SGH High Conviction Fund update – Q2 2025

SGH High Conviction Fund update: A volatile quarter highlights the importance of valuation discipline and long-term fundamentals.

Despite a tough June quarter and underperformance against the benchmark, the SGH High Conviction Fund remains focused on high-quality companies and structural growth opportunities. Portfolio Manager Hamish Tadgell and Assistant Portfolio Manager Michael Kordick unpack key contributors and detractors. They also discuss recent positioning shifts and share how they’re navigating tariff uncertainty, stretched valuations, and resource sector volatility.

Watch/Listen to the Q2 2025 SGH High Conviction Fund update ⏬:

 

Transcript:

Hamish Tadgell:

Welcome to the SGH High Conviction Fund, quarterly update for June. My name’s Hamish Tadgell, Head of Australian Equities and Portfolio Manager for the fund. And as a reminder, the SGH High Conviction Fund is an actively managed portfolio that holds up to 30 stocks. The strategy aims to capitalise on market inefficiencies and mispricing, with fundamental research and a longer-term perspective being key.

Today I’m joined by Mike Kordick, Head of Research and Assistant Portfolio Manager for the fund.

Michael Kordick:

Thanks, Hamish. It’s good to be here.

Hamish Tadgell:

Well, I think it’s fair to say, Mike, that the last quarter has certainly been eventful with no shortage of economic and geopolitical events. We’ve seen significant shifts in macroeconomic policy in response to President Trump’s tariff initiatives, heightened risks in the Middle East and conflict, and the ongoing Ukraine war, which have contributed to rising oil prices and energy instability. I believe the combination of these factors has certainly led to increased volatility at both the stock and sector levels.

But, despite all that chaos and the uncertainty, I think it’s amazing that markets have risen above all of that. Returns 7.6% for the quarter and 13.8% for the full year, for the financial year. And that’s certainly above the long-term average of about 8%. I think it’s fair to say that the SGH High Conviction Fund had a tough last quarter. We underperformed the index by 4.9%. That was after a relatively strong nine months. So, it was a bit disappointing in that respect.

However, I believe the portfolio performed very well initially during that April period. However, it disappointingly underperformed as the market rallied back. And I think we’ll talk a bit, Mike, about some of the reasons for that. Gold holdings contributed positively, but some of the energy exposures dragged on the portfolio as they were affected by tariff announcements and uncertainty. But, Mike, perhaps I can turn to you to provide a little more detail on some of the key contributors and detractors for the quarter.

Michael Kordick:

Key contributors: Nextdc and Netwealth

Sure, Hamish. On the positive side, we had Nextdc, our best contributor to the portfolio, up 30% over the quarter, primarily driven by a couple of contract wins that have increased their contracted utilisation capacity by 40%. Additionally, their forward book is up 65%. The company also announced its largest AI deployment in history in Melbourne and secured its first offshore contract win in Malaysia. Kind of proving the Asian strategy. The new contract wins, which we expect to commence in FY27 and ramp up into FY28, are anticipated. We continue to believe that the company presents a compelling growth opportunity and trades at a growth-adjusted discount to its peers, which we consider unjustified. Netwealth Group was another strong contributor, returning over 30% for the quarter, somewhat remarkably given the initial fall of around 15% on the Trump tariff announcements in early April.

The stock is heavily leveraged to the market. And with a broader market rally, it also posted a strong quarterly update, showing inflows of $3.5 billion as it heads into the seasonally robust June quarter. Management remains confident in the net flows outlook for FY26 and beyond, and we think it’s well supported with transitions and new client wins.

Key detractors: Botanix and Worley

However, on the negative side, Botanix and Worley were the biggest detractors. Botanix was impacted by Trump’s Most Favoured Nations Executive Order during the quarter, which aimed to lower US drug prices and align them with the lowest prices paid internationally for the same drugs.

We currently anticipate no material impacts on Botanix from this executive order, and its main product, Sofdra, is only approved and sold in the US. The Botanix distribution model, which bypasses wholesalers, aligns with the executive order to allow patients to buy directly from the manufacturer. On the other hand, Worley also came under pressure from concerns about slowing economic growth, as well as trade and tariff restrictions, and potential changes to the US Inflation Reduction Act early in the quarter, and has never really recovered. Despite this, the company held its annual investor day in May, where it acknowledged the uncertain outlook. However, it noted that well-capitalised customers were still pressing ahead with plans, and there were no material project cancellations or deferrals in FY25. We continue to see the medium to longer term resource and energy demand for fundamentals as attractive to Worley.

Hamish Tadgell:

Thanks, Mike. James Hardie Industries was one of the other stocks that noticeably underperformed during the quarter. Could you talk a bit about that and some of the reasons for that?

Michael Kordick:

Sure, Hamish, James Hardie is a high-quality business where we have been invested for some time, but management has undertaken a large dilution of capital through raising and acquisition at a very high price.

We found this particularly surprising and disappointing, given the strong growth opportunity in its core fiber business, as well as the lack of consultation and consideration for existing shareholder rights, which effectively resulted in the issuance of nearly a third of the company’s stock to the acquirer. Our investment thesis was that James Hardie is a high-return business with a strong competitive advantage, and it was well-leveraged to the US recovery in the housing market.

The decision to acquire AZEK, a decking business, arguably had some synergies. Still, it is significantly dilutive to returns, and the price paid effectively gave away cost and revenue synergies over the next two to three years, while leveraging up the balance sheet in a rather uncertain market.

We were very disappointed with this decision and the fact that shareholders had no vote in it, so we decided to exit our position in the quarter. It’s a good reminder and a valuable lesson: you need to understand what management’s motivations and incentives are tied to, and how they align with those of shareholders.

Hamish, perhaps I could ask you how we’re thinking about the outlook and current positioning.

Hamish Tadgell:

Sure, Mike. I think the first thing to say is that uncertainty still prevails. On balance, I think it is most likely that the on-again, off-again tariff situation with Trump will lead to a slowdown in the US economy, with likely ripple effects across the world.

The extent of any slowdown, I think, will be very difficult to judge, and we’ll be heavily dependent on how long the uncertainty prevails, the size of the tariffs, and how that then weighs on confidence and growth. Currently, I would say that markets don’t appear to be pricing any real slowdown in global growth.

Consequently, I think that if you see any signs that the US is slowing, we will potentially see a further sell-off or market weakness. That said, it’s essential to note that we feel Australia is better placed than many other countries to withstand the expected negative impact of tariffs.

And I think another important point is that Australia’s direct trade exposure to the US is relatively limited. And while indirect risks, via Asian trading partners, in particular China, exist, on a net basis, I’d say that we’re still better off relative to most other countries.

Michael Kordick:

And Hamish, how are we thinking about valuations? I mean, they look stretched for quite a while, and we’ve had a further rally. What are your thoughts on that? And any potential RBA rate cuts?

Hamish Tadgell:

Look, Mike, I think it’s a good question and there’s a fair bit to think about here. The first thing I’d say is that there’s no question that we’ve seen a strong run in markets since April. That has been driven primarily by valuation expansion, rather than earnings expansion. So, valuations are elevated. Secondly, I think the current environment is certainly favouring stocks with a structural competitive advantage and superior earnings growth. There’s a scarcity premium that’s being paid for high-quality growth stocks at the moment.

And that’s increased, I think, post-April. And given that the market is looking for companies with secular tailwinds, over sort of macro uncertainty. We’ve seen the most, this being most evident, I think, in the technology and infrastructure space. Really, on the back of this sort of resurgence of the AI phenomenon, post the sell-off around DeepSeek earlier in the year.

However, we’ve also seen it in banks, as well as in a select number of what I would call large-cap, quality names, such as Wesfarmers and JB Hi-Fi, among others. They’ve also been caught up in this, and evaluations are certainly starting to look very stretched. The problem I think for investors here is that there’s this question about. Do you continue to buy or hold out stocks with the higher valuations and lower earnings growth? Particularly when those valuations are near historical highs. And that’s particularly the challenge I think we’re seeing in the banks at the moment, and some of the more defensive sectors that I’ve just identified.

Mike, in light of the positioning and valuation we’ve just discussed, could you elaborate a bit on some of the key positions in the portfolio that we’re considering, where we see some latent value?

Michael Kordick:

Investment spotlight: Seek

Yes, Hamish, look, firstly, just dealing with Seek, we believe it’s a compelling investment opportunity if you look at it from a valuation perspective. We have increased confidence that they can grow their earnings strongly. Recently, they had their investor day, and management was focused on growing yield and managing costs to drive operating leverage. Something investors have been looking forward to for a number of years.

Seek’s recent product releases have been highly focused on addressing customer friction points, enabling them to achieve high single-digit to low double-digit yield growth, which we expect to continue into the foreseeable future. The recent platform unification investment will enable the business to deliver more product releases faster while managing costs. Something they’ve struggled with in the past, and we expect this to drive operating leverage in future periods. Seek remains leveraged to the macro environment, so as long as volumes can remain stable, we think Seek should be able to grow its earnings very strongly.

Investment spotlight: Light & Wonder

The other stock I would like to address here is Light & Wonder. Light & Wonder is an interesting opportunity. It’s a clear number two player in a highly concentrated US electronic gaming machine market. The management team has brought focus to the company, it’s turned around the business performance, and they’ve invested heavily in the research and development component of the business, which has generated strong game performance.

And in turn, that’s flowed through to sales and earnings growth. The management strategy is to roll out its gaming content across multiple channels, leveraging the R&D expenditure. We believe it will drive further margin improvement going forward. Additionally, they recently added a new distribution channel by acquiring Grover Gaming in the charitable gaming sector. We think they paid a reasonable price. The business has very high profit margins and strong free cash flow generation. Light & Wonder currently trades at a significant discount to its peer, Aristocrat, in the Australian market. We believe this will reduce over time once Light & Wonder moves its primary listing to ASX, and also, the legal dispute with Aristocrat is resolved. We anticipate that these factors will occur over the next six to 12 months.

Hamish Tadgell:

Mike, that’s great. I think one of the other areas is that the banks have been garnering much tension, given their very strong performance over the last 12 months.

How are we thinking about the banks now? And given the relative underperformance of the resources and energy sectors, relative to the banks, how do we think about the opportunity there?

Michael Kordick:

Sector views: banks and energy

Yeah, great question. I mean, firstly, I’d say that there’s a little argument that bank valuations are elevated. You have CBA extremes on a 30 times PE multiple. You’ve got it on a four times book value. It’s multiple standard deviations above its 30-year average. But this could remain the case absent any economic downturn or material increase in underperforming lines. However, at current levels, investors should expect low future returns given the valuation and earnings growth expectations.

We’re materially underweight in the banks. We hold 7-8% in the sector, versus the index at 21%. Our preference is NAB and ANZ, where we see better relative valuation. In terms of resources and energy, we continue to see opportunities. We recognise that tariff issues and geopolitics have created much uncertainty, but we feel a lot of this is reflected in the prices.

We think the energy transition theme is undeniable. Domestic gas producers play a crucial role in this. In our portfolio, we’ve got a number of exposures. We’ve got Beach Energy, Cooper, or now Amplitude Energy. And all are well-positioned to deliver into the East Coast gas market over the next couple of years, where significant shortfalls are predicted.

We’ve become more constructive on the resources, particularly in the base metals. As discussed, we’ve got good exposure to gold. We see this as a portfolio diversifier and a hedge against the US dollar weakness or any deficit risk. We also remain constructive on copper, which remains in short supply. Copper is a critical component in electrification and the transition to renewable and lower-carbon energy sources.

Sector views: resources, copper, and China

Over the last 12 months, for the first time in 20 years, no new copper project has been started. We have taken advantage of the recent weakness in Capstone Copper to add to our preferred specialist Australian-listed copper play.

There are also growing green shoots, causing us to become more constructive in China. Sentiment towards China has been pretty bearish, with ongoing concerns around the property market and the US-China situation. However, the China trade data continues to hold up reasonably well. There are signs that the Chinese government is encouraging domestic businesses to invest, potentially supporting larger construction projects. Sentiment, however, has been pretty poor. Therefore, it would take quite a lot to change things and potentially see some rotation out of the highly priced banks into resources. And, over the last quarter, we’ve leveraged the weakness to increase our exposure to South32. And that’s probably the main comment I make around resources, Hamish.

Hamish Tadgell:

Thanks, Mike. I think that’s great in providing colour in how we are positioning the portfolio. There are many things to consider, and a significant amount of uncertainty remains, given the current state of the world. It’s hard to know what Trump’s next move will be, and to be frank, whether it will involve tariffs or not.

 However, I think you highlight a critical point. In the current environment, it is more important than ever to focus on fundamentals and invest in quality companies at sensible valuations. That’s what we’re trying to achieve in constructing the high conviction portfolio. Focus on the fundamentals and try to pick stocks that we think are well-positioned to navigate the uncertainty and create value over the medium to longer term. So, Mike, I want to thank you for joining me today in the discussion.

Michael Kordick:

Thanks, Hamish. It’s been great discussing the portfolio and markets with you today.

Hamish Tadgell:

I hope that our investors and listeners have found this update useful and enjoyed the conversation. We look forward to joining you again next quarter.

 

*The text has been edited for clarity.

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Disclaimer

This fund update has been prepared by SG Hiscock & Company (SGH) 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 SGH, 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/.