The High Conviction Fund delivered a positive 10.3% return, net of fees, for the 12 months to 30 June, but underperformed its ASX300 benchmark by 3.4% (net of fees).

The 12 months to June 30 was a period of significant volatility in equity markets, navigating inflation concerns, geopolitical tensions, political upheaval in the US, and challenges to the global economic system driven by the US’s “America First” strategy.

Despite the volatility throughout the year, we maintained our disciplined investment approach, focusing our investments on companies within our ethically screened universe with good balance sheets, strong management teams, and possessing earnings growth prospects that we believe are being undervalued by the market. New investments throughout the year reflected this approach. We added CSL, Macquarie Group, Goodman Group, and Block. The Fund took advantage of opportunities to invest in high-quality companies at attractive prices in the last 12 months. We expect similar opportunities will present themselves in the year ahead. 

The primary driver of the Fund’s relative underperformance was the decision not to hold Commonwealth Bank (CBA). At an index (ASX 300) weight of 11%, CBA is a significant driver of overall market returns, and with the stock returning 50% for the year, the impact on the Fund’s relative performance was -3.2%. Disappointingly, the Fund was not able to offset this in other areas, despite some positive contributions from the healthcare sector, consumer staples and the broader Financials sector.

The decision not to own CBA reflects our investment process that focuses on fundamental valuation appeal. While CBA deserves to trade at a premium to its banking peers given its quality franchise, we view the stock as significantly overvalued on a P/E multiple of ~30x with little or no earnings growth over the next few years. We therefore retain the Fund’s zero weighting in CBA going into FY26.

The Healthcare sector delivered positive returns for the Fund. The investment in Resmed (RMD), which was established after the aggressive market sell-off in FY24 due to fears that obesity drugs would destroy its business, continues to deliver strong returns for the Fund and was the top individual contributor for the year. The stock remains attractively valued for the growth profile despite the positive share price returns from RMD, trading on a P/E multiple of 24x.

Another key contributor for the Fund was the decision to own Coles (COL) over Woolworths (WOW) in the Consumer Staples sector. In addition to trading on a lower P/E multiple than WOW, COL has a strong management team in our view and has outperformed WOW operationally over the last 12-18 months. With cost of living being a key focus for consumers, COL’s increased focus on value has resonated well with customers. COL will benefit from further efficiency savings in FY26 that will enable it to continue to compete on price.

Within the Financials sector, it was pleasing to see the Fund’s investment in Challenger contribute meaningfully, which saw Apollo sell down its 20% stake, but TAL Dai-Ichi Life come onto the register with its own 19.9% stake, and proposed APRA changes that will reduce the capital intensity of the business going forward.

During the year, we engaged with investee company QBE, requesting more information about its underwriting policies and the exposure to companies involved in fossil fuel expansion. We continue our engagement with QBE as part of the work we are doing under our strategic stewardship pillar to stop unrestricted underwriting of fossil fuel expansion.

While the Fund’s natural underweight to Energy and Iron Ore stocks provided a tailwind for relative performance, Gold stocks were a headwind as the gold price rallied throughout the year on the global uncertainties playing out. Mining has a broad range of negative impacts, so we restrict our investment to mining activities necessary to execute energy transition and for other critical purposes. We can invest in gold so long as adequate action is taken to mitigate impacts and it meet the ‘necessary harm’ threshold in our Ethical Criteria.

Outlook for the Fund

We firmly believe that some of the challenges the portfolio faced in FY25 will become strengths in FY26. Banks, particularly CBA, are trading at elevated valuation multiples that we don’t believe are sustainable going forward, particularly during an RBA rate cutting cycle.

Meanwhile, geopolitical tensions will likely continue driving market volatility in the near term, which is where our active bottom-up fundamental investment process can identify mispriced opportunities to deliver returns over the long term. We remain uniquely exposed to growth sectors in healthcare, technology, and renewables via our ethical screening process, overlayed by an investment process that focuses on attractively priced stocks possessing healthy balance sheets, positive cash generation and good earnings growth prospects overseen by capable management teams.

In an uncertain environment with volatility likely to remain a feature of the investment landscape in FY26, the Fund offers investors a concentrated, but well-balanced mix of growth and yield stocks across multiple sectors, rigorously screened using our proprietary in-house ethical investment approach. The Fund offers investors greater exposure to structural growth sectors in healthcare, technology and renewables (~43% of the Fund vs ~13% in the ASX 300 index), while limiting the exposure to the carbon intensive sectors in Materials and Energy (~7% of the Fund vs 22% in the ASX 300 index).

High Conviction (Wholesale) Fund Performance (with performance fee)

As at 30 June 2025^*

^Benchmark is the S&P/ASX 300 Accumulation Index. Past performance is not a reliable indicator of future performance.

Inception date: 01/10/2021.

Contributors

• Resmed (RMD) shares recovered in FY25 as fears about the impact of weight loss drugs on patient volumes subsided. The sleep apnoea device company delivered strong financial performance, supported by solid top-line growth and gross margin expansion, which was particularly well received given the broader macroeconomic uncertainty. We also believe that ResMed is shielded from US tariff impact due to the exemption under the Nairobi Protocol, which covers medical devices designed for individuals with sleep apnoea and chronic respiratory conditions. ResMed remains in a strong competitive position, with its largest competitor still managing the regulatory issues associated with the product recall.

• Westpac Bank (WBC) shares rose in FY25, as earnings proved to be resilient despite market challenges. The bank benefited from its hedging book and the strategic shift towards business and institutional clients, as competition in the mortgage market remained intense. The bank is executing a technology and business simplification initiative over the next few years. The $2b technology investment is expected to create efficiencies across the bank by consolidating legacy systems, improving customer data management and enhancing digital capabilities.  This should help to close the cost to income gap relative to competitors.

• Nuix Ltd (NXL) experienced significant share price volatility during the year. The stock initially rallied following upgrades to earnings guidance, prompting the Fund to trim its position. However, uncertainty regarding the timing of enterprise deals landing saw management withdraw guidance in February which saw a subsequent de-rating of the tech shares. There are some larger sized deals in the pipeline, of which the timing of their closure may see slippage, given that the political backdrop has paused decision making in its key market, the US. We have taken the opportunity to gradually re-add to our holdings on valuation grounds recently and feel confident in the company ability to scale its new product offering

Detractors

• Web Travel Group Limited (WEB) underwent a demerger during the year, and the Fund retained its position in the newly separated travel-tech business. The company faced some operational headwinds in FY25, including a re-set of revenue margins and more recently, investors have become more concerned about global travel demand amid a backdrop of geopolitical uncertainty. Despite that, WEB remains a profitable, growing tech company with a strong balance sheet. We see structural growth drivers supporting the business over the long term and believe that WEB is well positioned to grow market share in the global travel technology space

• Ramsay Healthcare (RHC) shares declined in FY25 as the private hospital operator faced challenging trading conditions in key markets. Although the UK operations are performing well, the Australian business saw margin pressure from wage inflation, lower hospital utilisation and lower insurance reimbursement; while the French operations have not seen government tariffs keep at pace with rising wage costs. We see scope for improved financial performance, supported by the new CEO’s focus on operational efficiency and potential value from global asset rationalisation. Ramsay’s strong market position and land holdings underpin our investment thesis.

• Pilbara Minerals (PLS) faced headwinds in FY25, with operating performance impacted by weak spodumene pricing, as near-term supply exceeds demand. These market dynamics have led to production curtailments across the industry, as higher cost producers become uneconomic. Despite the short-term challenges, the longer-term fundamentals for lithium remain strong, supported by growing demand from the energy transition. Pilbara has a Tier 1 quality asset, a low-cost producer, net cash balance sheet, strongly positioned for improvement in the pricing outlook, and in our view is trading at an attractive valuation.

We believe ResMed is shielded from US tariff impact due to the exemption under the Nairobi Protocol, which covers medical devices designed for individuals with sleep apnoea and chronic respiratory conditions

Portfolio changes

Additions to the Fund

• Block (XYZ) is a global payments provider consisting of Square, which offers POS software and hardware for merchants, and Cash App, which provides consumers a platform to transfer money, to buy/sell stocks & bitcoin, and file tax returns. We added Block because we view the valuation as undemanding We believe the company has the potential to re-accelerate growth with the rollout of Cash App's Borrow and Afterpay Cash App Card products
  
  
• Spark New Zealand Limited (SPK) – We added shares in the NZ telecommunications and digital services provider during the quarter, as we felt that the halving of the share price was overdone. While there have been some challenges in the business, we are seeing some green shoots including improved competitive dynamics in the NZ mobile market and stabilisation of the government business after a cost re-set. We expect a partnering deal on the data centres soon, which should alleviate balance sheet and dividend concerns.

Divestments from the Fund

• Our Fletcher Building Limited (FBU) position was exited due to concerns about the near-term earnings risks. The 1H25 result broadly met expectations, however reflected the ongoing weak operating conditions in Australia and NZ. While we remain optimistic for  longer-term cyclical recovery, near term uncertainty remains over the execution of strategic changes being implemented, legacy issues and market expectations assumed for the pace of the earnings rebound.

• Suncorp Group Limited (SUN) is a major Australian financial services group providing general insurance and life products to its customers. The company has benefited from the divestment of its banking operations to ANZ, while insurance results have been positive due to solid growth in premiums. However, the stock is now trading at an elevated P/E multiple, so we divested SUN in favour of our preferred pick in the general insurer’s space, QBE, which trades on a P/E multiple of 12x.

We added global payments provider Block to the Fund as we view the valuation as undemanding and has the potential to re-accelerate growth with the rollout of Cash App's Borrow and Afterpay Cash App Card products 

Sector allocation

Sector overweights
Communication Services, Health Care, Information Technology, Utilities (renewables)

Sector underweights
Consumer Discretionary, Energy, Financials, Materials

We maintained our disciplined investment approach, focusing our investments on companies within our ethically screened universe with good balance sheets, strong management teams, and possessing earnings growth prospects that we believe are being undervalued by the market.