Hamish Tadgell

SGH High Conviction Fund – Quarterly Update

10th Apr 2024

March quarter performance and key drivers*

It was another strong quarter in terms of equity market performance with the ASX 300 closing up 5.5% for the quarter, and the market’s now up 18.8% since the market bottom in October last year. Pleasingly, the SGH High Conviction Fund also performed well, beating the benchmark and was up 6.6% for the quarter.

The soft landing narrative for the US economy that has gripped financial markets since late last year has really continued to buoy equity markets, and that’s been supported by a growing expectation that central banks will pre-emptively cut interest rates to protect growth if necessary. Which has seen increased liquidity flowing into equity markets and a broadening of the equity market. That’s seen mid cap and small cap companies as big beneficiaries over the last quarter and actually they have outperformed the larger caps.

From a portfolio perspective, a number of small and mid cap companies performed very well – Cooper Energy, Net Wealth and Genesis Minerals all continued to contribute strongly in the quarter and amongst the larger caps positions in Next DC, QBE, and National Australia Bank also posted strong gains.

Reporting season lessons

The key message out of reporting season was things are better than feared. Again, top line growth proved very resilient, as did margins, helped by a greater focus on cost control.

One of the lessons from the last few years is inflation has allowed companies to pass on costs and the impact of higher rates has been felt very differently across different companies. This was probably no more evident than in the consumer discretionary space over reporting season, which continued to surprise versus expectations and has held up incredibly well in the face of rising cost of living pressures.

The other main area that surprised versus expectations was the domestic cyclicals companies like Downer and Seven Group that performed very strongly in the portfolio. They are benefiting from higher prices and in some cases improving seasonal weather conditions.

Finally, I think one thing to call out from reporting season is the strength of the M&A. We’ve seen a real pickup in M&A over the last six months and during reporting season, we saw $21 billion in takeovers.

Four out of the seven deals that were announced were from foreign companies coming and buying domestic companies. Typically, when we see that type of activity, it’s a good undercurrent in terms of market performance.

How is the portfolio positioned?

The first point to highlight is that a lot has been priced in very quickly over the last six months or so, on the expectation of rate cuts. We’re very conscious of that and the strong rally that we’ve seen and the fact that valuation multiples have expanded a lot faster than earnings.

A better balance of growth and inflation, in our view, is required to see an ongoing widening in equity market participation.

We think the cycle can continue to evolve, but there is a growing need for disciplined approach and being selective in managing the portfolio and having a strong eye to valuations because some pockets of the market are starting to look really strong.

This, in our view, necessitates looking for companies with identifiable tailwinds and strong competitive advantages and two themes that we continue to be heavily invested in in the portfolio. We see in our view undeniable tailwinds in the energy transition, the shift to renewables and in the almost insatiable demand for processing of data and AI.

What changes were made in the portfolio during the quarter?

During the last quarter, we made a couple of changes to the portfolio. We added the Lottery Corporation. This is a higher quality defensive company with a virtual monopoly in the lottery industry which announced its demerger from Tabcorp. It is in our view being underappreciated by the market and we think it’s a high quality business with stable earnings with some strong value latency at the moment.

We also added Beach Energy to the portfolio. This is a domestic gas producer that has had a recent change with the management team under Brett Wood, who is someone that we know well from his days working at Santos and we see multiple catalysts in Beach Energy over the next 12-18 months and again significant value latency that we think will be unlocked.

Going forward

Overall, our focus remains on dialling down the noise and maintaining a longer-term perspective, remaining very focused on the fundamentals and the competitive advantage, rather than being too perspective about trying to forecast the unknown.

There is a lot of uncertainty in the market at the moment and it’s important that we’re sticking to the fundamentals and maintaining a disciplined approach. We think that macro is continuing to create a lot of noise and that’s leading to a fair degree of volatility.

Therefore, we believe the best way to navigate this environment is to focus on the stock fundamentals and focus on investing in quality companies with strong competitive advantages and the SGH High Conviction Fund does exactly that – we invest in a concentrated portfolio of quality companies that are well positioned to grow through the cycle.



*The text has been edited for clarity.



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