‘Fund’) rose by 8.7% net of fees for the March quarter, outperforming the benchmark which rose 6%. The Australian Shares Fund (Retail) option rose 8.5% net of fees. It was the strongest calendar year start for domestic equity markets in five-years.
Equity markets hit record levels as investors digested reporting season updates, which were not as bad as feared. Investor sentiment improved with interest rate expectations plateauing following a synchronized move by central banks to tame inflation, prompting a shift from a defensive stance in portfolios to add growth.
The Fund benefited from stock selection in large cap names and the exposure to small cap companies, which outperformed their large cap counterparts during the March quarter. This reverses a trend seen in prior quarters where the large cap names have materially outpaced the small cap names.
The Fund’s investments in the Technology sector added value during the period due to stock selection with strong share price performance from holdings like Bravura and Gentrack. The Fund also benefited from its underweight position in the Materials sector, which underperformed due to weaker commodity prices.
The Healthcare and Consumer Discretionary sectors detracted from performance during the quarter. The Fund is underweight the Consumer Discretionary sector as nearly a third of the stocks are excluded due to our ethical process which restricts gaming and liquor stocks. The Healthcare sector lagged due to specific stock issues.
The Fund’s cash holding, which averaged 8% during the March quarter, detracted from performance. The Fund’s cash holdings are slightly elevated due to cash proceeds from takeover activity and a selective approach to allocating towards investment opportunities against a backdrop of elevated valuations.
We continue to see takeover activity feature in the Fund. The deal with Symbio and Aussie Broadband was consummated during the March quarter. Another portfolio company, Ansarada, was the subject of takeover activity during the period.
Australian Shares (Wholesale) Fund Performance
As at 31 March 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 8.7 | 6.0 |
| 1 year p.a. | 19.1 | 15.1 |
| 3 years p.a. | 4.8 | 9.6 |
| 5 years p.a. | 10.7 | 8.7 |
| 10 years p.a. | 11.1 | 8.6 |
| since inception p.a. | 12.7 | 10.1 |
^Benchmark is 65% ASX 100 / 35% ASX Small Ordinaries. Past performance is not a reliable indicator of future performance.
Inception date: 23/01/2012.
Australian Shares (Retail) Fund Performance
As at 31 March 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 8.5 | 6.0 |
| 1 year p.a. | 18.4 | 15.1 |
| 3 years p.a. | 4.2 | 9.6 |
| 5 years p.a. | 9.9 | 8.7 |
| 10 years p.a. | 9.9 | 8.6 |
| since inception p.a. | 9.7 | 7.5 |
^Benchmark is 65% ASX 100 / 35% ASX Small Ordinaries. Past performance is not a reliable indicator of future performance.
Inception date: 19/09/1994.
Contributors and detractors
Top 3 contributors to Fund return
+63.7%
Bravura Solutions Limited (BVS)
+20.9%
Suncorp Group Limited (SUN)
+32.8%
Gentrack Group Ltd (GTK)
Top 3 detractors to Fund return
-36.6%
Impedimed Limited (IPD)
-14.8%
Fletcher Building Limited (FBU)
-10.7%
3P Learning Ltd (3PL)Contributors
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Bravura Solutions (BVS) was a strong performer for the Fund in the March quarter, as the revamped management team delivered on the company’s turn-around. Improved financial metrics, alongside a better-than-expected balance sheet were positively received by the market when they announced their interim results in February. We see further upside to performance, as FY24 is a transitional year for the business as management re-sets the cost base and exits unprofitable contracts.
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Suncorp (SUN) delivered a strong 1H24 result, driven by strong investment income. Insurance margins are expected to remain within target as the increase in reinsurance costs moderates and pricing increases earn through. The ACCC approved the sale of the bank to ANZ and pending two further approvals, the transaction is expected to complete by the middle of this year. Suncorp as a pure-play general insurer is expected to trade at a similar PE multiple to IAG and this has been reflected in the recent share price increase.
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Gentrack (GTK) was a strong performer for the Fund in the March quarter, with the market anticipating the energy billing company will be a significant beneficiary of climate transition. There is a need for more sophisticated real-time software to process short-term energy pricing signals which enable demand responses from energy users, while keeping the grid stable and catering for the anticipated huge growth of intermittent renewable energy generation.
Detractors
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3P Learning Ltd (3PL) shares lagged the broader market in the March quarter, as investors digested a weaker than expected interim result. The B2C division has slowed as parents take up less digital education offerings and the B2B division was resilient, with the newer product offerings yet to ramp. In the prior quarter, the ed-tech company lowered its expectations for EBITDA to allow for additional investment associated with the change in distribution rights in the US market for Reading Eggs. The on-market buyback remains active.
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Impedimed (IPD) shares fell during the quarter as a change in management meant a re-basing of the market’s expectations for sales ramp-up post National Comprehensive Cancer Network guideline inclusions. We continue to see long-term value, with Impedimed benefitting from regulatory tailwinds, recurring style revenues and strong gross margins.
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Fletcher Building (FBU) detracted from performance during the March quarter following a disappointing interim earnings update, legacy issues, and balance sheet concerns. In addition, management changes were announced. We continue to see long term value in FBU, which has a strong market position in the NZ Building products industry, as earnings recover, and legacy issues are largely resolved by the end of the calendar year.
Bravura Solutions was a strong performer in the March quarter as the revamped management team delivered on the company’s turn-around.
Portfolio changes
Additions to the Fund
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Aussie Broadband Ltd (ABB) – ABB is a fast-growing telecommunications provider in Australia, originally focusing on NBN reselling but now offering a diverse range of data, voice, and connectivity services to residential, business, and enterprise customers. An unexpected contract loss towards the end of the quarter was disappointing but we believe the investment thesis remains intact and fundamental valuation attractive.
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Nanosonics Limited (NAN) – Nanosonics is an Australian infection prevention company that has unique technology for high level disinfection. We give credit to the sustainable, recurring sales model for existing products and see good medium-term optionality for the new product, Coris, expanding Nanosonic’s addressable market.
Reductions from the Fund
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Symbio Holdings Limited (SYM) – During the quarter, Aussie Broadband (ABB) completed the acquisition of Symbio.
Despite a share price fall during the quarter, we continue to see long-term value in the medical device company thanks to regulatory tailwinds.
We believe the current environment remains attractive for stock pickers given the elevated volatility in share prices and dispersion in stock returns.
Sector allocation
Sector overweights
Utilities, Information Technology, Financials
Sector underweights
Materials, Energy, Consumer Discretionary
*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.
Fund updates