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High Conviction Fund

High Conviction Fund commentary for the quarter ended 30 September 2023.
Published 26 Oct 2023   |   16 min read

The High Conviction Fund (Wholesale) (the ‘Fund’) fell 3.8% net of fees in the quarter ended 30 September 2023, underperforming the benchmark ASX 300 Accumulation Index’s return of -0.8%.

It was the second consecutive quarter of declines for the Australian share market, as investors digested reporting season updates, which led to aggregate consensus earnings downgrades for FY24. Cost inflation was a common theme across corporate Australia, with bottom line earnings also impacted by growing interest costs. Macro factors continued to be a driver of equity market volatility in the September quarter, as shifting sentiment around the outlook for rates continued. With inflation data remaining sticky, market expectations firmed that interest rates will need to stay higher for longer to combat it.

Portfolio underperformance during the quarter was driven by two main factors: 1) an underweight position in the market’s two best performing sectors for the quarter, Energy and Consumer Discretionary; and 2) a disappointing reporting season on balance for the portfolio with some companies reporting earnings results or FY24 outlook statements that missed market expectations. Our process continues to focus on fundamental valuations, and we therefore increased our weighting in stocks that we believe are fundamentally under-valued (e.g. Pexa), while reducing our weighting in stocks where we see further downside risk (e.g. Ansell).

At a sector level, Consumer Discretionary stocks performed well despite concerns over the outlook for the consumer, as FY23 results held up better than expected while balance sheets remain relatively strong. This is an increasing sector of interest for us, however we remain more defensively positioned currently given the risks to consumer spending ahead.

Healthcare was the weakest sector in the market during the quarter (-8.6%) and, given it’s one of our key overweight positions in the portfolio, was the biggest detractor from performance. Healius continues to struggle in the short-term with lower GP volumes post Covid, but we expect this to improve over the next 12-24 months.

Communication Services was the best contributing sector to performance during the quarter, driven by positive performance in TPG Telecom and Domain.

The Utilities sector also provided some defensive support for the portfolio with Contact Energy delivering a good result and positive outlook for the year ahead.

High Conviction (Wholesale) Fund Performance

As at 30 September 2023~

fund benchmark$
3 months -3.8% -0.8%
6 months -0.9% 0.1%
1 year p.a. 8.4% 12.9%
since inception p.a. -2.4% 1.9%

$ 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


Nuix (NXL)


TPG Telecom (TPG)


Suncorp (SUN)

Top 3 detractors to Fund return


Healius (ticker)




Coles (COL)

  • Nuix (NXL) shares rose 68% in the September quarter after delivering a strong financial update. Led by a refreshed management team, Nuix demonstrated strong growth in recurring revenue, which is measured by annual contracted value (ACV). Nuix showed discipline on costs and positive underlying free cashflow, which was favourably received by the market. The momentum seems likely to continue, with management targeting further recurring revenue growth and operating leverage in FY24. Nuix also resolved a litigation appeal from a former employee in August, bringing a close to the Ed Sheehy legal proceedings.

  • TPG Telecom (TPG) returned 14% for the quarter, buoyed by a highly conditional, indicative, non-binding offer from Vocus Group to acquire its Enterprise, Government and Wholesale assets plus associated infrastructure assets for $6.3bn. There is no certainty a transaction will be concluded and discussions remained ongoing at quarter end. TPG’s 1H earnings result was solid with a slight upgrade to FY23 EBITDA guidance.

  • Suncorp (SUN) delivered a strong FY23 result with Cash EPS at its highest level since FY14, driven by investment income returns and a record Bank profit. The outlook for FY24 is for premiums to grow at 10% and insurance margins to hold or slightly increase, with a stronger second half. In the medium term, insurance margins are expected to increase. It is expected that the Australian Competition Tribunal will announce the results of their review of the purchase of Suncorp Bank by ANZ, by February 2024.

  • Healius (HLS) was the single biggest detractor from performance in the September quarter due to a weaker FY23 result and outlook. Unfortunately, FY24 likely remains a transition year as Healius’ turnaround continues. The overall quantum of debt and lack of full-year dividend also weighed on investor sentiment during the quarter. Nevertheless, we continue to see a pathway forward for HLS as base-pathology earnings revert to pre-COVID-19 levels as GP volumes return.

  • PEXA (PXA) detracted from performance in the September quarter, as question marks were raised on their progress in the United Kingdom. The market has pushed out the timing of revenue generation and expectations for the UK until milestones are achieved with key lenders. The core Australian operations performed resiliently in their FY23 financial results, despite the softer residential property market backdrop. Volumes appear to have bottomed in Australia, which bodes well for FY24. At these share price levels, we believe that nil value is being ascribed to the UK business, which provides growth optionality outside of the domestic exchange franchise.

  • Coles (COL) shares declined 14% in the September quarter as the FY23 result fell short of analyst expectations and the commissioning of the Ocado customer fulfilment centre was pushed out by another year due to issues with the service provider. Although revenue growth was in-line with market expectations, there was a decline in EBIT margins due to an increase in stock loss (theft) across the store network. The supermarket chain has initiatives to combat theft underway, including expanding the use of camera technology at the self-check outs.


Nuix (NXL) shares rose 68% in the September quarter after delivering a strong financial update.

Portfolio changes

Additions to the Fund
  • ResMed (RMD) – RMD is a leading global MedTech player in the sleep and respiratory care markets, providing Continuous Positive Airway Pressure (CPAP) machines for treating obstructive sleep apnea (OSA). We added the stock to the portfolio as we believe a valuation gap has opened up following a sharp sell-off in the share price during the quarter. Concerns around the margin outlook from the result in early August were compounded by fears that weight loss drugs under development will reduce demand for RMD’s products going forward. While uncertainty as to the eventual impact on RMD will likely remain for some time, we think a lot of this downside risk is already factored into the share price given that RMD’s P/E multiple is at its lowest point since 2016.

  • Reliance Worldwide (RWC) – RWC is a global manufacturer of plumbing products with operations in the US, UK, Europe, and Australia. Company guidance is for lower volumes and margins in FY24 due to weaker macroeconomic conditions, however we expect operating leverage and margins to improve significantly when macroeconomic conditions turn. Fundamental valuation is attractive with RWC trading at a 20% discount to its historical relative P/E multiples.

  • Mercury (MCY) – MCY is a leading New Zealand ‘Gen-tailer’ predominantly based in the north island of NZ, with a ~20% share of the electricity generation market and ~25% of the retail market. Its generation is 100% renewable with hydro, geothermal, and wind sources. The medium to long term outlook for the NZ energy market is positive in our view given the shift towards decarbonizing the economy, requiring Gen-tailers like MCY to deliver new generation projects over a multi-year timeframe.

  • Qube (QUB) – QUB is a leading logistics provider across road, rail and port assets, predominantly focusing on import/export supply chains across Australia and New Zealand. QUB’s FY23 result highlighted that despite slowing consumer activity and cost inflation across its businesses, it is very well managed and is positioned well to continue growing its operations over the coming years. Trading at its lowest relative P/E multiple in 10 years we believe fundamental valuation is attractive for this quality business.

  • Challenger (CGF) – Challenger is a leading provider of annuity products in Australia and manages a multi-boutique asset strategy in the Fidante division. With the stock trading at 11x forward PE or ~1x book value and offering double digit earnings growth in FY24, we thought it was opportunistic to add the stock to the portfolio. The capital position of the APRA regulated entity was resilient at 1.59x at the end of the financial year.

Sell-downs from the Fund
  • Insurance Australia (IAG) – Following a strong period for IAG, we decided to take profits in this name and reduce our exposure to the insurance sector on valuation grounds. General insurers have benefited from an improvement in investment income, while being able to raise prices to offset claims inflation and increasing reinsurance costs.

  • Brambles (BXB) – BXB’s FY23 result highlighted the improving cash flow situation, however with the stock trading up at our fundamental valuation level, we think additional returns will be hard to achieve and have therefore divested our holding.

  • Ansell (ANN) – We elected to sell-down our position following ANN’s Jul-23 trading update on valuation grounds. The FY24 guidance range implied minimal valuation upside when considering the risks associated with the manufacturing rightsizing and IT investment programs.

  • Blackmores (BKL) – BKL was acquired by Japanese conglomerate Kirin for $95/share, with shareholders voting to approve the takeover and receiving the final proceeds on August 10th.


Coles (COL) shares declined 14% in the September quarter as the FY23 result fell short of analyst expectations and the commissioning of the Ocado customer fulfilment centre was pushed out by another year due to issues with the service provider.

The macroeconomic environment will continue to play a role in the broader volatility of markets, with persistent inflation and interest rates perched higher.
Sector allocation

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

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

Outlook for the Fund

The High Conviction Fund is a concentrated portfolio of typically larger cap stocks with active stock selection across our Ethical universe1. Our process focuses on fundamental research and we seek opportunities to invest in attractive companies, where the share price materially undervalues the long-term valuation. Reflecting this, we added a number of new names to the portfolio during the quarter, including Resmed (RMD), Mercury (MCY), Reliance Worldwide (RWC), Qube (QUB) and Challenger (CGF).

The macroeconomic environment will continue to play a role in the broader volatility of markets, with persistent inflation and interest rates perched higher. In this environment, we are attracted to companies with pricing power and strong balance sheets.

While we were disappointed about the portfolio’s underperformance in the September quarter, we believe the portfolio has the right mix of exposures to deliver strong returns for investors over the long-term. The portfolio has significant exposure to key growth sectors in Information Technology, Healthcare, and Renewables that we expect will outperform the rest of the market over the long-term. These sectors account for a ~30% weighting in the portfolio, compared to less than 15% in the ASX 300 index.

See Fund info

1. Further information on our ethical investment criteria is available in our Ethical Guide available at

~ 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.

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.

Australian Ethical acknowledges the Traditional Owners of the country on which we work, the Gadigal people of the Eora Nation, and recognise and celebrate their continuing connection to land, waters and culture. We pay our respects to Elders past and present and thank them for protecting Country since time immemorial.