During February 2020 the Ethical Partners Australian Share Fund returned -6.89% versus the S&P/ASX 300 Accumulation Index of -7.76%, outperforming the market by 0.88%(after fees). Over the last quarter the Fund benefited from underweight positions in Property and Materials. Key detractors over the last quarter included an overweight position in both Financials and Consumer Discretionary an underweight position in Healthcare.
Ethical Partners’investment process continues to be focused on investing in sound businesses at conservative valuations. As a consequence of this around 40% of the companies currently in the portfolio have net cash balance sheets (or close to), all are producing solid cash flows and all are conservatively valued on an earnings (not sales)multiple or have a valuation based on hard assets. As a result we have not had to change the way we think about stocks or our portfolio positioning in response to equities markets selling off.
Owning interests in well run businesses that produce solid cash flows has stood the portfolio in good stead. It means that we have options during market volatility and are not holding companies that rely on equities markets to be orderly for them to be well financed. Knowing our companies well means that we can selectively add to existing positions or find new holdings during market volatility.
Emma McCarthy recently joined Ethical Partners. Emma is a passionate final year law student and joins us as Sustainability and Advocacy Assistant. We are honoured to share with you her reflections on the recent UN Global Compact conference, and how it inspired her, as a new recruit to the global sustainability and human rights community, on her journey to fight for change.
During August 2020 the Fund returned 4.10% versus the S&P/ASX 300 Accumulation Index of 3.05%, outperforming by 1.05% (after fees). Overweight positions in Consumer Staples and Industrials added to performance while stocks in General Insurance and Building Products detracted from performance.
It appears that the Australian economy will be asked to grow itself out of debt post COVID rather than experience an increase in taxes once the economy is more stable. So what are the long term projects that would change Australia for the better? It was quite timely indeed then that the Australian Energy Market Operator (AEMO) recently released its 2020 Integrated System Plan (ISP). It appears to us that AEMO has put down the framework for how Australia will operate with less coal fired electricity generation given we have an aging fleet which will be gradually de-commissioned over the next 20 years.The AEMO Plan is a whole of system blueprint for the evolution and change the electricity market will experience in the 20 years to 2040. It expects 63% of the current coal fired power stations to close by then based on company disclosures and end of life assumptions. Herein lies Australia's great stimulus opportunity.
The last quarter has been the best of times for unprofitable but growing companies and the worst of times for value managers and others trying to buy equities with any margin of safety. Speculative activity in markets has been driven by excess central bank liquidity and real yields moving to -100bps, pushing risk assets higher, the valuations of technology companies up to levels not seen before and gold to all-time highs at around $2,000 USD per ounce.