SGH High Conviction Fund – Quarterly Update
December 2023, Hamish Tadgell
What were the key performance drivers for the SGH High Conviction Fund during the December quarter?
Like most of the last 12 months, the last quarter has been heavily influenced by the macro, inflation and interest rate settings. October saw a market sell off and was down about 3.8%. Then we saw a very strong rally in the last couple of months. Market was up 12.6%, one of the strongest and sharpest rallies we’ve seen since the Global Financial Crisis.
A key driver of that market rally has been a broadening out of equity market performance. This has been on the back of a shift to realisation that inflation has peaked and the potential for interest rate cuts coming into 2024.
Overall, the portfolio kept pace with the market and slightly outperformed and that was pleasing in a very strong and rising market. It saw many of the stocks that have underperformed on that rising rates start to outperform. Key contributors in the quarter were James Hardy, Northern Star and BHP. Woodside and Treasury were the main detractors for the portfolio.
How is the portfolio positioned?
Going into 2024, it’s almost the opposite to the start of 2023. While fears of rising inflation and interest rates led to broad concerns around a recession and market selling off last year, we’re now in a position where there is a feeling that inflation has peaked and moderating, that growth will be more balanced and the rates will be falling.
And I think that sets the market up reasonably well for the start of this year and into 2024. And if we see a broadening or a continuing broadening of the market like we saw in the last quarter, we should see improved activity and liquidity in markets. In turn this has the potential to feed through into renewed corporate activity in M&A, which we saw the early start of back in December.
While all this is good news for markets here, there is also a realisation and consciousness that the recent rally has been very strong and quite a lot of the positive news has been already priced in over the last couple of months and the speed and the scale of any rally from here is likely to be more tempered.
Has the Fund positioning changed?
Look in short, we haven’t changed the portfolio a lot. We have made some tilts on the basis of the outlook that we’ve talked about. But the core positions in the portfolio have not changed. We’ve added to positions like CSL and ResMed, which we think will benefit from an environment where interest rates potentially fall and longer duration stocks should benefit.
In October, we also added Transurban to the portfolio as the stock was sold off on rising bond yields. This is a high-quality business that owns domestic and US toll roads and which again we think will benefit as inflation and bond yields moderate.
We’ve also taken the opportunity to take some profits in managing some position sizing and trimmed positions in the likes of Seven Group and Woodside Petroleum.
Overall, our focus remains very much on dialling down the noise, maintaining a longer-term perspective and remaining focused on the fundamentals and investing in quality business with observable tailwinds and strong competitive advantages.
And the two areas worth highlighting again which we’ve called out in recent quarterly updates are opportunities in the energy transition space, and in data demand in the digital processing where we continue to see very strong thematic and tail winds.
So companies like Worley in the energy transition and Next DC and Chorus in data/digital transition remain very much core positions in the portfolio.
Why Invest in the SGH High Conviction Fund now?
As I mentioned, we continue to believe that the macro will be noisy and that’s likely to continue through the course of this year, with 60 elections globally, the highest in history, and the ongoing geopolitical risks and concerns. And that’s probably going to lead to continued market volatility.
We believe that the best way to navigate that is to focus on the stock fundamentals and focus on investing in quality stocks. We believe that the SGH High Conviction Fund does this through investing in a concentrated portfolio of quality names that are well positioned to grow through the cycle.
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The text has been edited for clarity.
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