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INVESTMENTS  |  FUND COMMENTARY
 

Australian Shares Portfolio (SMA)

The SMA portfolio underperformed its benchmark in the prior 12 months, delivering a return of +10.5% (net) compared to the ASX 200 Accumulation Index’s return of +17.2%.

The portfolio underperformed its benchmark in the December quarter, delivering a return of -1.8% (net) compared to the ASX 200 Accumulation Index’s return of 2.1%.


December 2021



Fund commentary for the past 12 months

The portfolio underperformed its benchmark in the prior 12 months, delivering a return of +10.5% (net) compared to the ASX 200 Accumulation Index’s return of +17.2%.

Underperformance over the last 12 months was driven predominantly by headwinds from inflationary issues that caused weakness across interest rate sensitive parts of the market, including key portfolio sectors information technology and utilities (renewables). Stock specific weakness in the financials sector also contributed to underperformance, with pressures on net interest margins impacting a number of our holdings, while some of the sector’s strongest performers were companies we don’t own due to ethical screening considerations.

On the positive side, healthcare was the biggest contributor to portfolio performance, with Healius (the portfolio’s largest weighting) having a good year as Covid testing remained elevated, while not owning CSL also contributed positively. Being underweight resources was positive over the course of the year, although provided a headwind in the second half of the year.


Fund commentary for the past quarter

The portfolio underperformed its benchmark in the December quarter, delivering a return of -1.8% (net) compared to the ASX 200 Accumulation Index’s return of 2.1%.

Underperformance in the December quarter was driven by a number of factors:

  1. the portfolio’s natural underweight position in the resources sector, which experienced broad recovery as commodity prices improved,
  2. headwinds from inflationary concerns that caused weakness across interest rate sensitive sections of the market, including key portfolio sectors information technology and utilities (renewables), and
  3. stock specific weakness in the financials sector relating to the outlook for operating performance.

Healthcare continued to be a strong contributor to the portfolio, while consumer staples was the best performing sector in the December quarter due to the strong performance of GrainCorp.

SMA Performance
As at 31 December 2021* PORTFOLIO BENCHMARK
3 MONTHS -1.8% 2.1%
6 MONTHS P.A. 0.5% 3.8%
1 YEAR P.A. 9.7% 17.2%
SINCE INCEPTION P.A. 28.4% 23.6%

Source: Praemium portal. Benchmark is the S&P/ASX 200 Accumulation Index and portfolio inception is 16 April 2020. Past performance is not a reliable indicator of future performance.

Contributors over the past 12 months

Healius (HLS) was the portfolio’s top contributor to performance, returning 46% over the prior 12 months. HLS is a national provider of pathology and imaging medical services and is the biggest weighting held in the portfolio. HLS is one of the key providers of polymerase chain reaction (PCR) tests in Australia and was buoyed by the continuing high rates of Covid testing across the year, particularly as the Delta and Omicron cases emerged. FY21 financial results increased significantly, with management making use of the strong balance sheet at its disposal by acquiring Agilex Biolabs (an Australian-based laboratory business providing bioanalytical services used in clinical trials) late in the year. The $301m price-tag is not cheap in our view, but provides HLS with diversification of revenue streams in an attractive adjacency as Covid testing gradually declines.

GrainCorp (GNC) was the portfolio’s second-best performer, returning 56% since its addition to the portfolio in July 2021. GNC is the leading bulk grain handling company in Australia, with a network of high-quality infrastructure assets utilised to store, handle, and connect grain to customers domestically and worldwide. GNC reported a strong financial result during the year, with EBITDA increasing 206% driven by a 142% increase in grain handled to 34mt. GNC is set to benefit from ongoing favourable crop conditions with ABARES forecasting the FY22 East Coast winter crop to be the second largest on record. With the balance sheet in a strong position, GNC has also announced it will commence a $50m on-market buy-back from February 2022.

Contributors over the past quarter

GrainCorp (GNC) was the portfolio’s top contributor to performance, returning 32% over the quarter. GNC is the leading bulk grain handling company in Australia, with a network of high quality infrastructure assets utilised to store, handle, and connect grain to customers domestically and worldwide. GNC reported a strong financial result during the quarter, with EBITDA increasing 206% driven by a 142% increase in grain handled to 34mt. GNC is set to benefit from ongoing favourable crop conditions with ABARES forecasting the FY22 East Coast winter crop to be the second largest on record. With the balance sheet in a strong position, GNC has also announced it will commence a $50m on-market buy-back from February 2022.

Link Administration (LNK) was another strong contributor to the portfolio’s performance, returning 27% over the quarter. LNK provides outsourced administration services to super funds, listed companies and others in Australia and the UK, while also holding an equity stake in Pexa (PXA). LNK was driven higher by multiple takeover approaches, initially from the Carlyle Group, and then ultimately by Dye & Durham, for total consideration of up to $5.68/share. The scheme will be voted on in May 2022 and implemented soon after if successful, requiring 75% support from shareholders.


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Detractors over the past 12 months 

Meridian Energy (MEZ) was the largest detractor from the portfolio’s performance, declining 32% over the prior 12 months. MEZ is one of the largest energy generators and electricity retailers (“Gen-tailer”) in New Zealand, producing 100% renewable generation through hydro and wind assets. MEZ was negatively impacted by softer earnings in FY21 as generation fell from record levels in FY20, a renegotiated contract at lower prices with their largest customer (New Zealand’s Aluminium Smelter (NZAS)) to support them continuing to operate through until 2024, global clean energy index adjustments that down-weighted existing constituents, and inflation concerns that impacted interest rate sensitive sectors like Utilities. However, the underlying business remains very strong in our view and we believe MEZ is well placed to grow earnings over the long term as they bring on new projects and benefit from increased demand from a decarbonising New Zealand economy.


Detractors over the past quarter 

Bravura Solution (BVS) was another detractor from the portfolio’s performance, declining 20% over the quarter. BVS provides software solutions for Wealth Management and Funds Administration companies around the world. Despite re-iterating FY22 guidance for mid-teen NPAT growth at the AGM in November based on a strong sales pipeline, BVS was caught up in the broader sell-off in the Information Technology sector as inflation concerns began to weigh on equity markets.


Nitro Software was a key detractor 

Nitro Software (NTO) was the largest detractor from the portfolio’s performance over the quarter, declining 32% and the second largest detractor from the portfolio’s performance over 12 months, declining 22%. NTO is a global SaaS company providing document productivity tools and e-signing solutions to business customers.

Despite a strong share price performance for most of the year, the stock declined late in the year as a result of:

  1. inflation concerns, which have been a headwind for tech stocks globally in recent months,
  2. NTO’s recent acquisition of Connective and subsequent $140m capital raising has resulted in some indigestion in the market, and
  3. global peer, DocuSign, reported slowing sales growth in Q3 and Q4 this year, causing the stock to fall 38% in December and weighing on peers like NTO.

Despite this short-term share price weakness, we are positive on the long-term future for NTO as it is growing strongly in a big global market through its PDF productivity tools and e-signing solutions.



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Portfolio changes over the past 12 months

Over the last 12 months we have added Insurance Australia Group (IAG), Genworth Mortgage Insurance Australia (GMA), GrainCorp (GNC), Blackmores (BKL) and Pilbara Minerals (PLS) to the portfolio. Stockland (SGP), Sims Metal (SGM), BigTinCan (BTH), and Australian Finance Group (AFG) have been divested from the portfolio, while Vocus (VOC) and Spark Infrastructure (SKI) also exited the portfolio after being acquired.


Portfolio changes over the past quarter

There was one addition to the portfolio in the December quarter, being Pilbara Minerals (PLS). PLS is a leading Australian developer and producer of a lithium raw material, spodumene, that is a critical component in the manufacture of batteries used in electric vehicles. We are attracted to PLS given its position as a sizeable independent producer of lithium, favourable industry long-term demand/supply dynamics, and healthy balance sheet. While the share price has recovered significantly from its lows early in 2020 when lithium markets were in oversupply, we expect the demand dynamic to remain healthy and supportive of high spodumene prices in 2022.

Spark Infrastructure (SKI) exited the portfolio during the quarter as a result of the successful completion of a takeover by a consortium involving KKR, Ontario Teachers’ Pension Plan, and PSP Investments, for a total cash amount of $2.8875 per stapled security. Since inclusion in the portfolio, SKI returned +50%.


Outlook for the fund

The portfolio continues to have significant exposure to key growth thematics in information technology, healthcare, and renewables. In the short-term, inflation concerns may remain a headwind in certain sectors and temper equity market returns, however we believe the portfolio has the right exposures to deliver strong returns over the long term.


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Portfolio strategy

Leveraging the expertise and experience of our award-winning investment team, the Australian Ethical Australian Shares Portfolio is an actively managed portfolio with a mix of quality growth stocks and traditional yielding stocks shaped by our Australian Ethical Charter.

SEE SMA INFO



Past performance is not a reliable indicator of future performance.

This is general information only and is not intended to provide you with financial advice or take into account your individual investment objectives, financial situation or needs. You should obtain and consider the relevant Financial Services Guide, Product Disclosure Statement and Target Market Determination relating to this product before making a decision. Our SMA portfolio is available for investment via Praemium and Hub24.

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.

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