INVESTMENTS | FUND COMMENTARY
Australian Shares Fund
Over the 12 months, the Fund underperformed its benchmark: +14.2% vs +17.5% (Wholesale +15% vs +17.5%). The underperformance is attributed to small companies underperforming large companies over the year. Our financials and utility exposures were a drag on investment performance over the 12 months.
The Fund has strongly outperformed its benchmark over the medium and long term.
December 2021
The Australian Shares Fund underperformed its benchmark over the quarter: -1.1% vs +2.2% (wholesale -1.0 vs +2.2%). The underperformance is attributed to small companies underperforming large companies in this quarter and the Fund’s significant underweight position in materials, with mining companies performing very strongly. As such we also attribute our underperformance to global inflationary concerns.
Meanwhile, global investors are grappling with the emergence of supply chain driven inflation, which is driving future interest rate expectations up. Soft and hard commodity owners are beneficiaries in an inflationary environment as commodity prices tend to keep pace with inflation. Conversely, high growth companies - particularly those in the earlier stage of commercialisation - are getting penalised by investors through the discounting of their earnings by a higher rate and because significant earnings are still several years away.
AUSTRALIAN SHARES (Wholesale) Fund Performance
*Benchmark is composite S&P/ASX Small Industrials Accumulations Index till 12 August 2019 and S&P/ASX 300 Accumulation Index thereafter. Past performance is not a reliable indicator of future performance.
AUSTRALIAN SHARES (RETAIL) Fund Performance
*Benchmark is composite S&P/ASX Small Industrials Accumulations Index till 12 August 2019 and S&P/ASX 300 Accumulation Index thereafter. Past performance is not a reliable indicator of future performance.
Contributors over the past quarter
The strongest quarterly stock contributor was education software company and owner of Mathletics and Reading Eggs learning programs, 3PL Group (+45%). We attribute the share price strength to a better appreciation of the company’s strategy and 2022 guidance, as well as the ongoing Covid-19 crisis which promotes home learning.
OFX Group which provides cost effective technology-based foreign exchange services to companies and individuals appreciated 46% over the quarter. The company announced a positive trading update for 2022, while also announcing an attractively priced acquisition of a Canadian FX peer.
Lithium producer Pilbara Minerals appreciated 56% on high demand and constrained supply leading to record global lithium prices. The electrification of the global automobile industry and the proliferation of lithium batteries on the electricity grid explain much of this record demand.
Contributors over the past 12 months
The strongest annual stock contributor was pathology company Healius which appreciated 42%. We attribute the gains to additional Covid-19 pathology testing volumes and a greater appreciation of the company after it sold its medical practice business in 2020.
Contract research company Cogstate which specialises in neurological research appreciated 120% on news the Federal Drug Administration had approved the first disease altering Alzheimer’s therapy. Cogstate benefits from more clinical research interest into Alzheimer’s and longer term it has some of the leading digital tools used for non-invasively monitoring cognition.
Data centre-focused Macquarie Telecom appreciated 40% over the year on news of the expansion of its NSW data centre capacity.
Detractors over the past quarter
Our largest quarterly detractor was software-as-a service company Bigtincan which fell 20%. Bigtincan sells documents management software that equips sales representatives with the most relevant marketing information, while tracking client digital interactions and providing digital coaching for sales reps. We attribute the share price decline to a broad sell-off in earlier stage US technology companies on inflationary concerns.
The share price of Westpac Banking Corporation fell 18% over the quarter underperforming peers. We attribute the relative underperformance of Westpac against peers to the optics around regulatory issues it has been dealing with.
One of our larger disappointments for the quarter was Salt Lake Potash which promised environmentally advantageous fertiliser but a combination of technology problems around brine production and a loss of investor confidence resulted in the company going into administration.
Detractors over the past 12 months
Renewable energy generator and retailor Meridian Energy (-34%) was the largest detractor over the year, after getting overbought in the 2020 year because of its inclusion and sizeable weighting in a global renewable index. The company was subsequently down weighted in this index.
Employee wellbeing software provider Limeade fell 70% after losing clients during Covid-19. We believe there is a role for technology in monitoring large workplaces and shining a light on staff that need support. This software can raise employee engagement and reduce employee turnover which is valuable to employers.
Personal protective equipment provider Cleanspace which provides powered air purifying respirator hardware disappointed in 2021, with the hospital market moving towards cheaper facemasks for Covid-19 protection. We believe the product is market leading and remain invested in the company.
Portfolio changes during the past quarter
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We have introduced EML Payments into the Fund after its share price was significantly de-rated on the back of an Irish regulatory investigation. We expect EML to be able to satisfy the regulator early in 2022 and return to growth thereafter.
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We added additional Nuix shares to the portfolio. Nuix provides investigative analysis and intelligence software, with the stock significantly downrated since its 2020 IPO.
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We divested our holding in IT system integrator Empired, cloud licensing company Rhipe and regulated energy infrastructure owner Spark Infrastructure on respective takeover offers.
Portfolio changes during the past 12 months
We added 10 new companies in 2021 while divesting from 11. Of the 11 names divested, six occurred through takeover offers. The takeover offers accepted included:
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IT system integrator Empired
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IT systems integrator RXP
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Consumer products company Asaleo
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Corporate telecommunications company Vocus Communications
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Cloud licensing company Rhipe
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Regulated energy infrastructure owner Spark Infrastructure
We have generally been adding to holdings of our underperforming names over the year.
Our significant IPO participation in 2021 was Rubicon Water which sells water solutions for large scale gravity feed irrigation schemes. We believe reliable irrigation water and the infrastructure that can manage it efficiently will be increasingly valued in the future.
Outlook for the fund
The Australian Shares Fund is overweight in more growth-orientated healthcare and information technology sector companies and is significantly underweight materials. With the emergence of inflation and ongoing debate around whether the inflation is transitionary in nature, earlier stage growth companies typically underperform in this environment while commodity-orientated companies benefit. While inflationary concerns are evident, we are bottom-up stock pickers using fundamental investment analysis and have confidence good opportunities will present in this environment.
Fund strategy
The Australian Shares Fund is an actively managed all-cap strategy investing in large, small and microcap companies listed on the ASX and NZX that meet our values-based Charter. We are a bottom-up investor using fundamental analysis with no change in fund strategy expected over the next 12 months.
SEE FUND INFO*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.
^According to the Mercer Investment Performance Survey of the Wholesale-Equity - Australia - All Cap (Core) Universe and the Retail-Equity - Australia - All Cap (Core) Universe as at 30 September 2021. Information sourced from MercerInsights has been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party.
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.
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