December 2023 Quarterly Report

January 22, 2024
Investment Updates

What worked for the Fund in 2023? In short, the Fund benefitted from being Overweight a range of cyclical stocks that had been sold down aggressively during CY22. For example, the Fund was aided by Overweight positions in Housing names, namely Reece, Reliance Worldwide and CSR Ltd. The Fund also saw positive attribution from select Consumer stocks including Super Retail, Breville and Wesfarmers. These cyclical segments enjoyed a strong bounce as concerns around economic growth abated significantly over the course of the year. The contrast was quite stark, CY23 started with fears around a mortgage cliff, but ended with Australian house prices approaching the previous peak and a firm belief that central bank rate hikes were firmly in the rear-view mirror. We have been selling or exiting some of these positions as both valuations and market expectations now exceed what we see as reasonable.

Whilst being Underweight resources, Fortescue was another key positive contributor over the year, we saw valuation support and after doing considerable work and engagement, saw merit in the decarbonisation efforts and capital discipline that surrounds it. As an aside, for those interested in how a business can pivot and decarbonise with ambition, I would encourage you to listen to our latest episode (Episode #30) of the Good Investing podcast which features Mark Hutchinson, CEO of Fortescue Energy.

What didn’t work for the Fund in 2023? We continued to build a position in Ramsay Healthcare during CY23 as we saw value on offer with their portfolio of assets, concerns on the balance sheet overplayed and underlying business momentum improving. However, earnings continued to miss expectations during the year, weighing on returns. Our conviction in the name is not diminished, we note post the finalised sale of the Malaysian assets on 28th December that it enters CY24 on a much stronger footing and we maintain our Overweight. The Fund was also weighed on by re-entering into IGO Ltd, a part owner of the highest quality producing lithium asset in the world. The stock was not immune to the precipitous fall in spot prices during the second half of the year, as well as having its own mea culpa on poorly executed M&A, suffering a steep drop. Again, we have maintained this Overweight position, buoyed by the net cash balance sheet and attractive valuation.

As stated above, the Fund remains Underweight the resource sector, with no position in either BHP or RIO, on ESG grounds, whilst also acknowledging these stocks are trading well in excess of their through-the-cycle valuations. We continue to be cautious of valuation in the ASX20 broadly speaking and we are currently 27% underweight the largest 20 stocks in the index, conversely, our bias to ex-50 and Small cap names is maintained. As we outline why later in the quarterly, we are cautious towards the broader market and have continued to re-position the Fund in the few remaining unloved sectors. We wrote in the September edition about the opportunities available in the Healthcare & REITS sectors, we continued to add here during the quarter. The Fund is now slightly Overweight Telco’s for the first time in almost 2.5 years. It is these sectors that is driving our positivity towards the portfolio as it stands given the significant valuation upside, despite our cautious stance to the index as a whole.

As a final point, we are proud of the emissions footprint of the Fund, being 10% of the equivalent emissions of the S&P / ASX 300. We firmly believe our discipline with our investment process embedded with strict ESG credentials, provides the platform for us to halve the emissions of the Fund out to 2030 (from a 2021 baseline) and commit to being Net Zero in 2050.

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