September, 2023
The Fund outperformed the market a little in the September quarter. The clear winner was online advertising group carsales.com although gaming machine company Aristocrat Leisure and major bank NAB also did very well. Other positives were from not owning toll road operator Transurban or global medical device maker Resmed Inc. Notable detractors were mineral sands producer Iluka Resources, gas producer Woodside Energy and not owning major bank ANZ or retail-heavy conglomerate Wesfarmers.
In a year during which the macro environment continued to be challenging to navigate it’s been encouraging to see stock selection contribute solidly to overall returns. Stock picking has been the key pillar of our long-term track record and, while macro factors will of course always influence individual companies’ earnings, identifying companies which are in an earnings upgrade cycle will in our view will keep being rewarded. The Fund has maintained its greater-thanbenchmark exposure to companies seeing positive earnings revisions. Until we see a meaningful shift in broader macro factors, we expect that those companies which have recently been delivering ahead of consensus expectations will be the most likely to do so in the next 3-6 months as well.
The August reporting season aligned well with this thesis, with a solid earnings upgrade score card for the portfolio in aggregate. As always, a few company results indicated deteriorating trends and we have taken action accordingly. We had already been taking profits in The Lottery Corporation and in this quarter we exited the position altogether. We also exited fund manager Perpetual which, after a promising start, has been disappointing as the inflection point for costs and improved funds flow continued to be pushed further into the future. We also sold out of mineral sands producer Iluka Resources as the price outlook for its key commodities deteriorated at the same time as the company is entering a heightened capex phase.
Finally, we switched our position in Fortescue Metals into Rio Tinto. Both companies remain intrinsically linked to the iron ore price in the short term but the numerous management changes at Fortescue as well as increased uncertainty about the capital allocation framework for the company’s investment decisions in renewable energy projects has increased its company-specific risks. While its ambitions in renewables are admirable, the share price consequences of unrealistic project assumptions have been on stark display in Europe this year.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Sept-23.pdfAugust, 2023
The Fund outperformed nicely in August with a number of decent winners and almost no losers. The best contributors to returns were from a variety of sectors and, pleasingly, from some of our larger active weights: industrial property (Goodman Group), online advertising (carsales.com), pallet pooling (Brambles Industries), medical devices (Cochlear), gaming (Aristocrat), health insurance (Medibank), and building materials (James Hardie). Not owning medical device company (Resmed), tech company WiseTech or supermarket operator Coles also added to returns. The only noticeable detractors were mineral sands producer Iluka Resources and financial services company Perpetual.
The portfolio’s skew towards companies with positive earnings momentum was well rewarded in August. So was also our reluctance to pay overly large premiums even for companies with positive earnings sentiment given the outsized risk from any disappointing earnings news for highly valued companies. Relative performance was also helped by the emergence of more cautious investor sentiment during the month. This came about largely due to stubborn inflation and stronger-than-expected economic growth, particularly in the US, which saw market participants hit the pause button on the goldilocks scenario of soft landing and quickly normalising inflation.
Frequent and rapid shifts in macro sentiment has been a challenge for all active managers to deal with over the last year or two, ourselves included, and while we are fully expect thatthis volatility will happen again at some point, it was pleasing to see bottom-up stock picking being rewarded during the August reporting season. Solid earnings announcements, and importantly generally positive outlook statements, were provided by a mix of companies that have been in the Fund for quite some time and also by some of our more recently added positions. Some of the highlights in the former category were Goodman Group, Medibank Private, carsales.com, QBE Insurance and Steadfast Group. Some of the relatively new positions that contributed positively included Brambles, James Hardie Industries, Cochlear and Worley. We were pleased that our winners came from many different sectors, meaning it was stock selection, rather than sector allocation, that added the most value.
Commodities continues to be a sector in which positioning is tricky. Cost and capex overruns were recurring themes from Resource companies during reporting season, and economic reports out of China continued to be concerningly weak. As always this led to hopes of government stimulus, and in recent weeks, modest stimulus measures were actually announced by the Chinese authorities. While undoubtedly positive for commodity demand, this stimulus still appears to be more focused on stabilising and improving consumer confidence in the general Chinese economy, and in the hard-hit property sector specifically, than meaningfully boosting construction activity, and therefore demand for our commodities, in the way previous stimulus programs did. Although we remain underweight the Resource sector, at the same time we are staying alert to any concrete evidence of a pick-up in activity in China. Encouragingly, supply discipline from resource-producing companies remains solid at this point.
The Alphinity team is travelling far and wide in September and October. This will see us doing on the ground research in the US, Mexico, Latin America, Israel, China, Korea and Japan, covering a range of industries and sectors including Healthcare, Consumer, Technology, Building Materials, Resources and Energy. We look forward to relating some of our findings in coming reports.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Aug-23.pdfJuly, 2023
The Fund underperformed somewhat in July. The best contributors were energy company AGL, packaging company Orora and not owning Macquarie Group; worst were lithium play IGO, pallet pooler Brambles, mineral sands/rare earth miner Iluka, and supermarket Woolworths; not owning ANZ Bank also hurt.
The Fund remains skewed to stocks which are going into reporting season with positive earnings momentum: i.e. the Fund’s holdings on average have had more positive changes to earnings expectations than the market over the last several months. This is typically a good lead indicator that there will be further earnings changes in the same direction. Our quantitative insights back up our fundamental research which also suggests the portfolio has solid prospects for ongoing positive earnings surprises. Of course, given the prevailing economic environment, this could actually mean they have less risk of disappointing earnings than the overall market.
We have taken the opportunity to further increase our underweight to Resource companies as many of their share prices – temporarily in our view – strengthened on the back of sentiment in China that so far looks to us to be overly optimistic. This sector could present us with some interesting opportunities later in the year as medium-term price expectations, especially for iron ore-producing companies, currently look undemanding. The near-term outlook, however, is more uncertain.
Increased supply, combined with the likely reintroduction of steel production caps by the Chinese Government in order to support steel prices and reduce the risk of over-supply, risks further iron ore price weakness in coming months.
As always, the August reporting season will bring new insights and possibly new investment opportunities. We look forward to reporting on them next month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Jul-23-.pdfJune, 2023
The Fund performed in line with the market in June, and lagged slightly over the June quarter. The best contributors were global insurer QBE, pallet hirer Brambles, lithium play IGO, advertising platform carsales.com; not owning resource giants South32 or Rio Tinto also helped. Offsetting these however were holdings in resource giant BHP and medical device maker Fisher & Paykel Health; being underweight ANZ Bank and not owning high tech companies Xero and Wisetech also detracted from returns.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_Jun-23.pdfMay, 2023
The Fund lagged the market a little in May, with a holding in respiratory products maker Fisher & Paykel and not holding accounting software provider Xero both detracting from returns. The portfolio benefitted from no exposure to Wesfarmers and gold miner Newcrest, while overweight holdings in CSL and Lynas Rare Earths also contributed to returns.
respiratory products maker Fisher & Paykel and not holding accounting software provider Xero both detracting from returns. The portfolio benefitted from no exposure to Wesfarmers and gold miner Newcrest, while overweight holdings in CSL and Lynas Rare Earths also contributed to returns.
Portfolio outlook
In a market with limited overall earnings growth and earnings revisions that, despite some stabilisation more recently, appears to have more risk to the downside than upside, companies which can deliver growth, and especially growth ahead of market expectations, should be well rewarded. The Fund remains well exposed to these types of companies overall and we look forward to confirmation of this as we approach the August reporting season.
During May we further reduced our Bank exposure as increased mortgage competition and higher funding costs will be a challenging combination for the Banks’ net interest margins, especially in a low credit growth environment. We remain less concerned about large credit losses for the banking sector as a whole given large unused provisions that were raised during the Covid period. A moderate underweight to the sector is appropriate, in our view. We have also reduced our exposure to the Resources sector in face of weaker economic data out of China. We remain firmly underweight that sector in aggregate with a maintained preference for iron ore exposure, albeit at lower levels.
We have however built positions in James Hardie and Cochlear during the past months. We previously had concerns with Hardie’s ability to manage margins and continue taking market share in a soft US house siding market that is increasingly competitive. While the overall market environment remains challenging, housing starts have stabilised at lower levels in recent months. More importantly however, James Hardie has managed the weak environment well from a cost and sales perspective resulting in a better than expected margin outlook and likely further earnings upgrades.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-May-23.pdfApril, 2023
The Fund performed essentially in line with the market in April, and there were few companies of note on either side of the ledger. The only meaningful positive contributor was not owning diversified miner Rio Tinto; the only meaningful detractors were owning resource giant BHP and not owning big bank ANZ.
Despite ongoing macro uncertainty, the portfolio has continued to exhibit better earnings revisions than its benchmark with March quarter updates from Brambles, Viva Energy, Medibank Private and Woolworths some of the highlights. Indications of stronger-than-anticipated increases in mobile pricing plans across the telecom sector has also benefitted Telstra.
The mixed news out of China, especially the suggestion that there might be a Government-mandated cap on steel production, has seen weakness across the commodity price complex. The portfolio remains underweight this sector and we trimmed our iron ore exposure somewhat as near term earnings upside has become more limited.
The Fund has for a long time been underweight gold mining stocks, preferring to invest in companies with more sustainable growth prospects. Despite sharply higher interest rates around the world, which has increased the opportunity cost of investing in assets such as gold with no income stream, the gold price has been strong thus far in FY23, and this has detracted from the Fund’s relative performance. The strength has been largely due to gold’s status as a “safe haven” in times of trouble, and this appeal has more than offset its lack of income. In addition, the weakness of the $US against major currencies has bolstered the price of gold, which is traded in $US. We will continue to monitor the situation but at this stage we are not convinced that the current strength in the gold price will be sustained.
We trimmed the Fund’s exposure to the Bank sector earlier in the year to close to a neutral position as mortgage pricing competition intensified. This trend appears to have continued and we trimmed our exposure further, even though strong balance sheets and attractive dividend yields should cushion the fallout from a faster than expected normalisation of net interest margins.
We remain confident in our ability to identify companies with stronger earnings prospects than forecast by market participants. We believe this will ultimately be rewarded by investors, notwithstanding continued volatility in market sentiment.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Apr-23.pdfMarch, 2023
The Fund performed a little better than the market over the March Quarter. The material contributors were a diverse mix: gaming company Aristocrat Leisure, health insurer Medibank Private, petrol distributor Viva Energy and pallet pool provider Brambles, and also not owning ANZ Bank. These were partially offset by our positions in National Australia and Commonwealth Banks and not owning gold miner Newcrest.
Following a brief period of individual company earnings focus, macro factors are again dominating the headlines. And following an even briefer period of market nervousness investors appear to have decided, for now at least, that the main upshot from the US regional banking calamity is further arguments for the US Federal Reserve and other central banks to end the current rate hiking cycle. The rationale behind this view is that reduced credit availability will now do some of the work higher interest rates would otherwise have had to do. Our own central ban ’s decision to not raise interest rates further in April is likely to have been at least partly influenced by this thinking.
As rising interest rates have been the main headwind for global equity markets a peak in interest rates is, everything else being equal, clearly positive. However, things are seldom equal. As we have argued for some months now the focus for equity investors should move from whether rates have peaked, or are close to peaking, to how long they will stay around current levels and how significant the impact on the economy, and in consequence, corporate earnings, will be from the sharp hikes we have already had.
While central bankers have shown they can change policy direction swiftly if the economic data surprises them, positively or negatively, they have also shown that they are concerned about repeating past mistakes of taking the foot off the brake too early. In Australia, this concern is likely to have been reinforced by the support from Federal and some State governments for CPI-equivalent minimum wage increases, which will likely flow on to substantially higher awards wages as well.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ALPH-FR-CASF.pdfFebruary, 2023
The Fund outperformed the market nicely in February, helped by strong returns from some of our key positions. The best contributors to overall performance came from health insurer Medibank Private, global insurer QBE, packaging company Orora, pallet company Brambles Industries, gaming machine maker Aristocrat Leisure and insurance broker Steadfast. The only detractors of note were our positions in BHP and Commonwealth Bank.
The February reporting season was a welcome break from the many macro factors that had been dominating individual share price performances. The Fund had a good month with most portfolio holdings which reported delivering strong results, positive outlook statements and, as a consequence, strong share price performance. Some of the highlights were pallets pool company Brambles, global insurer QBE, retailer Super Retail Group, packaging/distribution company Orora, logistics specialist Qube, airline Qantas and asset manager Macquarie Group, in addition to The Lottery Corporation, Medibank Private and Woolworths. While the earnings drivers naturally varied amongst this very diverse group of companies, common features were strong operational performance, the ability to manage cost pressure from higher input costs through a combination of operational efficiency and pricing power. We added to our positions in both Woolworths and Medibank Private after their 1H results with increased confidence in their renewed operational momentum with diminishing challenges from Covid disruptions and November’s cyberattack respectively.
In the banking sector, only CBA reported first half earnings while the others released 1st quarter updates. CBA delivered a strong set of numbers but also indicated that increased competition and a gradual rise in funding costs will start to impact margins in the second half. We continue to like the banks for their positive margin leverage from higher interest rates and strong balance sheets. However, we have trimmed the sector to a more neutral sector weight while monitoring for further evidence of their earnings resilience.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ALPH-FR-CASF-Feb23.pdfJanuary, 2023
With the equity market so far focusing on macro factors in the first few weeks of 2023, stock-specific drivers have largely taken a back seat. As the debate about the macro challenges discussed above continues to wax and wane, we expect that company-specific earnings outcomes and outlooks will start to play a more important role. The February reporting season will be an important test of the latest market optimism, especially for sectors other than Resources and Energy, where commodity prices will continue to dictate earnings trajectories.
Pre-announcements and results to date suggest a solid Christmas trading period for most consumer companies, although outlook commentary has been more mixed. The Fund’s portfolio enters the reporting season dominated by stocks that have experienced solid earnings upgrades compared to the overall market over the last few months and we believe this will support portfolio returns.
Companies such as oil refiner Viva Energy, retailer Super Retail Group, The Lottery Corporation, logistics company Qube, Qantas and Treasury Wine Estates have all been performing well in recent months and are expected to deliver solid results in February. A number of other holdings are also well positioned, in our view, to deliver earnings ahead of market expectations but might need to confirm this again in February in order to gain broader investor confidence.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/CASF_FS_Jan-2023-Rebranded.pdfDecember, 2022
The Fund lagged the market this quarter, but performed in line with the market for the whole year. For the quarter, the best returns came from iron ore miner BHP, insurer QBE, analytics company ALS and not owning either James Hardie or Pilbara Minerals. On the other side, however, owning hacking victim Medibank Private and gaming machine maker Aristocrat Leisure both cost some performance, as did not owning big bank Westpac, iron ore exposures Rio Tinto and Fortescue Metals or takeover target Origin Energy.
For the year, the best returns were from BHP, gas producer Santos, QBE and not owning retailer Wesfarmers or tech exposures Square (Afterpay) or Xero, but these were largely offset by positions in industrial property player Goodman Group, Aristocrat, owning building materials firms Reliance Worldwide and James Hardie for part of the year, and not owning Rio Tinto or Fortescue Metals.
In the current market environment in which there is lower-than-normal earnings certainty, Alphinity’s focus on earnings leadership will potentially be even more important than normal. While the overall market valuation has improved meaningfully over the last 12 months, thanks to strong aggregate earnings growth (albeit concentrated in a small number of sectors) in a fairly flat market, relatively few companies are trading on such low multiples that they can afford to disappoint on either short- or long-term earnings. We expect this will be true for stocks across the whole spectrum of the market, be they typically classified as defensive, cyclical, growth or any other type of stock.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Dec-22.pdfNovember, 2022
The Fund lagged the market a little this month, although it still delivered significantly positive returns. In November it was as much about what we didn’t own rather than what we did. Our biggest contributor was our holding in iron ore miner BHP, followed by not owning building products maker James Hardie Industries or big bank ANZ. Conversely, our positions in big bank NAB and gaming machine maker Aristocrat Leisure cost a little, and not owning iron ore exposures Fortescue Metals and Rio Tinto or takeover target Origin Energy cost more.
We maintain a relatively defensively focused portfolio. Our main exposure is to companies where we can see evidence of earnings being resilient in a worsening economic environment; Treasury Wine Estates, Carsales.com, Brambles, Orora and Telstra are some of the holdings we believe fit this description.
We also own companies which are currently enjoying solid upgrades but will be more at risk in a severe downturn. Commonwealth and NAB in the banking sector fall into this category, as do Industrials like Qantas and Qube. A deep recession would be more problematic for these companies but, at this stage, we still see more earnings upside than the market currently expects.
We have taken some profits recently in the Energy sector (primarily Woodside) and also the Resources sector by trimming lithium and nickel producer Independence Group. Our underweight to base metals, gold, and iron ore has been a detractor from performance in the last few weeks, whereas one of the key features of our performance historically has been consistent positive attribution from this sector.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Nov-22.pdfOctober, 2022
The Fund performed roughly in line with the market in October. Positions in big banks Commonwealth and NAB, and gas producer Woodside Energy all contributed positively, as did not owning resource majors Rio Tinto or Fortescue Metals. On the other side of the ledger, hacking victim Medibank Private cost a considerable amount of performance, and BHP a much smaller amount. Not owning big banks Westpac or ANZ also hurt.
Hacking went mainstream this month and everyone relearned just how important – and fragile – cyber security is. It started with telecoms major Optus in the dying days of September but a number of other companies since jumped on board (see BTW on p4). It didn’t hold the market overall back though, with a welcome ~6% bounce-back from September’s drubbing. So far this year there have been six months during which the market (ASX300 including dividends) has moved up or down by more than 3%. While it is still a little below where it started the year, it is up 10% from its nadir in June. With this degree of volatility, it feels like anything could happen the final two months of 2022.
Global markets also did pretty well for the most part. Most were solidly positive, led by Italy and Germany with heroic 11% gains as fears of a gas-less winter dissipated. Most other Euro markets were up by 4% or more, and the UK managed to appreciate 6% despite losing another PM. The US also performed very well with its broad market benchmark S&P500 rising almost 9%. The $A was virtually unchanged over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Oct-22.pdfSeptember, 2022
We expect our focus on earnings leadership will steer us through the current difficult macro environment. This sees us positioned relatively defensively at the moment but still well diversified.
While overall earnings risk into 2023 still seems biased to the downside, and this is reflected in the current portfolio positioning, it is in our view important to not get too caught up in the macro and to remain focused on individual company opportunities as well as sectors where the earnings outlook is more positive than a cursory top-down approach might suggest.
As such, the Fund has, following the August reporting season, increased its exposure a little to Qantas and to the Bank sector. It has also maintained, albeit at a slightly reduced level, the overweight to companies in the Energy sector. Qantas is currently benefitting from a very strong demand recovery which, in combination with limited seat capacity and a disciplined domestic market competitor in Virgin, has the potential to deliver a much stronger earnings recovery than is currently reflected in consensus earnings expectations. In the Bank sector, we see the market underestimating the companies’ earnings benefit from widening net interest margins while in the Energy sector, gas prices are likely to be supported by the situation in Europe for the medium term.
These stocks and sectors clearly are not without risk should a deeper recessionary scenario play out than we currently envisage, but we see that risk as well worth taking and manageable in the broader context of what remains a relatively cautiously-positioned portfolio.
Market sentiment is still being dominated by the influence of short-term inflation data on Central Banks’ future policy settings. The US third quarter reporting season will get underway in the next few weeks which should provide some insights into current the state of the US economy. Some of the recent company trading updates there, primarily in the Consumer Discretionary space, have suggested excess inventory and the need to de-stock following weaker than expected sales. This could be the first signs of the US economy slowing but considering the lag in the impact of higher interest rates on the economy, it will almost certainly be a few more months before we can draw definitive conclusions about this, especially while the US employment situation remains so robust.
The financial market turmoil and subsequent intervention by the Bank of England following announced, but later withdrawn, tax cuts by the new UK Prime Minister shows that Central Banks will act when faced with potential systemic risks. However, while it may have given Central Bankers around the world cause for reflection, it is unlikely to make the US Federal Reserve Bank move away from its determination to get inflation under control by raising interest rates further in the short term.
The Reserve Bank of Australia received global headlines when it slowed the rate of interest rate increments to 0.25% (from 0.5%) at its latest meeting. Some commentators saw this as a signal that other Central Banks might soon follow suit and that the tightening cycle is close to its peak. While it is inevitable that the US Fed will also be contemplating slowing its pace of rate hikes in the next few months, Australia doing so first is probably more a reflection of the faster transmission mechanism of higher interest rates to the economy here given the predominance of variable mortgage rates, and the slower rate of wage growth here to date.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Sep-22.pdfAugust, 2022
The Fund outperformed the market substantially in August. Positions in health insurer Medibank Private, lithium exposure IGO, gas producer Woodside Energy and automotive ad site Carsales.com all added alpha. The only one that detracted from returns was industrial property developer Goodman Group although that was quite small.
The Fund achieved solid outperformance in August. A partial reversal of the equity market optimism that the US Fed was potentially losing its resolve to raise interest rates, which hurt relative performance in July, assisted in August but, more importantly, the portfolio achieved a strong score card in the August reporting season, with the number of companies delivering earnings ahead of what the market was expecting, both in terms of FY22 earnings and outlook, comfortably exceeding the number that delivered more mixed results. Some of the highlights this time were QBE Insurance, Medibank Private, Steadfast Group, Brambles, Iluka Resources, Woodside Energy, Viva Energy and Carsales.com. We believe the portfolio is well positioned for the current market environment in which overall earnings risk is skewed to the downside, in our view.
Following the conclusion of reporting season we have added to our positions in several of the above names. The Fund’s overall exposure has become a little more defensively biased, especially as we have also continued to trim our exposure to Resources. Commodity prices have been softening considerably and China’s stimulus efforts appear to be having limited effect, and appear unlikely to provide a meaningful boost to activity during the upcoming peak construction season.
We were also encouraged by positive updates and consequent earnings upgrades for our two major bank holdings, Commonwealth and National Australia Bank. We retain a largely neutral weighting to the sector but expect solid results in November, driven by improved net interest margins and still-benign credit losses, when NAB reports its full year result and CBA provides its first quarter trading update.
While the macro environment remains uncertain, we believe the portfolio remains well exposed to companies with the potential to deliver earnings ahead of market expectations, the key driver of our long-term relative outperformance.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Aug-22.pdfJuly, 2022
The Fund lagged the market somewhat in July. Positions in industrial property developer Goodman Group, major banks National Australia Bank and Commonwealth, and not owning gold producer Newcrest Mining added to performance, but these were more than outweighed by holdings in resource major BHP, global insurer QBE, petrol distributor Viva Energy, gas producer Woodside Energy and not owning South 32. However it was another month in which macro moves had an out-sized impact on returns.
The turn in sentiment during July, resulting in previous winners being sold and losers being bought, was challenging for the relative return of the portfolio considering its exposure to companies experiencing positive earnings revisions and with above average quality in terms of cashflow and profitability.
This type of market event is unusual and generally requires a change in earnings leadership in order to be sustained. While our overall thinking is that negative earnings revisions in aggregate are likely to persist for some time, and will predominantly occur in companies that are already experiencing such revisions, changes can take place for multiple reasons at both the company and sector levels, as well as more broadly, and we will continue to monitor for any changes in the earnings outlook at all these levels.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Jul-22-2.pdfJune, 2022
The Fund outperformed the market in the June quarter and over the financial year. Positions in petrol distributor Viva Energy, health insurer Medibank Private, global insurer QBE and gas producer Woodside Energy were the main contributors for the quarter, while not owning financial services company Block Inc (Afterpay) continued to be a boon. On the negative side however was not owning toll-road company Transurban which reacted well to rising inflation.
For the financial year, the biggest contributor was not owning Block or major bank Westpac, followed by good returns from BHP and Lynas Rare Earths, QBE, major bank NAB, global asset manager Macquarie Group and Viva Energy. The only negatives of note were from holding James Hardie and being underweight Woodside earlier in the year.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Jun-22-1.pdfMay, 2022
The Fund outperformed the market a little in May. Our positions in major miners BHP and South 32, Rare Earth producer Lynas and wine maker Treasury Wine Estates all added value. On the negative side however were a number of companies which have de-rated largely because of macro forces despite each having ongoing earnings upgrades: property developer and owner Goodman Group, building materials producer CSR and job advertiser Seek
Positive earnings revisions continue to be found largely in the Energy and Resource sectors. We have recently added to our positions in Woodside Energy and BHP following the acquisition by Woodside of BHP’s Energy division. We believe the transaction will enable both companies to pursue attractive growth projects, and that strong cashflow generation will also provide capital management opportunities. This is particularly the case for BHP but Woodside also should start its new era with an ungeared balance sheet.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-May-22-1.pdfApril, 2022
The Fund performed in line with the market in April. The largest positive attribution came from petrol refiner and retailer Viva Energy, global insurer QBE and not owning Block Inc, which used to be Afterpay. The only detractor of note was gaming machine maker Aristocrat Leisure.
The portfolio continues to exhibit positive earnings revisions ahead of the overall market. Although the current macro uncertainty has created an unusually large amount of share price volatility, we believe earnings will ultimately drive share price performance.
We still see the risk of further compression of the premium the market is willing to pay for high growth stocks and remain underweight these companies in aggregate, although we have selectively added to some names where we expect upside to earnings expectations in the short to medium term and whose valuations now look more reasonable. We recently added to our position in CSL. There may still be some risk to earnings over the next 12 months due to last year’s plasma collection challenges, but with collection volumes now similar to pre Covid levels and poised to surpass historical levels in the year ahead, we perceive CSL to be well positioned to deliver better earnings growth over time.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Apr-22.pdfFebruary, 2022
The Fund underperformed the market a little in February although it maintains strong relative and absolute returns over longer time periods. The largest contributors were its holdings in diversified resource company South 32, petrol distributor Viva Energy and major bank NAB, and not owning Wesfarmers. Counting against were holdings in gaming machine maker Aristocrat Leisure, plumbing products maker Reliance Worldwide, property exposure Goodman Group and not owning major bank Westpac.
Over the last few months, the Fund’s outperformance has largely been driven by its underweight to the expensive IT sector and its positions in the Resource sector. Strong stock selection in Resources has contributed solidly, but rising bond yields and close to record-high commodity prices across the board (i.e. global macro factors) explain a large part of the outperformance. While the macro environment remains fluid we expect it to continue to be supportive of the portfolio in the near future. In the case of the IT sector, higher bond yields may have been the catalyst but the underperformance has also been a timely reminder that share prices are ultimately driven by share prices and the Australian IT sector, with some exceptions, either has no earnings or has struggled to deliver on the market’s expectations.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_Feb-22.pdfJanuary, 2022
The Fund outperformed the soft market nicely in January. Its holding in BHP was the biggest contributor to performance, followed by gas producer Santos and mineral sands company Iluka; not owning tech exposure Afterpay/ Square Inc/ Block Inc also helped. Counting against were holdings in medical tester Sonic Healthcare, building exposures Reliance Worldwide and James Hardie. Being underweight iron ore miners Rio Tinto and Fortescue and gas producer Woodside also detracted.
The Fund’s focus on companies exhibiting earnings leadership, by which we mean companies for which investors’ earnings expectations are increasing but where we also see potential for further earnings upgrades, has proved its value over the long term, and importantly also more recently. This, and our relatively low exposure to companies most at risk from tighter monetary conditions, has also worked well since the start of 2022. Broader market conditions, so far at least, look quite different to those of the past two years and have the potential to be the inflection point following a decade of falling interest rates.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Jan-22.pdfDecember, 2021
The Fund outperformed the market in the December quarter and for the whole of 2021. The best contributors were industrial property specialist Goodman Group, global asset manager Macquarie Group, diversified miner BHP, and plumbing products manufacturer Reliance Worldwide. Not owning credit providers Westpac or Afterpay also helped returns substantially. The only meaningful detractors were gas exploration company Santos and from not owning iron ore miner Fortescue Metals Group.
Macquarie Group was the biggest positive contributor to performance in 2021, followed by not owning Afterpay. Value was also added by long positions in Reliance Worldwide, building products firm James Hardie, Goodman Group, National Australia Bank and medical diagnostics company Sonic Healthcare. Not owning Telstra detracted from performance over the year, as did gas producer Woodside Petroleum
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_Dec-21.pdfNovember, 2021
The Fund outperformed the market in November. The most material positive contributors diversified resource company BHP, industrial property specialist Goodman Group, building materials producer James Hardie, dominant supermarket operator Woolworths, and plumbing products manufacturer Reliance Worldwide. Not owning big bank Westpac or credit provider Afterpay also helped returns. The only meaningful detractors were gas company Santos and big bank CBA, although not owning Fortescue or Telstra also hurt a little.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Nov-21.pdfOctober, 2021
The Fund outperformed the market a little in October but there were few big movers. The most material positive contributors were global investment bank and asset manager Macquarie Group, and plumbing products manufacturer Reliance Worldwide; not owning Rio Tinto also helped. The only detractor of note was health insurer Medibank Private.
The strong $A took the shine off offshore returns. The US and Canada were both up about 3% but most European markets returned between 0 to -2%. Japan was a notable underperformer, losing 8%, and other Asian markets like Korea (-6%) and China (-4%) fell. Brazil was the worst at -13%. It was hit by a combination of sluggish growth, higher rates and fears that President Jair Bolsonaro may be about to blow up the country’s finances. In Australia, tech stocks (+2%) and healthcare (+1%) were the best performers, while industrials (-3%) and consumer staples (-2%) fared the worst.
Quarterly releases and AGM updates for companies in the portfolio have thus far been quite positive with Macquarie Group, Reliance Worldwide, industrial property developer Goodman Group and gaming machine company Aristocrat Leisure some of the highlights. More domestically-focused companies such as Super Retail Group, Bapcor and Viva Energy will likely require good Christmases and second halves however to make up for the negative impact of the east coast lockdowns. With the opening up so far on track or even ahead of expectations we believe that each of these are well positioned to do so, especially as they were all trading well in the months prior to the lockdowns
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Oct-21.pdfSeptember, 2021
Global shares generally did better than ours in the September quarter with a 3.5% fall in the $A proving a strong headwind. New Zealand, Japan and the US were the stars, rising between 6 and 7% in $A terms; most European markets appreciated between 2 and 4%. Hong Kong was a challenged market though, with its own shares falling more than 10% and Chinese shares listed there down by 14%. The only worse market was Brazil, losing 16.5% in $A terms.
The Fund outperformed the market in the September quarter. The best contributors were global investment banks and asset manager Macquarie Group, health insurer Medibank Private, security app Life 360 and auto advertiser Carsales.com. Not owning iron ore miner Fortescue Metals Group helped too, although this was more than offset by our position in diversified miner BHP Group. Not owning takeover target Sydney Airport or gas producer Woodside Petroleum both detracted from returns
Portfolio positioning is complicated in the current environment. On the one hand, despite still having attractive valuations many cyclical companies have lost some of their appeal thanks to the slowdown in global and domestic economic growth. On the other hand, companies supported by more structural growth drivers are vulnerable to higher bond yields due to their historically high valuation premiums.
As always, we continue to be led by where we see earnings leadership combined with attractive valuations. In the Resource sector, this has seen us follow our exit of Fortescue and Oz Minerals a few months ago with an exit of our position in Rio Tinto. As a result the Fund is now underweight iron ore. While our exposure to BHP has also reduced, we see greater earnings offsets for it as a result of the Group’s product mix and it remains one of the core resource exposures for the Fund
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_Sep-21.pdfAugust, 2021
The Fund performed below the market in August. Afterpay was a big detractor, hopefully for the last time, but BHP was bigger after it was hit by the sharp fall in Iron Ore prices. Other detractors of note were from positions in auto spare parts distributor Bapcor and another iron ore name, Rio Tinto. On the positive side, not owning iron ore miner Fortescue Metals offset much of the drag from BHP, while positions in building materials company James Hardie, fast food provider Domino’s Pizza, and insurance exposures Steadfast and QBE all made solid contributions to return.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Aug-21.pdfJuly, 2021
The Fund outperformed the market nicely in July. Not owning Afterpay helped, as did our holdings in miners BHP and Lynas Rare Earths and industrial property group Goodman. Being underweight major bank Westpac was also positive. On the other side of the ledger the biggest detractor was not owning Sydney Airport, which attracted a takeover bid at the start of the month. Aside from that, our holding of Santos and not owning Fortescue Metals both cost a small amount in July.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR-Jul-21-1.pdfJune, 2021
The Fund performed in line with the market over the June quarter. Considering the amount of volatility in that period there were remarkably few stand-out companies. It benefitted most from a diverse group of companies, including waste management company Cleanaway, major bank CBA, industrial property developer Goodman Group, steel producer Bluescope Steel and building materials company James Hardie. The largest detractors from performance were Qantas, Ramsay, NAB and being underweight Aristocrat.
With most of the positive earnings growth surprise potential still concentrated in Resource companies, we retain a solid exposure to the sector. Within that however, we have further skewed the positions towards diversified miners BHP and Rio Tinto, as we see in them the greatest potential for further earnings upgrades in addition to healthy dividend payments in coming months. Copper miner Oz Minerals has been a favourite company of ours and management has hardly put a foot wrong over the last several years. However, with consensus copper price expectations now close to the spot price (which is up 60% over the last 12 months) and the company’s growth projects largely reflected in the share price, which has doubled in the same period, we continued to reduce our position.
While we are skeptical about bond yields staying at current levels, and as a result continue to be underweight Technology, which is the most expensive sector in the market, we have continued to diversify the portfolio by adding more strucural growth companies in recent months. A few months ago we added Domino’s Pizza Enterprises, attracted by that company’s accelerating store rollout in Japan and Europe; more recently we added Aristocrat Leisure and Resmed. Both have been in the portfolio before but a lack of earnings upgrades kept us out recently
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_Jun-21.pdfMay, 2021
The Fund performed a little better than the market in May. The Afterpay yoyo went in our favour this month: it was the best individual contributor to fund performance (by not owning it). Our holdings in major bank Commonwealth Bank and global insurer QBE were the only other contributors of note. On the other side of the ledger our position in ventilator manufacturer Fisher & Paykel Healthcare and not owning major bank Westpac both cost a small amount of performance in the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_May-21.pdfApril, 2021
April saw an almost 4% rise in the market (ASX300 including dividends), bringing the year-to-date market increase to 8%; the positions in the Fund have added further to that, bringing year-to-date returns approaching 10%. It continues to feel a bit surreal, after all the headwinds and challenges that the world has thrown at us over the past year or so, but when you look at the other asset classes you have to choose from, equities obviously look to many like the least worst option.
Australian shares did well compared to most global markets despite a stronger $A. While it lagged the 5-6% rises in a couple of European markets and Brazil, the ASX matched the US market and did better than the rest. China and Japan both experienced modest falls and the rest were flat to up a couple of percent. An incredible 18% rise in the price of Iron Ore was behind much of our strength (and Brazil’s) and most base metals also did well; precious metals however were relatively flat. The price of oil was up about 4% over the month.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_Apr-21.pdfMarch, 2021
n the March quarter, the market rose by a pleasing but unexceptional 4% (ASX300 including dividends). Thinking back to this time last year however, in March 2020, the market was in the process of having a full-blown panic attack about what a pandemic might do to the global economy, particularly to corporate earnings which are the key drivers of share prices. The ASX300 tumbled 37% in the four weeks from its late February 2020 high to a low in the last week of March, the shortest, sharpest bear market we have ever seen. 12 months on from that we are now starting to cycle those panicked times, resulting in some very large numbers showing up. Things quickly started getting better after April 2020, at least for economies and equity markets; the human toll kept getting worse in many places and is only now really showing signs of improvement in some. Contrast the time of panic with the situation today, in which many global equity markets are at or close to all-time highs despite the ongoing economic impact Covid has had on many countries and companies. Australia’s economy seems to have escaped relatively unscathed, with the exception of a few sectors, thanks to the enormous amounts of government largesse thrown at it
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_Mar-21.pdfFebruary, 2021
The Fund outperformed the market nicely in February. It benefitted from holdings in resource exposures BHP and Oz Minerals, insurer QBE and global asset manager Macquarie Group. Not owning Afterpay, Coles or Northern Star also helped as these companies underperformed substantially. Major detractors from performance were retailers Woolworths and Wesfarmers, industrial property developer Goodman Group, and not owning company Rio Tinto or major bank Westpac
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_Feb-21.pdfJanuary, 2021
The Fund lagged the market a little in January. It benefitted from holdings in retail and industrial conglomerate Wesfarmers, while not owning Sydney Airport or accounting software company Xero also helped. Against those however were holdings in industrial property developer Goodman Group and not owning either consumer credit innovator Afterpay or major bank Westpac.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_Jan-21.pdfDecember, 2020
The market put on almost 14% in the December quarter, much of it in November when vaccines were announced. The Fund underperformed this slightly but still delivered a strong absolute return for the quarter.
It benefitted primarily from holdings in resource plays Fortescue Metals, Oz Minerals and BHP, services provider Seven Group, and major bank NAB. Not owning infant formula maker A2 Milk also helped. The detractors were gold producer Newcrest, global insurer QBE, blood fractionator CSL, hospital operator Ramsay Health and; not owning consumer credit provider Afterpay Touch or major bank ANZ also hurt performance somewhat.
The fund matched the market in 2020, best contributors again being Fortescue, BHP and Oz Minerals, but also industrial property developer Goodman Group, CSL, and building products producer James Hardie. Not owning major bank Westpac or gas producer Woodside were also major positives. The key detractors were Newcrest, QBE, Treasury Wine Estates, airline Qantas, gas producer Santos, property developer Mirvac and not owning Afterpay, ANZ or accounting software provider Xero.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_Aug-20.pdfAugust, 2020
Portfolio comment
The Fund underperformed the market somewhat in August. It benefitted primarily from its holdings in major airline Qantas, industrial property developer Goodman Group. Not owning infant formula maker A2 Milk also added to returns. The biggest detractor however was from not owning consumer credit provider Afterpay Touch, although the Fund’s gold exposure Newcrest Mining, telco Telstra Corporation and gas infrastructure company APA Group also detracted somewhat.
Portfolio Outlook
Top-down portfolio themes are likely to continue to be centred around the pace and sustainability of the economic improvement we’ve seen in recent months, and the potential for a successful vaccine to accelerate that improvement. While these are clearly important issues to consider they are also inherently difficult to be definitive about. We remain of the view that identifying individual company earnings leadership will be the best way to capture both company specific themes and potentially broader economic tailwinds, while minimising the risk that our positioning is relying too much on overly optimistic (or pessimistic) economic forecasts. Of course, we need to be mindful of distinguishing between earnings leadership (by which we mean stronger earnings growth than the consensus is expecting) that is driven primarily by factors that are transient and unlikely to persist in a post Covid world, and more sustainable earnings upgrades. In our view it is likely that some of the factors that are presently generally perceived to be only short term drivers will end up surprising positively, both in terms of their magnitude and durability. And this can happen even if the global economy continues to improve. For example is portfolio holding Sonic Healthcare, which we wrote about last month. We believe the market continues to underestimate the size and longevity of the Covid testing opportunity, the impact it will have on Sonic’s earnings and, as a consequence, the dramatic strengthening of the group’s balance sheet. This will ultimately facilitate capital returns and/or, more likely, further acquisitions which will underwrite additional future earnings growth. At the same time as it is experiencing high demand for Covid testing, Sonic’s base pathology business has essentially returned to normal testing conditions in several countries and continues to improve even in Covid-laggard countries such as the US and the UK. In summary, while we expect the Fund’s portfolio to continue to progressively become more leveraged to economic growth, assuming the recovery remains on track, we will ensure that its well-diversified portfolio considers other good businesses with the potential to deliver positive earnings surprise.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/ACASF_FR_Aug-20.pdfticker: HOW0026AU
commentary_block: Array
factsheet_url:
https://www.alphinity.com.au/our-thoughts/fund-reports/2020-2/
PORTFOLIO COMMENT + PORTFOLIO OUTLOOK
release_schedule: Monthly
fund_features:
The Fund is suitable for investors aiming for a higher return compared to the market, but prepared to take on additional volatility. It is is a diversified portfolio of 20-35 best ideas derived from the broader Alphinity investment process.
- The Fund’s benchmark is the S&P / ASX 200 Accumulation Index, and it aims to outperform its benchmark after costs and over rolling five-year periods.
- Focused portfolio of quality large cap companies at the right point in their earnings cycle.
- Alpha will be delivered predominantly from high conviction stock selection.
- Active Share typically around 60%.
manager_contact_details: Array
asset_class: Domestic Equity
asset_category: Australia Large Growth
peer_benchmark: Domestic Equity - Large Growth Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund