September, 2023
The Fund lagged the market slightly in the September quarter. The clear winners were online advertising group carsales.com and industrial property developer and owner Goodman Group. Other positives were owning global medical device maker Cochlear and not owning global medical device maker Resmed Inc or supermarket Coles. The only notable detractors were mineral sands producer Iluka Resources and not owning gas producer Woodside Energy
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 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.
Financial services platform HUB24 delivered one of the stronger results in August. Ongoing market share gains (funds flow) resulting in positive margin leverage provides the potential for earnings growth to continue to surprise positively, in our view.
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/2020/12/ASSF_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: online advertising (carsales.com), industrial property (Goodman Group), medical devices (Cochlear), pallet pooling (Brambles Industries), 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 that this 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, and Cochlear. 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/2020/12/ASSF_FR-Aug-23.pdfJuly, 2023
Economic data has improved recently, with GDP expectations rising, resilient labour markets, strong consumption, inflation beginning to fall, and financial markets generally responding well to tighter financial conditions. We continue to see potential risks from the lagged, cumulative impact of Fed rate hikes, but we are also aware that some normally reliable economic indicators are already at low levels and the outlook for growth appears somewhat better than many feared at the start of the year. The US manufacturing Purchasing Manager’s Index (PMI) peaked well above 60 in 2021, and after a two-year downcycle it is now at ~46; while deep in contractionary territory this is approaching levels which have historically been associated with cyclical bottoms.
From a corporate earnings perspective, and after a similar nearly two-year period of negative revisions, there also appears to be some early signs of stabilisation. The second quarter reporting season has so far been better than expected with beats, both by number and magnitude, higher than normal. Nevertheless, generally cautious forward guidance has met with mixed price responses and muted earnings revisions. For example, consensus earnings expectations for both 2023 and 2024 have barely moved over the last three months (+0.1% respectively), although flat estimates are a marked improvement from the previous negative trend of -2% to -3% per quarter. Meanwhile, underlying sector dispersion is relatively wide. Materials and Energy have seen significant negative revisions reflecting lower commodity prices, while Consumer Discretionary, Communications and Tech Hardware are amongst the sectors with positive revisions for both years. More defensive sectors like Property, Health Care and Consumer Staples continue to slip in relative earnings strength. While there are some encouraging signs, and the negative earnings cycle is relatively mature by historical standards, our stock analysis and recent research trips suggest it’s still too early to call a sustained turn in the earnings cycle
From a market perspective, leadership has rotated again this year, mostly back to growth stocks and away from defensives, although there has also been a significant rally in some cyclical industry groups recently (e.g. Autos, Semiconductors, Retail and Transport), which have responded positively to a more resilient growth outlook and rising bond yields.
Narrow market breadth has been another distinct feature, with the so-called ‘magnificent seven’ group of mega-cap stocks, which make up ~27% of the S&P 500 market capitalisation, delivering ~73% of the YTD return through to end July (albeit an improvement from 102% at the end of May 2023). Against this more challenging backdrop, we continue to focus on our bottom-up earnings analysis to manage the changing environment.
During July we continued to add to our positionsin Edwards Lifesciences, following a pullback in the stock despite a strong report, and ING, on strong earnings momentum. This was financed through taking profit in some of our best performing growth stocks (e.g. Mercadolibre, Fortinet, OnSemi & Intuitive Surgical), and also reducing other stocks where relative earnings support is falling (e.g. Chubb, Nextera Energy Partners, Otis and Keysight). Overall positioning has not changed significantly despite these changes, with the portfolio still wellpositioned in strong growth stories, combined with some flagship defensives.
We have recently added to our cyclical exposure where we have established fundamental stock conviction; however, the portfolio overall remains relatively less invested in cyclical stocks. We continue to work hard at identifying opportunities across all sectors as the earnings cycle continues to evolve.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AGSEF_FR_July-2023.pdfJune, 2023
The upcoming August reporting season should provide further insights into the extent of the economic slowdown the RBA has tried to orchestrate since the current interest rate tightening cycle started in May last year. The portfolio remains well exposed to companies that have seen better-than-average positive earnings revisions over the last several months. While there is always a risk, especially late in the cycle, that investors look beyond the current earnings environment and focus on a potential future earnings recovery, in our view it is unlikely that we have arrived at that point yet. A more decisive change in monetary policy, a pivot to a more expansive fiscal policy or a more significant fall in earnings that resulted in a “this is as bad as it gets” argument would typically precede such a change in investor sentiment.
For now, however, strong current operational performance should continue to be well rewarded. We see this as being achieved by a mix of portfolio holdings that also reported well in February – companies like Brambles, QBE, Steadfast, Medibank, Orora and Woolworths – as well as some newer positions in companies that have managed through a challenging industry environment and have come through at the other end in a good position to benefit as headwinds ease.
Last month we wrote about building materials manufacturer James Hardie being one of those companies. Despite going through a potentially destabilising management change last year, and even though US mortgage rates have ticked up again, the company appears to have stabilised and be back to delivering above-market volume growth.
The Fund performed in line with the market in June, and lagged slightly across the June quarter. The best contributors were pallet hirer Brambles, global insurer QBE, advertising platform carsales.com and domestic insurer Suncorp; not owning resource giants South32 or Rio Tinto also helped. Offsetting these however were holdings of resource giant BHP and medical device maker Fisher & Paykel Health; not owning high tech companies Xero and WiseTech also detracted from returns.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR_Jun-23.pdfMay, 2023
The Fund lagged the market a little in May, with a holding in respiratory products maker Fisher & Paykel and Lifestyle Communities both detracting from returns. The portfolio benefitted from no exposure to gold miner Newcrest, while overweight holdings in Suncorp and Lynas Rare Earths also contributed to returns.
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.
Cochlear is benefitting from the dual tailwinds of a post-covid recovery in implant surgeries and the successful launch of its latest generation sound processor, the Nucleus 8. Processor upgrades are typically released every five years and the latest version, which is smaller and has better connectivity than its predecessor, should enable Cochlear to not only gain share of new patients but, importantly, also trigger strong demand from N6 and N7 users that will now be eligible for an upgrade, funded by their health insurers.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_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 most meaningful positive contributors were health insurer Medibank Private, housing provider Lifestyle Communities, pallet company Brambles and auto advertiser carsales.com; the only meaningful detractor was owning resource giant BHP.
Despite ongoing macro uncertainty, the portfolio has continued to exhibit better earnings revisions than its benchmark with March quarter updates from Brambles, 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.
Artificial Intelligence (AI) has been an issue bubbling away for some time but it has been brought to prominence this year by the release of ChatGPT. There are few companies for which AI will not become relevant over the next few years. It has the potential to provide great productivity improvement, but there might also be negative outcomes for society. To that end, Alphinity has teamed up with Australia’s premier scientific research organisation, CSIRO, to conduct a study into how it can be used responsibly. We will talk more about this in coming months.
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/2020/12/ASSF_FR-Apr-23.pdfMarch, 2023
The Fund performed in line with the market over the March Quarter. The material contributors were a diverse mix of health insurer Medibank Private, packaging company Orora and pallet pool provider Brambles, retailer Super Retail Group and insurer QBE, although these were partially offset by our positions in Lifestyle Communities and National Australia Bank. Not owning Aristocrat Leisure or gold miner Newcrest, both precluded by the Fund’s Charter, also cost some performance.
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.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ALPH-FR-SSF.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, sustainable packaging company Orora, global general insurer QBE, and insurance broker Steadfast, pallet company Brambles Industries, and not owning Rio Tinto or gold-producer Northern Star. The only detractors of note were our positions in Lifestyle Communities and BHP.
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/2020/12/ALPH-FR-SSF-Feb23.pdfJanuary, 2023
The Fund largely kept pace with the rampant market in January. The best returns came from industrial property developer Goodman Group, retailer Super Retail Group and rare earths producer Lynas; not owning Woodside Energy or registry operator Computershare also helped. On the other side, however, health insurer Medibank Private, pallet pool operator Brambles Industries and insurance broker Steadfast all lagged the very strong market. Not owning lithium producer Pilbara Minerals also hurt a little.
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 retailer Super Retail Group, logistics company Qube and Qantas 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.
While Commonwealth is the only major bank to report, we continue to see upside from better margins and low credit losses. We also remain overweight the Insurance sector, one in which stock selection has been important over the last couple of years. We continue to see upside resulting from strong premium growth for insurance broker Steadfast in particular, but also underwriters QBE and Suncorp.
While the economic recovery in China will take some time to gain momentum and is likely to be more consumer-led than in the past, the bulk commodity producers have been getting upgrades and we have added iron ore producer Fortescue Metals to the portfolio. The company is not without its issues: while its allocation of capital to Fortescue Future Industries is admirable, from a financial point of view the returns are uncertain. Nonetheless, stronger iron ore prices have the potential to trump these issues in 2023.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR-Jan-23-Rebranded.pdfDecember, 2022
The Fund lagged the market slightly this quarter, but underperformed the market for the whole year. For the quarter, the best returns came from affordable retirement village operator Lifestyle Communities, iron ore miner BHP, and insurer QBE, and not owning James Hardie, Aristocrat or Pilbara Minerals. On the other side, however, owning hacking victim Medibank Private, infant formula market Bubs and supermarket operator Woolworths cost some performance, as did not owning iron ore exposures Rio Tinto and Fortescue Metals or takeover target Origin Energy.
For the year, the best returns were from QBE, medial exposure Virtus Health and lithium producer IGO, while not owning tech exposures Square, Xero or Aristocrat helped returns. These were more than offset by its position in industrial property player Goodman Group, owning Reliance Worldwide and James Hardie for part of the year, not owning BHP at the start of the year when it had fossil fuel exposure, and not owning gas producers Woodside Energy and Santos at all.
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/2020/12/ASSF_FR-Dec-22.pdfNovember, 2022
The outlook for growth remains challenging. The global economy is still struggling with high inflation, an abrupt tightening of financial conditions and of course a strong dollar. Together these represent significant headwinds for growth, pressuring real wages, consumer confidence and housing markets in the U.S. and across the world. While there are some recent signs of moderating inflationary pressures in the U.S., which could translate into a less hawkish US Federal Reserve (Fed), there is a risk that this will be too late to avoid a sharp slowdown in global growth and corporate earnings.
There has been a recent acceleration in cuts to global earnings forecasts, and we are now in one of the steepest downgrade cycles seen over recent years. However, analysts still appear to be behind the curve on earnings estimates for 2023, and we expect the trend to continue. Over the last three months, global earnings expectations have fallen by -3.1%, with negative revisions across across nearly all sectors. More defensive sectors such as Utilities, Consumer Staples and parts of Financials have held up relatively better, while downgrades are steep in more cyclical sectors Materials, Communications and Technology. The exception to this otherwise typical sector profile has been Energy, driven up by the oil price spike following the Russian war, but it’s worth noting that at the current oil spot price ($78) current earnings expectations for the sector are too high ($95-$100 oil price baked in).
Despite the global earnings cuts, bottom-up consensus still expects Earnings Per Share (EPS) growth for the MSCI World Index of +4.0% for 2023. This seems optimistic in the context of current strong headwinds to growth and margins. Our analysis and recent overseas trips continue to suggest that further earnings downgrades are likely over the next few months, especially as managements provide guidance for 2023.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AGSEF_FR_Nov-2022-1.pdfOctober, 2022
The Fund underperformed the market a little in October. Positions in affordable property developer Lifestyle Communities, big banks NAB and Commonwealth, and security app Life 360 all contributed positively, as did not owning iron ore plays Fortescue Metals or Rio Tinto. On the other side of the ledger, hacking victim Medibank Private cost a considerable amount of performance; infant formula maker Bubs Australia, supermarket Woolworths, BHP and not owning gas producer Woodside Energy also detracted.
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/2020/12/ASSF_FR-Oct-22.pdfSeptember, 2022
The Fund underperformed the market a little in the September quarter. Positions in lithium producer IGO, health insurer Medibank Private and affordable retirement player Lifestyle Communities all added to returns, as did not owning gold producer Newcrest. The main detractors from returns were industrial property developer Goodman Group and packaging company Orora, and not owning lithium play Pilbara Resources or coal miner Whitehaven Coal.
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. 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.
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.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR-Sep-22.pdfAugust, 2022
We would expect financial markets to continue to be volatile against the current macro-economic and geopolitical backdrop. Some of the large, current uncertainties are Europe heading into winter with an ongoing energy crisis, the end game for the Fed’s tightening cycle, and China’s persistence with Covid lockdowns. Meanwhile, the global earnings cycle has continued to weaken at a similar pace as before, with market earnings expectations falling another -0.3% for both 2022 and 2023 during August. With third quarter reports approaching, we have also seen a ramp up in profit warnings lately across many sectors and regions.
From a sector perspective, relative differences in earnings revisions are small, with most sectors now seeing net downgrades. Overall, aided by insights from our team’s many recent overseas research trips, we still believe earnings expectations seem overall too high. Global analysts expect nearly 10% earnings growth in the second half of 2022, which appears too optimistic.
In terms of portfolio decisions, this is a period of headwinds (macro and earnings) where individual stock picking and detailed fundamental analysis come to the fore. We have seen plenty of examples where similar companies, which operate in the same market segment, produce very different earnings outcomes. Company market position, pricing power, operational quality and management execution are big drivers of relative stock performance at the moment, which isn’t unusual when economies are slowing down, financial conditions tightening, and equity markets are volatile.
During the last month we added a new position in Nextera Energy Partners, a high-quality renewables owner and operator. MercadoLibre, the leading ecommerce and payments platform in Latin America, also entered our portfolio after another revenue beat and with earnings having turned a corner. Finally, we also added back some cyclical exposure through Advanced Drainage Systems, the market leader in HDPE and PPE water management solutions. We trimmed our position in Microsoft due to some potential earnings risks going forward and reduced our exposure to Prologis and Keysight on valuation grounds after good performance.
We continue to look for global stocks with misunderstood and under-appreciated earnings potential, and our highest conviction and quality ideas make up our relatively concentrated portfolio.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AGSEF_FR_August-2022-2.pdfJuly, 2022
The Fund lagged the market a little in July. Positions in affordable retirement player Lifestyle Communities, industrial property developer Goodman Group, major banks National Australia Bank and Commonwealth, all contributed positively to returns, as did not owning gold producer Newcrest Mining. On the negative side were holdings in resource major BHP, global insurer QBE, packaging company Orora and not owning South 32. However it was another month in which macro moves had an out-sized impact on returns.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR-Jul-22-1.pdfJune, 2022
The Fund underperformed the market in the June quarter. Our strongest contributors were health insurer Medibank Private, global insurer QBE and insurance broker Steadfast, while not owning financial services company Block Inc (Afterpay) continues to be a boon. On the negative side however was not owning BHP for much of the period, and not owning Woodside Energy at all. For the financial year, the biggest contributor was Block, followed by QBE, Lynas Rare Earths, health exposure Virtus and Macquarie Group. The main negatives were BHP and Woodside, although building materials maker James Hardie Industries and CPAP maker Resmed also hurt.
All up, notwithstanding the recent falls we are only a little more comfortable with the Australian equity market now than we were earlier in the year. We do see some opportunities, but risks remain from pressures building in the domestic economy as a result of higher inflation, rising interest rates and tighter monetary conditions.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR-Jun-22.pdfMay, 2022
The Fund lagged the market somewhat in May. Our positions in major miner Rio Tinto, rare earth producer Lynas and health insurer Medibank Private all added value. On the negative side however were a number of positions that cost including property developer and owner Goodman Group, building materials producer CSR and supermarket operator Woolworths.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR-May-22-1.pdfApril, 2022
The Fund underperformed the market a little in April. The largest positive attribution came from petrol refiner and retailer Viva Energy, global insurer QBE, insurance broker Steadfast, and not owning Block Inc. Against those were our positions in mining company Lynas Rare Earths and safety app Life 360 which all cost a small amount. Not owning hospital operator Ramsay Healthcare, which was subject to a takeover bid, or toll collector Transurban also detracted from returns.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/AASF_FR-Apr-22.pdfMarch, 2022
The Fund underperformed the market across the March quarter, during which a number of large companies the The fund is unable to invest in performed very well, most notably resource companies South 32 and BHP and gas producers Woodside Petroleum and Santos.
The largest positive contributors to returns were its holdings in diversified resource company Rio Tinto, a metal recycler Sims Group and not owning tech company Xero or gaming machine maker Aristocrat Leisure. US building exposures James Hardie and Reliance Worldwide, local affordable housing group Lifestyle Communities and pathologists Sonic Healthcare all detracted from returns.
The quarter was a difficult one for the Fund. Not only did we have no exposure to Energy and limited exposure to Resources, we also didn’t get the rebound in some of the more expensively-valued long duration stocks. As discussed in the previous section, we expect that the headwind from higher rates is not over for the latter group of companies. The chart below shows just how meaningful the increase in real US rates has been in recent months, and it may have further to go before it has run its course.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR-Mar-22.pdfFebruary, 2022
The Fund underperformed the market in February. Its fossil-free charter prevented it from owning mining company BHP or gas producer Woodside. The best contributors were its holdings in diversified resource company Rio Tinto, metal recycler Sims and major bank NAB, rare earth miner Lynas, and not owning either tech exposure Xero or gaming machine maker Aristocrat Leisure. Counting against were holdings in tech company Life 360, plumbing products maker Reliance Worldwide, building materials maker James Hardie, being underweight major bank Westpac and not owning South 32 or gold producer Newcrest.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR_Feb-22.pdfJanuary, 2022
The Fund lagged the market somewhat in January. Not being able to hold fossil fuel-exposed BHP, Woodside Petroleum or Santos were substantial headwinds, although these was partially offset by holdings in Rio Tinto and Iluka Resources. Virtus Health added to returns, as did not owning tech exposures Afterpay/ Square Inc/ Block Inc and Xero. Counting against were holdings in Lifestyle Communities, Sonic Healthcare, and building exposures Reliance Worldwide and James Hardie.
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 for most of our Funds since the start of 2022. The Sustainable Share Fund’s returns were held back by its inability to own BHP shares as a result of its fossil-free charter, and even relatively large exposures to BHP’s iron ore producing peers wasn’t enough to compensate that month. The size of the imbalance might add volatility to month-to-month relative performance but we expect it to be less of an issue over longer periods. 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/2020/12/ASSF_FR-Jan-22.pdfDecember, 2021
The Fund outperformed the market in the December quarter and for the whole of 2021. The best contributors were rare earth miner Lynus, industrial property specialist Goodman Group, global asset manager Macquarie Group, and plumbing products manufacturer Reliance Worldwide. Not owning consumer credit provider Afterpay and being underweight big bank Westpac added to returns strongly. Health insurer Medibank Private cost slightly, but not owning diversified miner BHP was the largest individual detractor during the December quarter.
The most significant positive contributors to performance over 2021 were owning affordable retirement housing company Lifestyle Communities and Macquarie Group and not owning either Afterpay or BHP. Aside from those were strong contributions from miner Iluka, Oz Minerals, safety app Life 360, Reliance Worldwide, James Hardie, and Goodman Group. The major detractors over the year were car parts maker Carbon Revolution, iron ore miner Fortescue Metals and consumer finance group Liberty Financial.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR_Dec-21.pdfNovember, 2021
The Fund outperformed the market in November. The most material positive contributors were industrial property specialist Goodman Group, rare earth miner Lynus, building materials producer James Hardie, IT company Megaport and plumbing products manufacturer Reliance Worldwide. Being underweight Westpac and not owning credit provider Afterpay also helped returns. Not owning diversified resource company BHP hurt returns the most, while affordable housing company Lifestyle Communities and rare earth miner Iluka were small detractors.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR-Nov-21.pdfOctober, 2021
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.
The Fund performed in line with the market in October with few big movers to note. The most material positive contributors were global investment bank and asset manager Macquarie Group, plumbing products manufacturer Reliance Worldwide, safety app Life 360 and retailer Super Retail Group; not owning BHP also helped. The only meaningful detractors were health insurer Medibank Private and iron ore miner Rio Tinto.
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 technology company Life360 some of the highlights. More domestically-focused companies such as Super Retail Group and Bapcor 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 both 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/2020/12/ASSF_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 retirement property operator Lifestyle Communities, auto advertising site Carsales.com, global asset manager Macquarie Group, health insurer Medibank Private, security app Life 360, insurance broker Steadfast and insurer QBE. Not owning diversified miner BHP helped too, although this was partially offset by positions in iron ore miners Fortescue Metals Group and Rio Tinto. Not owning takeover target Sydney Airport or gas producer Woodside Petroleum both detracted from returns
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR_Sep-21.pdfAugust, 2021
The Fund outperformed the market a little in August. Afterpay was a big detractor, hopefully for the last time, as was iron ore miner Fortescue Metals 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 BHP more than offset the drag from the other miners, while positions in affordable housing provider Lifestyle Communities, building materials company James Hardie and insurance exposures Steadfast and QBE all made solid contributions to return.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR-Aug-21-1.pdfJuly, 2021
The Fund outperformed the market nicely in July. Not owning Afterpay helped this month, as did our holdings in miners Fortescue, Iluka and Lynas Rare Earths, property groups Lifestyle Communities and Goodman and online advertiser Carsales.com. 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 position in Megaport and not owning BHP both cost performance in July.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR-Jul-21.pdfJune, 2021
The Fund outperformed the market nicely over the June quarter. It benefitted most from tech exposure Megaport, mineral sands producer Iluka, waste management company Cleanaway, iron ore miner Fortescue Metals, industrial property developer Goodman Group. Not owning gas producer Woodside Petroleum also helped. The largest detractors from performance were lightweight car parts maker Carbon Revolution, horticulture company Costa Group, airline Qantas, held back by more lockdowns, and hospital operator Ramsay Healthcare. Not owning gaming machine maker Aristocrat Leisure also detracted from returns.
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 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 have reduced our position somewhat. 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 structural growth companies in the past few months.
Recently we added ResMed, which has been in the portfolio before but a lack of earnings upgrades kept us out until recently. ResMed has had some challenges with the lagged impact on demand for its sleep apnea products due to a decline in sleep diagnostics during Covid. Testing is now recovering and a significant global product recall by its major global competitor, coinciding with ResMed’s launch of its new S11 airflow generator, is also providing the company with an opportunity for a step-change in market share globally.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR_Jun-21.pdfMay, 2021
The Australian share market (ASX300 including dividends) edged higher by 2.3% in May, bringing the rise for the five months so far of 2021 to 10.5%. May was a bit like a mini-reporting season with a number of conferences and results from companies with odd balance dates providing a lot of noise for the market. Our market lagged some of its major western peers a little: most European markets rose by between 3 and 6% and Canada by 5%, although it outperformed the US. The broad S&P500 was up only 0.7% and the tech-focused Nasdaq fell 1.5% as some heat came out from some of the high-flyers. Japan fell slightly as another wave of the virus took hold there.
Commodity prices continued their recent strength, the bulks especially. Iron ore had a wild ride, starting the month at $US180 and spiking to $240 before China put some calming measures in, discouraging speculators and bringing the price back down to $190 at the end of the month. Coal however rose sharply: thermal coal (for power generation) rising 27% and metallurgical coal (for use in steel making) 38%. Gold rose 7.5% in the month and most base metals were firmer, although only by a few per cent. Oil was also slightly higher.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_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/2020/12/ASSF_FR_Apr-21.pdfMarch, 2021
The Fund underperformed the market only fractionally during the March quarter. It did well from holdings in resource company Oz Minerals, waste company Bingo Industries and retailer Super Retail Group; not owning Afterpay, gold producer Northern Star, supermarket Coles Group, infant formula maker A2 Milk or tech play Xero, which all underperformed, also added to returns. Major detractors were tech exposures Megaport and Nuix, iron ore plays Fortescue Metals and Deterra, and lightweight auto parts maker Carbon Revolution. Not owning BHP also detracted from returns.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR_Mar-21.pdfFebruary, 2021
The Fund outperformed the market nicely in February. It benefitted from holdings in resource exposures Oz Minerals and Iluka as well as affordable housing provider Lifestyle Communities, global insurer QBE and global asset manager Macquarie Group. Not owning consumer finance provider Afterpay, supermarket Coles or gold producer Northern Star also helped. Major detractors from performance were IT security company Nuix, retailer Wesfarmers, lightweight parts maker Carbon Revolution, industrial property developer Goodman Group, medical device company Fisher and Paykel, and IT exposure Megaport; not owning resource company BHP also hurt.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR_Feb-21.pdfJanuary, 2021
The Fund underperformed in January, giving back a little of the strong returns generated in 2020. It benefitted from holdings in waste management company Bingo Industries and conglomerate Wesfarmers; and not owning either Sydney Airport or accounting software company Xero helped. Against that however were its holdings in iron ore exposures Fortescue Metals and Deterra Royalties, industrial property developer Goodman Group, Macquarie Group and Qantas which all held performance back. Not owning Afterpay or BHP were also impediments.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/ASSF_FR_Jan-21.pdfSeptember, 2020
Portfolio Comment
The Fund outperformed substantially over the September quarter. It benefitted from holdings in a diverse group of companies: copper miner Oz Minerals, data centre connector Megaport, industrial property play Goodman Group, iron ore miner Fortescue Metals, lightweight car parts maker Carbon Revolution, auto parts wholesaler Bapcor, waste management company Bingo Industries; not owning Woodside Petroleum or A2 Milk also helped. There wasn’t much on the negative side, just renewable energy company New Energy Solar and not owning consumer credit provider Afterpay Touch.
Portfolio Outlook
The portfolio continues to be exposed to companies exhibiting earnings leadership across a number of thematics including a broadening of the economic growth recovery, structural growth, and stocks benefiting in some way from Covid. We think a well-diversified portfolio is always a good strategy but this is especially the case in the current environment.
Companies in the broadening growth category include Resources stocks such as Oz Minerals and BHP as well as hospital operator Ramsay Healthcare, which will benefit from normalising – or possibly even larger than normal volumes – of elective surgery as economies open up. We also expect that even a partial return of domestic flights would result in earnings for Qantas that are ahead of beaten-down market expectations.
Furthermore we have reduced our underweight to the Bank sector as the extensive Government stimulus should at least delay large scale credit losses. More structural growth stocks continue to trade quite expensively but we are maintaining some positions for which we see further earnings upside including industrial property developer Goodman Group and respiratory product maker Fischer & Paykel Healthcare.
The duration of the current Covid-impacted environment, and as a consequence the current consumer trends, remains to be seen but we suspect the earnings impact for some stocks will be both greater and more enduring than current consensus earnings reflect. Companies such as auto parts wholesaler Bapcor, Super Retail Group, Reliance Worldwide, Wesfarmers and James Hardie are in strong positions to capture the upside from consumer spending in segments such as DIY, domestic holidaying, second-hand car sales and housing repair and construction.
A more difficult call is what to do with so-called yield stocks. While the dividend yields of some companies of around 4% look attractive compared to bond yields which are currently close to zero we suspect improving earnings upside in other areas of the market might detract from that appeal. There is also some risk that the large scale stimulus we are seeing will result in higher inflation expectations and, as a consequence, cause an uptick in bond yields which would prove a challenging environment for these stocks. We have as a consequence reduced or exited some of these positions.
ticker: HOW0121AU
commentary_block: Array
factsheet_url:
Portfolio Outlook + Comment
https://www.alphinity.com.au/our-thoughts/fund-reports/2020-2/
release_schedule: Monthly
fund_features:
Alphinity Sustainable Share Fund aims to outperform its benchmark after costs and over rolling five-year periods. The Fund provides a diversified portfolio of Australian stocks listed on the ASX that have strong Environment, Social and Governance (ESG) characteristics and, where possible, contribute towards the advancement of the UN Sustainable Development Goals (SDG) agenda.
- A portfolio of Australian-listed companies that support one or more of the Sustainable Development Goals, have strong ESG practices and offer attractive prospective returns.
- A committee of reputable external experts ensures the fund stays true to charter and drives active engagement with companies.
- A proven investment team with strong track record applying a disciplined process.
- Benchmark: S&P/ASX 300 Accumulation Index.
asset_class: Domestic Equity
asset_category: Australia Large Growth
peer_benchmark: Domestic Equity - Large Growth Index
broad_market_index: ASX Index 200 Index
manager_contact_details: Array
structure: Managed Fund