The High Conviction Fund (Wholesale) (the ‘Fund’) fell 3.3% net of fees in the quarter ended 31 March 2025, compared to its benchmark which declined 2.9%.

The March quarter was the worst quarterly performance for the Australian equity market in nearly 3 years. Equity markets dropped to 7-month lows, as global uncertainty and a tepid domestic earnings season rattled investor confidence. Trump tariffs dominated the headlines and accentuated share market swings, creating opportunities for our active stock picking style of investing. 

Our funds held elevated cash levels leading up to recent volatility which means we had been looking to deploy capital into quality investments at more attractive valuations. We see volatility and short-term corrections as an opportunity to buy companies at more reasonable valuations than may have previously been possible. Reflecting this, the Fund made new investments into QBE and Goodman Group during the quarter, as well as increasing positions in CSL and Macquarie.

The top contributors to performance in the March quarter were the Communication Services and Financials sectors. Communication Services was boosted by a proposed takeover announcement of Domain. The Fund held a meaningful position in Domain, but with the company struggling to make inroads into the leadership position held by competitor REA Group, the Fund used the opportunity to divest its holding to the potential acquirer at an attractive premium. The Financials sector also contributed positively to performance, with a recent investment in insurer NIB Holdings delivering good returns following positive updates at its recent financial results.

Detracting from performance were the Information Technology and Materials sectors. The Technology sector was the worst performing sector in the market during the March quarter as growth stocks came under pressure, with the portfolio’s holdings in Pexa, Nuix, and SiteMinder declining. With long-term fundamental valuation becoming increasingly attractive in each company, we were buying towards the end of the quarter. The Materials sector was a modest natural headwind for the portfolio as the sector outperformed during the quarter, while the portfolio’s holdings in Orora and Pilbara Minerals underperformed. Sims provided a partial positive offset with their half-year financial result ahead of expectations.

Looking ahead, we expect equity markets to remain volatile as inflation and geopolitical issues remain front of mind. Volatility provides more opportunities for stockpickers like us to invest, and in this environment, we continue to focus on attractively valued companies within key long-term growth sectors like healthcare and technology.

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

As at 31 March 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

• Domain (DHG) was a key positive contributor in the quarter after it received a proposed takeover bid from CoStar which was at a significant premium to the existing share price. With the company struggling to make inroads into the leadership position held by competitor REA Group, the Fund used the opportunity to divest its holding to the potential acquirer at an attractive premium.

• NIB Holdings (NHF) was a strong performer in the March quarter after it was oversold in 2024 on concerns of faster than expected margin decline due to increased claims costs. At the 1H25 result in February, NHF experienced a moderation in claims inflation and guided to full year margins at the top end of its 6-7% target range. The government approved premium increases of 5.8% for NHF from 1 April 2025, which has alleviated concerns of claims inflation for the upcoming year.

• Sims (SGM) had a strong quarter after delivering a better-than-expected earnings result, driven by improved North American margins and good cost control. In addition, the metals recycling company disclosed that is looking to optimise their property asset portfolio, which has a market value $1.5bn above book value. Sims is one of the few companies with operations in North America that will likely benefit from the US tariff regime. A competitor company, Radius Recycling, has been subject to a takeover offer at a large premium, which is supportive of steel sector valuations in the current environment.

Detractors

• SiteMinder (SDR) underperformed over the quarter as its 1H25 result was slightly below consensus, partly due to onboarding discounts being provided to larger hotels. We looked through the short term, recognising the underlying ARR growth and operating metrics were still positive and supportive of the long-term investment thesis of expanding its share of the large addressable market. The key catalyst from here is the rollout of its new Smart Platform products which appear to be broadly on track to potentially generate meaningful revenue growth from FY26E.

• Nuix (NXL) shares retreated during the quarter as they softened growth expectations in annualised contract value (ACV) for FY25 to 11-16% (from 15%) which implies a 2H25 weighting due to the slippage of some larger enterprise deals. We note that there are some larger sized deals in the pipeline, of which the timing of their closure will be a key factor to where the ACV growth lands for FY25. We have taken the opportunity to gradually re-add to our holdings on valuation grounds as the company continues to scale its new product offering, after reducing the fund’s exposure prior to the 1H25 update.

• Orora (ORA)'s share price during the quarter was impacted by cost over-runs at the G3 furnace build and weaker outlook for the Australian Gawler operations. In addition, the outlook for Saverglass in the near term remains uncertain due to patchy consumer demand, de-stocking and uncertainty around US tariffs.  On a longer-term view, we expect a cyclical recovery in volumes to emerge, and the strong balance sheet, accretive on-market share buy-back, and attractive valuation remain supportive factors.

Health insurer NIB was a strong performer in the March quarter after it was oversold in 2024 on concerns of faster than expected margin decline due to increased claims costs.  

Portfolio changes

Additions to the Fund

• Goodman Group (GMC) is an owner, manager and developer of industrial properties, with over $80 billion of assets under management globally. We participated in the capital raise targeted at developing over $10 billion of data centers. Goodman has a track record of double-digit earnings growth. The data center opportunity should generate higher returns in the medium term, using in-fill land, close to metro populations, that Goodman has purchased and developed over decades.
• 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’s 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 expect QBE’s PE multiple to re-rate closer to that of the Australian general insurers given its improved earnings performance.

Divestments from the Fund

• Domain Holdings Australia Ltd. (DHG) was the subject of a non-binding takeover proposal from US based CoStar. With the company struggling to make inroads into the leadership position held by competitor REA Group, the Fund used the opportunity to divest its holding to the potential acquirer at an attractive premium.

Metals recycling company Sims had a strong quarter after delivering a better-than-expected earnings result, driven by improved North American margins and good cost control.  

Sector allocation

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

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

Our funds held elevated cash levels leading up to recent volatility which means we had been looking to deploy capital into quality investments at more attractive valuations.