High Conviction Fund

High Conviction Fund commentary for the year ended 31 December 2022.

Published 1 Feb 2023 | 9 min read

The High Conviction Fund (Wholesale) (the ‘Fund’) fell 6.5% net of fees in the year ended 31 December 2022, underperforming its ASX 300 benchmark which declined 1.8%.

Key drivers of the underperformance were the Fund’s significant underweighting in Materials and Energy sectors. Also impacting negatively on returns were the Fund’s exposures in Information Technology and Healthcare.

Financials (overweight) were the strongest positive contributor, followed by Consumer Discretionary (underweight) and Real Estate (underweight). When compared to the S&P/ASX 300 Industrials Accumulation index, which excludes resource companies, the Fund was ahead by 1.5% over the 12 months.

The strongest individual contributors to the Fund included Helia (HLI), Ansell (ANN) and Suncorp (SUN). Detracting from performance were positions in Healius (HLS), Fletcher Building (FBU) and Nuix (NXL). We remain positive on the longer-term outlook for all three companies.

Overall, the Fund is positioned towards exposures that are expected to be defensive to a slowing economic environment and remains focused on more mature profitable companies with established businesses and strong balance sheets.

High Conviction (Wholesale) Fund Performance

As at 31 December 2022^*

	fund	benchmark^{^}
3 months	4.6%	9.1%
6 months	1.9%	9.6%
1 year p.a.	-6.5%	-1.8%
since inception p.a.	-6.8%	0.3%

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

+34.4%

Helia Group (HLI)

+14.0%

Ansell (ANN)

+12.6%

Suncorp (SUN)

Top 3 detractors to Fund return

-71.6%

Nuix Limited (NXL)

-39.5%

Healius (HLS)

-30.9%

Fletcher Building (FBU)

Contributors

Helia Group (HLI), a major provider of lenders mortgage insurance, produced strong results during 2022. Despite rising interest rates, the company continues to experience low levels of claims. The strong capital position of the company has allowed it to return capital to shareholders via attractive dividends and buybacks.
Ansell (ANN), a major global supplier of surgical and industrial gloves, was added to the Fund following an earnings downgrade which allowed the Fund to purchase stock at attractive levels. Recent business results have pleased the market, allowing some recovery in the share price. The outlook for COVID-related demand for commoditised gloves remains difficult, but we think that Ansell is less exposed to these trends than some other industry participants.
Suncorp (SUN) outperformed the market despite ongoing weather events. The pricing environment for general insurance has been robust and the company received a favourable judgement from the High Court in relation to business interruption and COVID-19, which will allow it to release the majority of its provision for these claims.

Detractors

Nuix Limited (NXL) performed poorly amidst global headwinds for technology valuations and ongoing concerns over governance and legal costs. We view 2022 as a transition year and expect the new management team’s efforts to drive improved revenues in 2023, which are not reflected in current valuations being ascribed to the company.
Healius (HLS) is a significant provider of diagnostic services across pathology and imaging, which benefited initially from the significant increase in work associated with COVID-19. However with COVID-19 pathology volumes now falling, the company has experienced negative operating leverage and near term earnings expectations have been reduced.
Fletcher Building (FBU) underperformed as the RBNZ raised rates and investors price in a more difficult construction environment. The company continues to trade on a low multiple and has been undertaking a focused operational improvement strategy, that should support improved returns when conditions stabilise.

Helia Group (HLI), a major provider of lenders mortgage insurance, produced strong results during 2022.

Portfolio changes

Additions to the Fund

Ansell (ANN) – Ansell, a global PPE supplier, was added following a profit downgrade that saw a material share price fall.
Downer (DOW) – Downer, a major domestic contractor was added on expectations of post COVID-19 business recovery.
Perpetual (PPT) – Perpetual, a diversified fund manager and financial service provider, was added on share price weakness.
QBE Insurance Group (QBE) – QBE, a global insurer, was added following share price weakness and in line with the view that insurers would benefit from higher interest rates
Domain (DHG) – Domain was added as a high quality real estate platform business that exhibits pricing power.
EQT Holdings (EQT) – EQT was introduced as a leading trustee services provider trading at a reasonable valuation.
Opthea (OPT) – OPT was introduced with a small weight, with the potential for significant upside if the company is successful in its clinical trials.
Dexus (DXS) – We introduced DXS which is predominantly an office focused real-estate investment trust into the Fund. We are attracted to the significant discount to NTA and decent yield.

Reductions from the Fund

Costa Group (CGC) – CGC (agribusiness) was removed after disappointing performance and balance sheet concerns.
EML Payments (EML) – EML (payments provider) was divested following significant ongoing regulatory issues.
NIB Holdings (NHF) – NIB (health insurer), was divested early in the year, with MPL the preferred health insurance exposure.

Ansell, a global PPE supplier, was added following a profit downgrade that saw a material share price fall.

The Fund is positioned in line with our Ethical Charter with material exposures to sectors such as Communications, Healthcare and Utilities and limited exposure to heavier footprint industries such as Resources.

Sector allocation

Sector overweights
Communication Services, Healthcare, Utilities (Renewables)

Sector underweights
Materials, Energy, Real Estate

Outlook for the Fund

The Fund is positioned in line with our Ethical Charter with material exposures to sectors such as Communications, Healthcare and Utilities and limited exposure to heavier footprint industries such as Resources. We continue to seek exposures that are defensive to the economic cycle, with established business models and strong balance sheets. We expect ongoing market volatility to provide opportunities to add to key holdings at favourable prices.

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.

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