SGH High Conviction Fund update – September Quarter 2026

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Transcript:

SGH High Conviction Fund performance for the quarter

We were pleased with the last quarter. The fund returned 5.1%, outperforming the benchmark by 3.9%. So it’s good to see the portfolio performing after, some more difficult, challenging times earlier in the year. And I think the quarter was again really characterised by continued macro volatility, around the Iran and Russia-Ukraine wars, and higher inflation, and also a surge in AI investment starting to come through in the headlines and starting to cause some volatility.

And then the other key thing was the domestic reporting season. The most significant thing through the quarter, though, I think, was September, when we saw a quite dramatic move in bond yields. Really on the back of monetary tightening, that saw a really sharp repricing of interest rate expectations in the market and a repricing of domestic cyclicals as well.

So things like REITs and consumer discretionary underperformed, and we’re underweight a lot of those areas, and that certainly helped contribute to the performance of the portfolio.

Key drivers of performance

Looking at the key drivers, just really following on from what I’ve just said, it was particularly pleasing that we saw the performance we did in the portfolio given the macro volatility.

And I think it was largely driven by the fact that, during August reporting season, a lot of the fundamentals in the portfolio started to come through. I always think of reporting season as a scorecard for how the portfolio is going. And as I say, it was pleasing during the August reporting season.

Earnings meets, I think, were often beats given depressed valuations. And given that we’ve had some stocks that have been held back on valuation grounds, I think we started to see some catalysts emerge through the reporting season. Things like Healthcare, particularly CSL, welcomed a relief rally on positive trends in its core immune and globulin business.

Corporate activity certainly helped Cleanaway and Northern Star, with both companies receiving corporate news or M&A news during the quarter. The other area which outperformed strongly was materials. After a sharp pullback, gold and copper prices rose again in the middle of the year.

That drove very strong gains in companies like BHP, Genesis Minerals, and Capstone Copper in the portfolio. And lastly, energy. With the Middle East crisis or war still unresolved and protracted, we saw oil prices up 40% in the last quarter, which helped drive performance in our Santos and Ampol positions in particular.

Current fund positioning

If you look at the fund positioning at the moment, as I said, reporting season showed results were better than feared. But the dominant theme through reporting season was inflation, and it’s absolutely everywhere. And I think it’s important to appreciate that inflation is being driven less by sort of conventional overheating of the economy and more by events like the Iran and Russia-Ukraine wars, the climate and geopolitical shocks and, this surge we’re seeing in AI investment.

And the result is that we’re seeing a very bifurcated economy. Households’ spending is slowing, while investment is strong, particularly in areas like infrastructure, defence, mining services and data centres. And that’s creating a real dilemma for the RBA and other central banks, and it’s also leaving investors trying to work out really what is pushing bond yields higher.

So those movements in the bond yields are really what we’re grappling with at the moment as investors and in positioning the fund. With bond yields at really new post-GFC highs, we have seen a number of the more interest rate sensitive stocks in the portfolio underperform.

So things like Next Seek Vicinity and Chorus have weighed on performance, even as other holdings have done well. And in many cases, I would argue that the historical sensitivity we’re seeing to rising rates is much greater than we’ve historically seen. And that’s creating opportunities in the portfolio.

And so we think that, if we do start to see the RBA rates slow, the higher rates that have been put through are certainly having the desired effect of slowing the economy. And we think that if that continues and that the rate increases slow or even it stabilises, we should start to see these stocks really start to outperform.

And I’m talking about positions we’ve got in Chorus, SGH, Light & Wonder even Aristocrat should really start to outperform in the portfolio. And we still think there’s a lot of value latency in the portfolio to be sort of unlocked through that if that occurs.

We haven’t made many changes to the portfolio in the last quarter. As I mentioned, with the sell-off in some of these quality names, we’ve actually been adding to positions there. So we’ve added to things like Light & Wonder and Chorus. We’ve also added a little to Stockland. We also added to Ampol early in the quarter.

As I mentioned previously, we see Ampol benefiting from the energy crisis. But it is increasingly apparent that if the Iran war is more drawn out, the structural risks around energy security will come to the fore. And I think there’s an increasing realisation that refining assets are essentially essential services and strategically very important.

And we think that’s been really underappreciated in the case of Ampol at the moment; hence, we’ve added it. Another one which we like at the moment, which we’ve been adding to, is Amplitude Energy. So this is a small cap stock. It’s in the energy space, an East Coast gas producer.

It’s had a bit of a checkered past, but new management is improving visibility around cash flow generation in its core business. And also it’s got a number of growth options in the Otway Basin. It has recently had some successful drill results and is moving toward final investment decisions and development.

And we think that the combination of those growth opportunities plus East Coast gas markets remaining very tight really positions Amplitude very well, and we see probably 25- 30% upside there. Lastly, we continue to see gold as an important hedge against the base case, and we have been trading our gold position a bit, recognising moves in the gold price and periods of strong performance.

We’ve been taking some profits and just managing position sizing. But we continue to think that the backdrop for gold remains very favourable, and it’s still a core position in the portfolio. We continue to think there’s a fair bit of, or a lot of, value latency in the portfolio and that the portfolio’s very well-positioned.

The bond moves I’ve talked about have seen a broad de-rating in quality, particularly in some of the small- and mid-cap stocks where we have holdings. If you look across the ASX 300, the 200 stocks outside the 100, only 20 are up year-to-date; calendar year to date.

In our view, that’s creating compelling opportunities, as we think valuations have corrected far more than fundamentals. We see good opportunities there in the portfolio. And I think it’s important to recognise at the moment that a lot has already been priced in for the move in bonds.

Reasons to invest in the SGH High Conviction Fund

Now, it’s not to say that they couldn’t go higher. Still, we think that if you even get some stabilisation, you don’t need to see a decline in bond yields; that will alleviate those valuation headwinds, and we should see very strong performance in our portfolio. As always, though, we remain very disciplined in how we do things, focused on the fundamentals and our stock pickers. And we think, as I say, the portfolio’s very well-positioned to navigate the uncertainty, but also the outlook, given the valuation latency in the portfolio.

*The text has been edited for clarity.

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Disclaimer

This fund update has been prepared by SG Hiscock & Company trading as SGHiscock Investment Management (SGHiscock) to provide general information only and is not intended to take the place of professional advice. It does not take into account the investment objectives, financial situation or particular needs of any particular person.

Equity Trustees is the responsible entity for the SGH High Conviction Fund. Neither SGHiscock, Equity Trustees nor any of its related parties provide any warranty of accuracy. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product. Follow the link for the full disclaimer:https://sghiscock.com.au/podcast-disclosures-and-disclaimers/.