SGH High Conviction Fund - Hamish Tadgell and Mike Kordick

From Banks to Resources: How We’re Positioning for 2025

5th Feb 2025

Hamish Tadgell and Mike Kordick, SGH High Conviction Fund

High-Conviction Stock Picks & Market Outlook: December 2024*

Hamish Tadgell: Happy New Year. My name is Hamish Tadgell and I’m the Head of Australian Equities and Portfolio Manager for the SGH High Conviction Fund. And today I’m joined by Mark Kordick, Head of Research and Assistant Portfolio Manager for the Fund. Today we’re going to provide an update on recent performance over the last quarter.

And we’re also going to provide some market perspectives on the year ahead and how we are positioning the portfolio. The SGH High Conviction Fund is an actively managed portfolio that holds up to 25 to 30 stocks. The strategy seeks to exploit market inefficiencies and mispricing through fundamental research and taking a longer term perspective.

Key to this is investing in companies with a strong competitive advantage, with a sustainable earnings growth and seeking to buy them at sensible prices. Hi, Mike. Welcome.

Mike Kordick: Thanks, Hamish. It’s good to be here.

Hamish Tadgell: A good place to start, I think, is perhaps just the highlights of the last quarter. Perhaps you could run us through those.

Mike Kordick: Certainly, Hamish. Over the last quarter, the fund returned minus 1.7%, and for the full year, a positive 10.4% after fees. Really the main contributors for the fund’s strong performance were Aristocrat Leisure, Genesis Minerals, Net Wealth, Generation Developments, Beach Energy and some of the detractors were BHP, Next DC and James Hardy.

Hamish Tadgell: Thanks, Mike. That’s great. Perhaps I think we might just try and dive a little bit deeper into some of the underlying trends and what drove performance. Clearly, the most dominant feature of the last quarter was the Trump election win, which really saw animal spirits ignited, markets rallied very strongly before, you know, sell off in the December on a more hawkish Fed.

I guess as we sit here today the challenge is really that we’ve had this incredibly strong market rally. There’s a risk that the market becomes disappointed or simply breathes a sigh of relief and realises that things aren’t as rosy as perhaps valuations are currently suggesting.

If I can ask you how are we thinking about markets as we go into 2025?

Mike Kordick: Yeah, sure, Hamish. Certainly there’s no question that animal spirits have been ignited and there’s a lot priced in already. In aggregate, market valuations on most measures look pretty toppy if you look at historical standards. And as we enter the start of 2025, the key issue is really Trump’s policy agenda, and I guess, how that unfolds post inauguration.

Making market predictions, especially short term, is always fought with danger. But we’re inclined to think the cycle has further to run. Overall, we think that the market can move higher in 2025, particularly if we see some broadening out in earnings and market participation.

Hamish Tadgell: The question is probably, and it’s probably a good lead in, to discussion about inflation and interest rate expectations.

Now, how are we thinking about domestic rates as we move into 25?

Mike Kordick: Yeah, good question. Things that people are thinking about at the moment. I think it’s fair to say that inflation continues to ease but probably remains sticky due to public sector spending and the tight labour market we’re experiencing at the moment.

Arguably, Trump’s policies are stimulatory. And we’ll probably add to the inflation pulse, which we’ve seen the market reduce expectations further for US rate cuts.

In Australia, the probabilities of interest rate cuts in 2025 have risen in recent months, and that’s really been around the disappointment with growth, and the ease in inflation, or somewhat easing in inflation.

At the moment in Australia, the market’s expecting a first rate cut in May, which has moved a bit back from February, but this will really be dependent on that December inflation print, which we’re expecting at the end of January.

Hamish Tadgell: Thanks, Mike. That’s a very useful summary. I mean, I think from a stock implications perspective monetary easing is certainly positive for the consumer sectors and sort of retail stocks.

As we think through it, probably it should also be supportive for REITs and property stocks. I’ve got a number of those positions in the portfolio, such as Summerset, James Hardy, which I think will be beneficiaries if we see that coming through. Also some of the longer duration stocks should benefit, particularly things like CSL and maybe some of the more growth oriented stocks that we think about.

Added a couple of small caps to the portfolio most recently. I guess that’s another area which if we see easing in rates, we should see a pick up.

Maybe you’d like to just run through some of those names and, and what we’ve done there.

Mike Kordick: Yeah, certainly Hamish. Look recently we’ve added Generation Developments, which is a specialist provider of investment bonds, and it also recently acquired 100 percent of Lonsec business, which is an investment research business.

In addition to that, we recently added Botanics Pharmaceuticals. That’s a small pharmaceutical dermatology company, which has recently gained approval for a topical gel and this is really for treating hyperhidrosis. We see a number of really strong catalysts for the stock to be re rated as it launches that new product into the US this year.

Hamish Tadgell: Yeah, thanks Make. It’s interesting, one of the other big themes through the market this year, or over the last year I should say, has been market concentration and the risks associated with that. That’s been most evident in the US, in the technology stocks or the “Magnificent Seven” as they’re often referred to, which rose 47 percent over the last year and contributed 57 percent of the return of the S&P500 and now represent 34 percent of the S&P index.

I guess importantly that rally in the Magnificent Seven has really been driven by strong fundamentals and earnings growth. However, that clearly needs to remain the case for current prices and valuations to be supported.

I guess domestically concentration risk has been most evident in the banks in Australia over the last 12 months and they’ve risen 36 percent over the last year. What are our thoughts on the banks at the moment and over the next 12 months?

Mike Kordick: As you say Hamish, the banks posted very strong returns last year, outperforming the resources by about 50%.

And by historical standards they do look quite expensive, trading on 19 times multiple, long term averages about 12 and a half times. And they could easily remain expensive at the moment really depending on economic downturn, maybe an increase in bad and doubtful debts.

Over the last six months we’ve been gradually reducing our exposure to banks somewhat and remain in an underweight position.

Some of that capital we have therefore redirected elsewhere in the portfolio and we’ve bought Infratil, which is a New Zealand investment company, has exposure to large data centres, particularly in Canberra, and also renewables in the US.

Hamish Tadgell: Thanks, Mike. You make some good points there.

Mike Kordick: Hamish, perhaps I can throw a couple of questions back to you. I guess we’ve been grappling with the issue of, will we see any mean reversion with the banks versus resources trade in 2025? And I guess that’s a good point to also hearing your thoughts on China given how important that is to the Australian resources sector.

Hamish Tadgell: Sure. I think you touched on the banks before, and selling ANZ, NAB, reallocating some of that capital into Infratil, is one thing on the banks. On the resources side and about China. The first thing I would say is that, China continues to face structural growth headwinds and post COVID.

Exports have recovered strongly, but consumption in China is still very, very weak and property prices are depressed. Secondly, the big thing about China, which everyone’s focused on at the moment, is the US-China tariffs and what Trump will do. And really how the Chinese government will respond to that in terms of stimulus. As we sit here today, um, we think that there is some good chance that the tariffs will be more measured than the headlines perhaps suggest. And that could be a catalyst for a rewriting in the resources. And what we’ve been doing over the last quarter, we’ve been adding a little bit to the resources.

We bought into South 32 which is a large diversified resource play. It doesn’t have iron ore and that’s one of the appeals. We are less constructive on iron ore because we think in China the stimulus is not going to be directed towards infrastructure development, you know, with copper and nickel and aluminium plays, which South 32 has exposure to, we think that that’s going to puts it in a much better position. And clearly we’re continuing to watch this and if we start to see some positive, more positive trends and narrative around the tariffs, then potentially we can add, we’ll be adding further to resources.

Mike Kordick: Thanks Hamish.

Hamish Tadgell: Thanks Mike. And thank you for joining Mike and I in today’s conversation.

We look forward to updating you further next month around reporting season. But I also think it’s important to stress that at this time in markets, the High Conviction Fund offers good risk management and diversification away from the concentration risks that we’ve highlighted.

Also, the margin of safety focus really is important at times like this when valuations look elevated and we need to have strong focus back on sustainable earnings.

And thirdly, it’s an actively managed fund. So we’re constantly looking to find our best ideas and manage those through the cycle. And in difficult times like this, that’s especially important.

Thank you.

 

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*The text has been edited for clarity.

 


 

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