The High Conviction SMA portfolio delivered a 4.2% return (gross of fees), for the 12 months to 30 June, while delivering on its ethical investing commitment to invest positively for people, planet and animals.

FY25 was a year of significant volatility as equity markets navigated inflation concerns, geopolitical tensions, political upheaval in the US, and challenges to the global economic system driven by the US’s “America First” strategy. In response, equity market returns skewed towards the large, blue-chip companies at the expense of fundamental value. With growing passive and international flows into the Australian market, this dynamic was amplified amongst the broader Industrials and Financial sectors of the market with investor interest driven away from the Resources sector due to weaker commodity prices.

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 established a position in CSL for the first time during the year. CSL has not been a stock we have invested in historically due to valuation concerns, with the stock trading on P/E multiples of ~30x for much of the past five years, reaching as high as ~40x. With the stock trading on a P/E multiple of just 21x, we think it is one of the most compelling large cap ideas in the domestic market currently, which has resulted in CSL finishing FY25 as the largest weighting position in the Portfolio. 

During the year we also made new investments in Macquarie Group, SiteMinder, CAR Group, Block, QBE, and Challenger. Common to most of these names is a global presence that provides sizeable growth opportunities beyond the Australian market. Macquarie is a high-quality franchise with a strong management team, that we expect to see ROE improvement from over the coming years as rates decline and the franchise continues to grow.

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.

Despite some of these positive developments during the period, the Portfolio underperformed its ASX 200 benchmark. The main driver of the disappointing relative performance was the decision not to hold Commonwealth Bank (CBA).

At an index (ASX 200) 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 Portfolio’s relative performance was -3.2%. 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 Portfolio’s zero weighting in CBA going into FY26.

Consumer Discretionary as a sector was another key detractor from performance relative to the benchmark. Not owning Wesfarmers (WES) and JB Hi-Fi (JBH) due to valuation concerns detracted from performance as both performed well over the 12 months as the market rewarded quality over value. The Portfolio’s zero exposure to gaming also negatively impacted, with Aristocrat Leisure (ALL) one of the top performers in the market over the year.

While the Portfolio’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.

While Information Technology detracted from performance during the year, the market volatility provided opportunities to invest in reasonably priced tech companies, including SiteMinder (SDR), CAR Group (CAR) and Block (XYZ). All these businesses offer material growth opportunities within their target markets and possess a significant global presence. For technology businesses this is a key attribute to achieving genuine scale. All three companies trade at valuation discounts to peers and therefore offer significant upside to our fair valuations.

The Healthcare sector was a continuing bright spot 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.

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. The portfolio’s underweight position to Banks provides greater exposure to other areas of the market that we believe will deliver outperformance.

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.

High Conviction SMA Portfolio Performance

Previously the Australian Shares SMA Portfolio

As at 30 June 2025^*

Source: Praemium portal.

^Benchmark: S&P/ASX 200 Accumulation Index. Past performance is not a reliable indicator of future performance.

Inception date: 16/04/2020.

Contributors

• Suncorp (SUN) had a solid year in FY25, delivering strong underlying insurance margins. This was helped by a period of benign weather and high interest rates, which boosted the company’s investment returns. SUN is now purely focused on general insurance, having sold its banking operations and its NZ Life business. Capital returns were received from the bank sale earlier this year, with further capital returns from the NZ divestment expected to be announced at the full year result.

• Bank of Queensland (BOQ) shares rose as investors gained confidence in the bank’s transformation strategy. The bank delivered stronger than expected financial results, reinforcing its turnaround story. BOQ is making strategic changes in the business aimed at boosting profitability - including closing owner managed branches and moving to full ownership of the Retail division as well as growing the Business bank, which has a higher return on equity. Management sees a pathway to further improvements in its return on equity in FY26.

• Insurance Australia Group (IAG) had a solid year in FY25, delivering strong underlying insurance margins. This was helped by a period of benign weather and high interest rates, which boosted the company’s investment returns. To strengthen its financial resilience, IAG entered into a multi-year reinsurance agreement during the year. The arrangement should reduce earnings volatility and provide extra protection against natural perils going forward. IAG also announced plans to acquire two automobile club insurance businesses, including RACQ in Queensland. This acquisition is expected to boost earnings from the first full year of ownership, with the deal set to complete later this year.

Detractors

• Nuix (NXL) experienced significant share price volatility during the year. 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. However, we feel confident in the company’s ability to scale its new product offering.

• 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.

• Web Travel Group Limited (WEB) underwent a demerger during the year, and the Portfolio 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.

With the stock trading on a P/E multiple of just 21x, we think it is one of the most compelling large cap ideas in the domestic market currently, which has resulted in CSL finishing FY25 as the largest weighting position in the Portfolio.   

Portfolio changes

Additions to the Portfolio

• Block, Inc. (XYZ) is a global payments provider consisting of Square which offers Point-Of-Sale software and hardware for >4m merchants and Cash App which provides >57m consumers a platform to transfer money, buy/sell stocks & bitcoin, and file tax returns. We view the valuation as undemanding with the stock trading on a P/E of 17x and having the potential to re-accelerate earnings growth with the rollout of Cash App's Borrow and Afterpay Cash App Card products.

• CAR Group Limited (CAR) is a global online marketplace and classifieds business which operates in the automotive, motorcycle, caravan, marine and equipment industries across Australia, the US, LatAm and South Korea. CAR has an attractive marketplace business model, dominant market position, strong cash generation and growth optionality in international markets which we view as a potential long-term compounder of earnings. Valuation is attractive with CAR trading at a 25-30% P/E discount to its ASX marketplace peers (REA and SEK) despite having a greater global growth opportunity.

• Challenger Limited (CGF) is the largest provider of annuities in the Australian market. It is estimated that 3 million people and $1 trillion of assets will be shifting into retirement phase over the next 3 years. Recognition of the importance of retirement income by the Government is increasing with APRA recently proposing changes that will reduce the amount of capital required to be held for annuity providers. The consultation phase for these proposals are due at the end of July. This should lead to more annuity providers entering the market and CGF being a beneficiary of increased awareness. In addition CGF is implementing cost efficiency practices with its IT partner Accenture. CGF's return on equity and cost to income ratio should therefore improve in the near term.

• QBE Insurance Group Limited (QBE) is a global insurance company, primarily underwriting commercial insurance for businesses. Other insurance lines include crop in the US and lenders mortgage insurance in Australia. QBE has seen steady earnings growth since the appointment of Andrew Horton as CEO in September 2021. QBE has undertaken large risk transfer protections against its longer dated reserves and thus far is underwriting newer business to plan. We don’t believe the market is giving QBE enough credit for the improvement in its business in recent times, with the stock currently trading at a 30-40% P/E discount to its General Insurer peers. We expect this gap to close and therefore expect QBE to outperform its peers over the next 12 months.
  
  
• SiteMinder Limited (SDR) is a global hotel software platform provider. We are attracted to the significant growth potential as it raises its take rate in the large global hotels addressable market, driven by the rollout of its key new products. We think valuation looks attractive with the company trading on an EV/Sales multiple of 4x, while targeting revenue growth of 20%+ and focused on achieving the tech industry’s key “Rule of 40” metric. Recent geopolitical uncertainty has weighed on travel related stocks, including SiteMinder, however we believe the company is more immune to these issues than traditional travel companies given its growth is largely related to increased penetration of its key software products and subscription model.

Divestments from the Portfolio

• Bank of Queensland Limited (BOQ) is a leading regional bank operating under three major brands, Bank of Queensland, ME Bank, and Virgin Money. BOQ has been going through a strategy reset, which the market has responded well to over the last few months. However, with bank stocks expensive and the stock trading at a premium to historical levels we have chosen to take profits. Going forward we have focused our banks exposure on the larger banks that have a stronger competitive position in the market.

• Medibank Private Ltd. (MPL) – Medibank Private was divested when its listed peer competitor NIB Holdings (NHF) was oversold on claims inflation and margin decline concerns. After the FY24 result in August, NHF traded at lows representing a PE of 12-13x, well below its historical average, compared to MPL’s PE multiple of 17x. This represented the opportunity to deploy funds in the relatively defensive private health insurance sector, for greater upside on an oversold position.

• Mirvac Group (MGR) owns, develops and manages properties across the Residential, Office & Industrial, and Retail sectors. Going forward we have focused our investments within the Real Estate sector on Goodman Group, possessing a substantial global portfolio of industrial properties and pipeline of data centre developments, and Dexus, which has significant leverage to the recovering office market in Australia.

• 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 a historically high P/E multiple of 18x and we have therefore divested SUN in favour of our preferred pick in the general insurer’s space, QBE, which trades on a P/E multiple of 12x.

• Woolworths Group Ltd (WOW) is an iconic supermarket chain and operator of the Big W department stores across Australia and New Zealand. WOW has been outperformed by Coles (COL) recently as consumers have favoured COL’s value offering. With cost of living a key topic for households, we think COL is better placed to continue outperforming WOW. We have therefore streamlined our investments in the sector to focus on our holding in COL.

Suncorp had a solid year in FY25, delivering strong underlying insurance margins. This was helped by a period of benign weather and high interest rates, which boosted the company’s investment returns.  

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.

Sector allocation

Sector overweights
Health care, Industrials, Information Technology, Utilities (Renewables)

Sector underweights
Consumer Discretionary, Energy, Financials, Materials, Real Estate