SGH20 invests in a concentrated portfolio of Australian stocks that aims to offer long term returns in excess of the measures over a rolling 5 year period. The fund will be managed according to the following guidelines: Investments in a portfolio of approximately 20 stocks that are listed, or due to be listed within the next 12 months, on the ASX or NZSE.
For the month the portfolio returned -2.67% outperforming the benchmark by +0.22%, resulting in the portfolio returning 1.24% for the quarter ending 30 September, +2.09% ahead of the benchmark.
Seven Group Holding (+11.2%) continued to perform strongly following a solid full year 2023 result in August which showed ongoing signs of operating momentum in its core Coates and Westrac businesses, and investment in Boral. We expect solid earnings growth over the next few years to continue to be underpinned by the ongoing turnaround in the Boral business and sustained demand for mining parts/ service at Westrac given aging fleet and rebuild activity.
Seven Group has also signalled plans to take a more active approach in managing its 28.5% investment in Beach Energy. Ryan Stokes recently announced he will re-join the board and this coincided with Brett Wood being appointed CEO starting in the new year. Brett is an experienced oil and gas executive from Santos who we know, and who has a strong engineering and geo-science background and track record in project delivery. This should help in providing greater focus and supervision to the Watsia project, which has been a repeated source of disappointment over the last few years with reserve downgrades, sub-contractor issues and start-up delays in bringing the gas processing plant on-line. We increasingly see a path to latent value being unlocked over the next 12 months as the Watsia project is derisked.
QBE Insurance Group (ASX: QBE +6.9%) also performed well during the month being a perceived beneficiary of rising bond yields and potential for interest rates to be higher for longer. Over 50% of QBE’s investment book is in corporate bonds which have been less impacted than longer dated Treasuries, and in an environment of sustained higher rates this is positive for insurers. When combined with the benefits from the hardening of the premium rate cycle and improving underwriting conditions this continues to be supportive for higher returns and the insurance sector.
Treasury Wine Estates (ASX: TWE +3.4%) also outperformed during the month on continued speculation that the Chinese tariffs on Australian wine could be relaxed following the recent decision to remove duties on Australian barley. We currently don’t assume any tariff removal by China in our forecasts, but should it happen and TWE is able to regain half of the 300k cases it lost over the next 3 years, we estimate it would add around 12-15% to group earnings.
During the month Treasury also announced that CFO Matt Young would be replaced by Stuart Boxer. Mr Baxter is an experienced executive with strong listed financial and strategy experience who prior to joining TWE we have known through his roles as Executive General manager of Strategy at DuluxGroup and as CFO at South Cross Broadcasting.
What is SGH20 SGH20 is an Managed Funds investment product that is benchmarked against ASX Index 200 Index and sits inside the Domestic Equity - Large Growth Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The SGH20 has Assets Under Management of 17.25 M with a management fee of 0.9%, a performance fee of 20.00% and a buy/sell spread fee of 0.25%.
How has the investment product performed recently?
The recent investment performance of the investment product shows that the SGH20 has returned 6.12% in the last month. The previous three years have returned 7.5% annualised and 15.4% each year since inception, which is when the SGH20 first started.
How is risk measured in this investment product?
There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since SGH20 first started, the Sharpe ratio is 0.48 with an annualised volatility of 15.4%. The maximum drawdown of the investment product in the last 12 months is -7.22% and -38.37% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.
What is the relative performance of the investment product?
Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The SGH20 has a 12-month excess return when compared to the Domestic Equity - Large Growth Index of -1% and 0.45% since inception.
Does the investment product produce Alpha over its Peers?
Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. SGH20 has produced Alpha over the Domestic Equity - Large Growth Index of -0.04% in the last 12 months and 0.05% since inception.
What are similar investment products?
For a full list of investment products in the Domestic Equity - Large Growth Index category, you can click here for the Peer Investment Report.
What level of diversification will SGH20 provide?
SGH20 has a correlation coefficient of 0.91 and a beta of 0.96 when compared to the Domestic Equity - Large Growth Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.
How do I compare the investment product with its peers?
For a full quantitative report on SGH20 and its peer investments, you can click here for the Peer Investment Report.
How do I compare the SGH20 with the ASX Index 200 Index?
For a full quantitative report on SGH20 compared to the ASX Index 200 Index, you can click here.
Can I sort and compare the SGH20 to do my own analysis?
To sort and compare the SGH20 financial metrics, please refer to the table above.
Has the SGH20 been independently verified by SMSF Mate?
This investment product is in the process of being independently verified by SMSF Mate. Once we have verified the investment product, you will be able to find more information here.
How can I invest in SGH20?
How do I get in contact with the SGH20?
Comments from SMSF Mates
SMSF Mate does not receive commissions or kickbacks from the SGH20. All data and commentary for this fund is provided free of charge for our readers general information.
Performance Commentary - August 31, 2023 In August the ASX300 Accumulation returned -0.76% after rallying 3.0% from intra-month lows, outperforming most global indices including the S&P500 which lost 1.5%.
Notably Industrials outperformed Resources by 1.5% with Consumer discretionary the best performing sector returning 5.7% over the month. REITs (+2.3%) also outperformed on Goodman Group rallying (+12.9%) after tapping into the artificial intelligence narrative and highlighting its pipeline opportunity for developing data centres.
Consumer Staples (-3.2%) was the worst performing sector driven by a weaker result from Coles Group (-11.2%) on the back of cost pressures and theft, and Endeavour (-8.7%). Materials (-2.1%) also lagged with resource stocks weaker from ongoing concerns around the slowdown in the Chinese economy and lack of policy stimulus.
The July Chinese data was unequivocally weak with negative year on year inflation, another month of declining property prices and the lowest monthly RMB loan growth to the real economy since 2006. Perhaps more concerning for confidence is the lack of transparency and growing pattern of the Chinese Government suspending or not reporting weak economic data: the youth unemployment series was suspended in July after the 16–24-year-olds rate climbed to 21% in June, land sales have not been published in 2023 after volumes dropped 53% in 2022, and March consumer confidence numbers were released in May and April numbers in August. This is adding to questions about the state of China’s economy and whether its weaker than the headlines suggest.
The spark for the rally in Australian equities from intra-month lows was correlated with the more dovish domestic July CPI print at 4.9%, and better than expected retail sales numbers. The inflation data provided further confirmation that tradable/ goods inflation has slowed (from a peak of 9.9% in December to just 1.7% in July).
However, non-tradable/service inflation remained relatively sticky (at 6.5% in July, although down from its cycle high of 7.7%). The 6% increase in electricity prices was the surprise reading in the CPI numbers and coupled with the resurgence in the oil price (23% in the last quarter) has potential to disrupt the recent downward trend in inflation over coming months, adding to the noise around whether rates have peaked.
The US driving season typically results in an uptick in the oil price at this time of year, but geo-politics appears to also be playing its part, as always. A less publicised, but notable development during the month was the decision at the BRICS countries summit in Johannesburg to invite Saudi Arabia, Iran and the UAE to join the BRICS alliance.
This is potentially a significant development as the BRICs countries will now control 42% of the world’s oil exports (up from 14% currently). In addition to this the new group of 11 BRICs countries will account for 68% of coal production, 38% of natural gas production and 46% of the world’s population. This has potential to exert more influence on commodity prices, but also has longerterm implications for inflation, shifts in global trade patterns and the US dollar. The full implications are hard to predict.
However, it adds further weight to the argument the international rules-based order is under threat, we are past peak globalisation, and the world is shifting to an era of ‘spheres of influence’ and alliances built around economic resilience and national security: arguments supporting a higher inflation regime.
Moving from the big picture to more domestic and stock specific news, reporting season dominated proceeding during the month. Overall, beats versus misses were broadly in line with longer term averages, but an improvement on the last few halves. However, the results showed a discernible slowdown in in overall sales growth in the last 6 months (8% versus 12% in Jun-Dec-23), operating margins contracted modestly (approximately 2% drag on earnings on average) and aggregate earnings were downgraded by about 6%.
Higher labour and wage costs were a feature of many company results, but the full impact was helped by falling input prices (particularly freight, commodity inputs). The increase in financing costs from higher rates, was unsurprisingly also a feature of reporting season, and we expect will continue to be an earnings headwind as the benefits of those companies that have fixed their debt at lower interest costs continues to roll-off.
The share price movements around results were more volatile than usual. According to Goldman Sachs circa 15% of companies that reported saw share prices move +/-10%, double the long-term average, and valuation multiple expansion explained approximately 85% of the gains for companies that rallied greater than 10%. This speaks to positioning being a bigger driver than fundamentals, consistent with investors being too negative about the economy and consumer discretionary and cyclical stocks tending to do better than the more defensive sector like staples and healthcare names.
Performance Commentary - July 31, 2023 In July the ASX300 Accumulation rose 2.98% after rallying 5.8% from intra-month lows. Energy (+8.8%) and Financials (+4.9%) led the way while healthcare (-1.5%) was the worst performing sector for a second month in a row (weighted down by CSL continuing to underperform following its lowerthan-expected FY24 guidance in July) and Staples (-1%) lagged.
Softer inflation prints both in the US and Australia during the month supported the narrative that monetary tightening is working, central banks are close to being done in raising rates and there is a lower risk of central banks overtightening and potential soft landing (no recession).
The decision by the RBA to keep rates on hold at 4.10% at its July and August meetings adds weight to the view there is sufficient tightening in the system, and it will take an accumulation of economic surprises to force the RBA back to the table.
Sifting through the economic noise, one thing that has been consistent is the strength of the labour market, which has been incredibly resilient. In June Australia’s employment-to-population growth hit record highs with the unemployment rate remaining steady at 3.5%. Strong rises in full-time employment and hours worked further suggests Australians looking for more hours work to meet rising costs of living pressures are still able to do so.
While softening in the leading economic indicators is yet to show up the economic data, there are signs the household sector is finally starting to feel the pinch from 12 rate hikes in short order. Retail sales in June fell 0.8% month-on-month and credit growth showed a material slowdown increasing only 0.2% month-on-month.
Performance Commentary - June 30, 2023 The portfolio returned 1.02% (net) during the quarter outperforming the benchmark by +0.03% but struggled to keep pace over the 12 months to 30 June returning 9.91%.
By historical standards the market rally over the last 12 month has been ‘narrow’ with 75% of the ASX Index performance driven by the Materials, Financials, and IT sectors.
Looking ahead into the second half of 2023 we expect financial conditions will continue to tighten due to higher interest rates and living costs. This is likely to result in an uneven economy and ongoing earnings and returns dispersion, necessitating being selective and active in managing the portfolio and focusing on quality businesses and their fundamentals, rather than trying to predict macroeconomic outcomes.
The US construction boom, energy transition, Australia’s surging migration and persistence in inflation are providing strong tailwinds and investment opportunities for a number of companies in the portfolio despite the broader economic uncertainty, which we discuss further in this report.
In the June quarter NextDC, James Hardie and AUB Group contributed strongly, while BHP, IDP Education and Treasury Wine Estates were the major detractors.
During the quarter we added AUB Group to the portfolio and added to existing positions in Genesis Minerals, QBE Insurance and Worley.
A narrow market rally & AI euphoria It is fair to say, equity markets have been incredibly resilient in the face of monetary tightening, with individual stock positioning key in driving portfolio returns given the high level of sector returns dispersion.
By historical standards the market rally has been ‘narrow’. This has been most evident in the US, with the Nasdaq and S&P500 up 32% and 16% respectively in the last 6 and 12 months, and five mega cap technology stocks (Apple, Microsoft, Nvidia, Amazon and Meta) in the S&P500 accounting for 62% of Index performance. This is down from 88% since the beginning of June, but still very skewed.
Performance Commentary - May 31, 2023 For the month the portfolio returned -2.29% outperforming the benchmark by +0.24%.
NextDC (+11.1%) was the largest contributor to performance during the month after it announced a $618m 1:8 underwritten entitlement and details around its plans to expand regionally outside Australia into the Malaysian and New Zealand markets. As part of the announcement NextDC also announced the acceleration of the fit out of its existing Sydney S3 data centre and upgraded FY23 guidance with revenue now expected to be between $350-360m (previously $340-355m) due to higher power utilization, with EBITDA to be in the range of $192m to 196m (previously $190m to $198m).
After years of preparing the market for offshore expansion it is little surprise to see NextDC move offshore. Entering new markets is not without risk, but we see it as a credible strategic move given the attractive fundamentals of these markets and demand being led by existing customer growth.
Worley (+7.9%) held its annual investor day during the month focusing on the opportunity it has in Energy Transition to support a double-digit medium term earnings growth target.
We increasingly see a natural adjacency for Worley to leverage its skills, client relationships and project experience in helping solve the challenges in transitioning to more sustainable lower carbon technologies. This includes planning and supporting the development of industrial hubs, decarbonising existing assets, green hydrogen, carbon capture and storage, offshore wind, power networks, sustainability advisory and environmental consulting.
To capitalise on this opportunity Worley has made an early strategic shift to invest $100m in scaling up and building out its sustainability consultancy capability and capacity, with the aim of 75% (currently 32%) of its sales being from sustainability projects by 2026.
Importantly, there is also growing evidence Government policies and regulations are starting to create the right environment for Worley’s customers to invest. The US Inflation Reduction Act (IRA) has been instrumental in seeing a shift in attitude and behaviour by many of Worley’s customers to commit to lower carbon technology projects.
The European New Green Deal, UK Energy Security Plan and Canadian renewable tax credit initiative show further commitment that Governments are becoming more serious in funding the energy transition.
If the latest estimate by the Global Energy Transitions Commission in their ‘Financing the Transition’ report, that around $3.5 trillion a year of capital will be needed on average between now and 2050 to build a net-zero global economy, we see strong tailwinds and opportunity for Worley given its global scale and competitive advantages.
The growth in sustainable work for Worley is coming off a low base and it is still relatively early days. But the Investor Day highlighted there is growing momentum in the key operating indicators around growth in headcount, backlog and sales pipeline. Sustainability work is also outpacing work in traditional markets, and now represents 40% of the backlog, and supports the target of having 75% of its sales coming from sustainability work by 2026.
We see the combination of better market growth through a potential four-fold increase in global energy investment and decarbonisation projects, ability to take share and fixed cost leverage driving a 10-year earnings per share compound annual growth of around 10%.
Performance Commentary - February 28, 2023 From a portfolio perspective it remains important to focus on what we can control and stock fundamentals. The February reporting season provided an opportunity to get a report card on portfolio holdings and insight in the general health of corporate Australia.
Overall, the results season showed corporate earnings have proved relatively resilient in the face of rising inflation and tightening monetary policy, at least to now. There were few signs of any significant slowdown in sales with greater than 80% of companies meeting or beating revenue expectations. Price rises have helped maintain top line growth, even where there has been some softening in demand starting to creep in. However, at the earnings line there was growing evidence of margin pressure with nearly 50% of companies missing expectations (versus ~30% long run). That said, many companies suggested that input costs have peaked and are starting to ease given falls in commodity prices and supply chains easing. Labour costs were generally the exception with labour markets remaining tight (particularly in mining and construction) and little discussion of laying off staff (as distinct from the recent US quarterly reports). Given how hard it has been to attract staff, there seems a general willingness to still hoard labour at this point.
Performance Commentary - December 31, 2022 December saw somewhat of a reversal of the bear market rally of the last few months. The S&P/ASX300 Accumulation Index closed down -3.3% for the month, after rallying 12.5% in October and November, resulting in the Australian market closing down -1.77% for the year. This was well ahead of the US S&P500 which declined 5.9% in December and closed down 19.5% for the year.
All sectors were negative in the month with Discretionary (-7.0%), Property (-5.6%) and Technology (-5.4%) falling the most, while Resources (-0.9%) Consumer staples (-1.9%) and Utilities (-2.2%) relatively outperformed.
Across the ASX300 Energy (+49%), Utilities (+31%), Materials/Resources (+13%) and Financials (+2%) were the only sectors to post positive returns in the last 12 months, with Technology (-32%), Discretionary retail (-20%) and Property (-19%) the worst performing sectors. Needles to say, it was an extreme year in terms of returns dispersion.
A growing feeling inflation may have peaked combined with growing hope the US may avoid a recession have been the catalysts for the recent bear market rally. However, the hawkish December US Federal Reserve FOMC meeting, and a surprise change to Japanese monetary policy, dampened sentiment and with it weighed on equity markets.
The all-important US 10-year Treasury bond yield ended the month at 3.87%, 46 basis points down from its 2022 peak of 4.34% reached in October, though up 47 basis points from the recent low of 3.40% in early December.
Performance Commentary - November 30, 2022 For the month the portfolio returned 4.38% (after fees) underperforming the S&P/ASX300 Accumulation Index by -2.11%. During the month we sold out of TPG Telecom. We initially entered the stock earlier this year, but the recovery in global roaming, a key earnings driver has been slower to play out than expected. Further, the company has increased its guidance around the investment in the business and seen a material increase in its interest expense due to rising rates on its floating debt. The positive fixed cost leverage we originally invested for has been diluted and balance sheet become more challenging making the risk/reward less compelling.
Further, the deferral of the ACCC decision on regional infrastructure sharing arrangements with Telstra, has been deferred to the end of this year with both parties likely to appeal any decision creating a headwind to performance
We also sold out of Lendlease during the month following the company strategy update, where it downgraded its 2023 financial year guidance targets primarily due to lower than expected activity across its business and a more challenging macro outlook. Management also advised they plan to pivot the portfolio towards investing more capital in its funds management investment business over developments resulting in lower construction earnings and a lower return on equity. This will result in a lower recycling of capital and has necessitated the need to reduce the dividend payout policy. The risk is in a rising rate and slowing economic environment the recovery in earnings has been pushed out yet again and risk-reward declined. The stock looks attractively priced versus history, but we see better opportunities to deploy capital elsewhere in the current environment.
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