Colonial First State Wholesale Concentrated Australian Share Fund aims to provide long-term capital growth by investing in a concentrated portfolio of 15-30 stocks. The option aims to outperform the S&P/ASX 300 Accumulation Index over rolling three year periods before fees and taxes.
The Concentrated Australian Share Fund outperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the September quarter.
Contributing to the Fund’s outperformance were overweight positions in healthcare imaging software company Pro Medicus (PME) and cloud connectivity services company Megaport (MP1). A high quality FY23 earnings result and new contract win in the September quarter underpinned a rise in +27.3% Pro Medicus. PME delivered strong double digit growth across a number of key financial metrics including a 34% increase in revenue and +36% rise in EPS.
Pleasingly, PME produced an EBIT margin of 67% and Management anticipates that these solid margins are to remain broadly in line with these levels in the near term, reiterating the highly scalable operating leverage within the business. Another key takeout was the improvement of PME’s implementation speed, the Company actioned 8 cloud-based implementations in the year. As cloud adoption continues to accelerate we believe PME will be well positioned to capitalise on new opportunities. Later the in quarter, PME announced a new $140M, 10-year contract with not-for-profit IDN Baylor Scott & White, the largest of its kind in Texas and one of the largest in the United States. We were also encouraged to see that the new contract included PME’s ‘full-stack’ of products Visage 7 Open Archive, Visage 7 Workflow and Visage 7 Viewer, which has been a trend in a number of new contracts won in FY23. The ‘full-stack’ trend underscores PME’s growing penetration of the North American market as well as further validating PME’s unique and market leading imaging technology. In our view, the deal re-emphasises PME’s robust business model and reiterated to us that the Company is still in the early stages of capturing market share in a large addressable with short to medium term drivers being continued innovation and development in key growth areas including cardiology, a healthy contract pipeline with leads gained from the recent Radiological Society of North America (RSNA) conference, growing demand from existing and new customers for PME’s full stack of products and ramp up of large contracts.
Megaport (+63.0%) rose strongly the September quarter following two reasonably positive updates in July. Firstly, MP1 came to market early to upgrade its FY23 and FY24 guidance, while also announcing strong cash flow outcomes. Later in July, MP1 announced its 4Q23 Quarterly Update which we believe was a robust update. Although the quarterly update meant that the FY23 result was then largely pre-released, positive sentiment further compounded in August. The key driver of the strong performance was driven by the Company’s update to its FY24 EBITDA guidance which is now expected to fall in the range of $51M to $57M and is an impressive increase of ~152%-182% versus MP1’s FY23 earnings of $20.2M. Additionally, FY24 revenue was guided to $190M to $195M and Management confirmed that it expects to be net cash flow positive for the entirety of FY24. On other metrics, MP1 delivered 40% revenue growth YOY and indicated that aggregate customer lifetime value increased to 30% and is reflective of an increase in customers (+8%) and Customer Lifetime Value with customers on average using MP1’s services for 9 years. Moving forward, we maintain our conviction in MP1 given the Company is the global leader in cloud connectivity, we believe enterprises and Governments are still early in the cloud migration journey and MP1 is a share gainer, with its customers subscribing for more services over time, illustrating the power of the offering.
Somewhat offsetting these positive contributions was the Fund’s overweight positions in logistics solutions company WiseTech Global (WTC) and medical device maker ResMed (RMD). WiseTech Global declined -18.4% in the September quarter due to disappointing FY24 EBITDA guidance that was materially below market forecasts and disappointingly overshadowed the strong FY23 earnings result. WTC guided to revenue and EBITDA growth of 27%-34% and 18%-27% respectively, missing expectations given the dilutive margin impact of recent acquisitions and a step up in R&D reinvestment. We were encouraged by WTC’s strong FY23 financial performance which included revenue increasing +29% to $817M and underlying earnings rising to $417M. During the year, WTC secured six new Large Global Freight Forwarder (LGFF). We remain bullish on the long-term trajectory of the stock given recent acquisitions of leading US landside logistics software companies Envase (trucking) and Blume (rail, intermodal). These acquisitions provide WTC with a leading and unique position in the highly fragmented US landside logistics software market. This segment is highly complementary to their core freight forwarding operations and significantly expands WTC’s total addressable market. Accelerating contract wins post-COVID with major global freight forwarders including UPS and FedEx and more recently a global rollout of customs module with Kuehne & Nagel (world’s largest freight forwarder) has reinforced our conviction in the WTC as the unrivalled market leader.
ResMed (-27.9%) produced a broadly solid FY23 result in August with 21% revenue growth driven by both devices and masks, operating profit growth of 14% and strong cash flows. However, the fourth quarter featured a further decline in gross margins in contrast to guidance for improving margins. Gross margins fell 30bps during the quarter due to FX headwinds and an unfavourable product mix caused by a step down in sales of high margin ventilators. The fumbled guidance and poor explanations triggered a sharp selloff in the in share price. Also weighing down the share price is market concerns about the longer term impact on RMD’s growth from anti-obesity GLP-1 medications such as Ozempic/Wegovy. These medicines have proven very effective in reducing weight in clinical trials and have created a lot of buzz and uptake over the last 1-2 years. Given that 70% of obstructive sleep apnea (OSA) incidence is due to obesity, these drugs have the potential to reduce the population of OSA sufferers and shrink the market. However, there are a number of real world hurdles facing these drugs (including high cost, unpleasant side effects, low adherence, and high discontinuance rates) that limit their effectiveness in achieving long term sustained weight loss necessary to eliminate OSA.
What is CFS Wholesale Concentrated Aus Shr CFS Wholesale Concentrated Aus Shr 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 CFS Wholesale Concentrated Aus Shr has Assets Under Management of 82.80 M with a management fee of 0.96%, a performance fee of 0.00% and a buy/sell spread fee of 0.4%.
How has the investment product performed recently?
The recent investment performance of the investment product shows that the CFS Wholesale Concentrated Aus Shr has returned 3.54% in the last month. The previous three years have returned 4.79% annualised and 14.48% each year since inception, which is when the CFS Wholesale Concentrated Aus Shr 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 CFS Wholesale Concentrated Aus Shr first started, the Sharpe ratio is NA with an annualised volatility of 14.48%. The maximum drawdown of the investment product in the last 12 months is -5.13% and -46.68% 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 CFS Wholesale Concentrated Aus Shr has a 12-month excess return when compared to the Domestic Equity - Large Growth Index of 2.31% and 0.26% 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. CFS Wholesale Concentrated Aus Shr has produced Alpha over the Domestic Equity - Large Growth Index of NA% in the last 12 months and NA% 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 CFS Wholesale Concentrated Aus Shr provide?
CFS Wholesale Concentrated Aus Shr has a correlation coefficient of 0.95 and a beta of 1.07 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.
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Comments from SMSF Mates
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Performance Commentary - March 31, 2023 The Wholesale Concentrated Share Fund outperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the March quarter.
Contributing to the Fund’s outperformance were overweight positions in logistics solutions company WiseTech Global (WTC) and cloud accounting services provider Xero (XRO). WiseTech Global rallied over the March quarter, climbing +28.5% off the back of strategically accretive acquisition announcements, a strong 1H23 financial earnings result and new global rollouts. The latter consisting of four new global rollouts with NTG Nordic Transport Group, IFB International Freightbirdge, EMO Trans as well as WTC’s first global roll out in its global customs and compliance solution product with one of the world’s largest 3PL provider Kuehne + Nagel. This landmark deal with Kuehne + Nagel has taken WTC’s overall large global freight forwarder (LGFF) count to 11 of the top 25 global freight forwarders and presents WTC with further cross-selling opportunities and growth within the highly fragmented global customs industry. Recent acquisitions of landside logistics companies Envase and Blume Global also provides WTC with a clear runway to expand their total addressable market and is consistent with Management’s strategy and desire to expand CargoWise’s capabilities to ensure it remains a valuable, market-leading service. Lastly, February reporting season continued to deliver evidence of WTC’s superior product innovation and enhancements, solid demand for their CargoWise platform from both existing and new customers with group and CargoWise revenue respectively increasing 35% and +50% or organic growth of 32% and 46%.
Xero rallied +27.3% over the March quarter following the announcement of a cost reduction program involving a reduction of 700-800 roles across the business (15% of the workforce). XRO’s new CEO, Sukinder Singh Cassidy, an outside appointment, only formally commenced her role from February 1st but has wasted no time in taking action to rebalance XRO’s focus towards profitability. Ms. Singh Cassidy is a highly experienced Silicon Valley executive with more than 25 years global experience including senior positions at Google, Amazon, StubHub (eBay) and co-founded several other digital companies. We are confident she will bring greater scrutiny on expenditure and M&A activity and we are very encouraged by her early progress, including the exit from their struggling receivables factoring business Waddle.
Somewhat offsetting these positive contributions was the Fund’s zero-weight position in gold miner Newcrest Mining (NCM) and overweight position in cloud connectivity services provider Megaport (MP1). Gold miner Newcrest Mining rallied +33.0% over the March quarter, benefiting from strong appreciation of its mined commodity gold which increased by +8.0% over the period. The Company was also bolstered by positive sentiment stemming from an acquisition offer from Newmont and a positive exploration update for its Red Chris exploration, expanding its exploration target for East Ridge.
Performance Commentary - December 31, 2022 The Wholesale Concentrated Share Fund underperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the December quarter.
Contributing to the Fund’s underperformance were overweight positions in the building materials company James Hardie (JHX) and cloud connectivity services provider Megaport (MP1). James Hardie fell -14.4% in the December quarter as investors were discouraged by a downgrade to profit guidance in their 2Q23 results update. The fibre cement company flagged a fastening deterioration in volumes seen in the last 45 days with order backlogs diminishing as a result of a weaker-than-expected construction market, change in building process whereby JHX products are used earlier and housing completions outpacing new starts. Management expect new builds to see a -30% decline in 2H23 as the US housing market slows. Whilst disappointing we were more sanguine on the result and note that JHX’S North America Fibre Cement business is only 30% exposed to the single family construction market with the greater majority 70% exposed to the residential repair & remodel (R&R) segment which is expected to be more resilient. We remain encouraged by continued strength in JHX’s ColorPlus volumes (+31%) which we believe is demonstrative of the effectiveness of their strategy and recent marketing efforts. JHX’s dominant market position and consistently strong price mix growth should support margins in near-term periods of volatility.
Megaport fell -19.0% given a softer first quarter trading update and broader weakness in the Information Technology sector. The market reacted poorly to MP1’s trading update, focusing on: a moderate slowdown in underlying monthly recurring revenue (MRR) growth from MP1’s record 4Q22; softer key metrics for new ports and customer additions; and higher capex for FY23. However, we were more optimistic on the quarterly given MP1 delivered close to record metrics in 4Q22 and its September quarters have historically slowed after its June quarters, exhibiting some seasonality. Additionally, we are comfortable with the company spending moderately more on capex and working capital to fortify inventory and mitigate supply chain issues to ensure its growth runway is not hampered. We maintain our conviction in the strength of MP1’s connectivity offering, with the Company’s global footprint (MP1’s network spans almost 800 data centres in 25 countries) a key competitive advantage. Further, the Company has built a rich, global ecosystem that is a key attraction for enterprises, data centre operators and cloud service providers (CSPs). We believe MP1 has a strong, long term growth trajectory and forecast annual sales growth for MP1 of over 40%.
Performance Commentary - September 30, 2022 The Wholesale Concentrated Share Fund outperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the September. The Fund continues to diligently navigate through periods of volatility through application of our be-spoke fundamental research process, allowing us to identify high quality, growth stocks that we believe will generate superior returns for our investors over time.
Contributing to the Fund’s outperformance were the overweight positions in logistical solutions company WiseTech Global (WTC) and cloud connectivity services provider Megaport (MP1). An upgrade to guidance in July instigated positive market sentiment for WiseTech Global as the company increased their EBITDA guidance range from $275-295m to $310-$320m and also indicated that revenue would reach the upper end of their current range. Optimism compounded further after releasing a convincing full year earnings result strengthened by continued global rollouts of their best-in-class Cargowise platform, new customer wins, increasing customer usage and innovative product enhancements. All of which supported a 25% yoy increase in revenue – the top end of their guidance – and robust EBITDA margin of 50%. Key rollouts in the year included the likes of UPS, FedEx and Craft Multimodal, the former taking WTC’s overall large global freight forwarder (LGFF) count to 10 of the top 25 global freight forwards, signalling growing momentum and accelerating penetration in the logistical solutions space. As a dominant market leader, we remain attracted to WTC’s ability to exert a high degree of pricing power to offset inflationary pressures demonstrated by the price increase made in the second half of the year. The combination of accelerating momentum and strong pricing power should place WTC in good stead to continue generating attractive sales growth over the medium to long term.
Similarly, a strong fourth quarter trading update and full year results propelled Megaport +42.9% in the quarter. The market was encouraged by growth in all key regions and a number of strong KPI results including 24% increase in average revenue per customer, +9% rise in average services per customer and +16% increase in total customers. We were also pleased to see an acceleration in monthly recurring revenue (MRR), increasing from $9.2m to $10.7m yoy. We maintain conviction in the strength of MP1’s global footprint which reinforces its offering, as MP1’s network spans over 750 data centres in 25 countries. The company has built a rich, global ecosystem that is a key attraction for enterprises, data centre operators and cloud service providers (CSPs), a key competitive advantage. We believe that MP1 has a strong long term growth pipeline and forecast annual sales growth for MP1 of over 40%.
Performance Commentary - June 30, 2022 The Wholesale Concentrated Share Fund underperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the June quarter but continues to deliver attractive levels of excess returns over longer periods as our be-spoke fundamental research process allows us to identify high quality, growth stocks that we believe will generate superior returns for our investors over time.
Contributing to the Fund’s underperformance were the overweight positions in the digital payments company EML Payments and cloud connectivity services provider Megaport (MP1). EML Payments (-59%) continued to de-rate in the June quarter alongside other tech and payment names. A FY22 trading update in April lowering profit guidance accelerated a downward trajectory for EML given cuts were 8% lower than consensus expectations. The downgrade was largely attributed to a loss in non-recurring revenues and higher costs in the European business related to the Central Bank of Ireland’s remediation process. While disappointing, we believe these issues are very short term and maintain a positive growth outlook for the company following the resolution of the remediation process. We remain attracted to EML as its Australian and North American businesses performed in line with expectation and core business grew ~18% in the third quarter, demonstrating robust growth in their underlying business. We are also optimistic about the pipeline of growth particularly as they enter the ~A$88bn Employee Benefits Market through their latest partnership with Up Spain and look to pursue further penetration within the open banking market through their NuPay products.
Similarly, poor sector sentiment has placed Megaport under short term pressure resulting in the Information Technology constituent falling -61% over the June quarter. MP1 is a global cloud connectivity leader via its Network-as-a-Service (NaaS) model and its cloud computing addressable market is growing at more than ~30% annually as enterprises and governments continue to migrate to public and hybrid cloud. However, in this current volatile environment, the market reacted poorly to MP1’s third quarter trading update given a slowdown in underlying monthly recurring revenue (MRR) growth and FX headwinds. However, we were of the view that MRR growth headwinds were largely temporary and instead were encouraged by a number of strong KPI results including 489 new ports, 67 new Megaport Cloud Routers (MCRs) the second highest quarter on record and 19 new Megaport Virtual Edge (MVE) instances. We maintain conviction in the strength of MP1’s global footprint which underpins its offering, as MP1’s network spanning over 750 data centres in almost 25 countries. The company has built a rich, global ecosystem that is a key attraction for enterprises, data centre operators and cloud service providers (CSPs), a key competitive advantage. We are of the view that MP1 has a strong long term growth pipeline and forecast annual sales growth for MP1 of over 40%.
Performance Commentary - March 31, 2022 The Wholesale Concentrated Share Fund underperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the March quarter but continues to deliver attractive levels of excess returns over longer periods as our be-spoke fundamental research process allows us to identify high quality, growth stocks that we believe will generate superior returns for our investors over time.
Contributing to the Fund’s underperformance were the overweight positions in building materials company James Hardie (JHX) and accounting software developer Xero (XRO). JHX (-27%) faced a tough start to the quarter following the departure of its CEO Jack Truong. JHX continued to move lower in light of the Russia-Ukraine war and as its impact materialised through softening European activity, increased energy, freight and pulp costs, and rising mortgage rates in the US. JHX’s North America Fibre Cement business is 70% exposed to the residential repair & remodel (R&R) segment, with the remaining 30% exposed to the single family new construction market. In our view, the R&R market is likely to hold up in the face of rising mortgage rates given strong house price appreciation in the US, significant levels of home equity, strong employment, and a shortage of new housing stock. We remain confident in JHX’s ability to control costs and their pipeline of new products and projects to generate returns as they continue to expand their global presence. The cloud-based business XRO (-27%) was no exception to the indiscriminate sell-off in technology companies as the prospect of interest rate hikes increased and news of the Russia-Ukraine war unsettled the market.
Despite the market’s view on a rising cost of capital, the fundamentals of XRO remain attractive. We maintain our positive outlook for XRO given the ongoing strong growth in cloud computing and product development, recognised as XRO reached 3m subscribers for the first time in 1H22 (23% YOY growth). Although subscribers are mainly located in Australia, New Zealand and the United Kingdom XRO has a large addressable market and are on track for building momentum in Singapore, South Africa and North America.
Performance Commentary - December 31, 2021 Rising government bond yields were a headwind for performance and resulted in the Fund declining in value by 1.5% during the quarter. Reported returns were in line with the benchmark Bloomberg AusBond Composite 0+ Yr Index. The product is designed so that returns should always remain close to those of the benchmark.
Performance Commentary - June 30, 2021 The Wholesale Concentrated Australian Share Fund outperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the June quarter and continues to deliver attractive levels of excess returns over longer periods as our be-spoke fundamental research process allows us to identify high quality, growth stocks that we believe will generate superior returns for our investors over time.
Contributing to the Fund’s outperformance were the overweight positions in the cloud connectivity services provider Megaport (MP1) and the leading radiology software provider Pro Medicus (PME). MP1 rallied +66% in the June quarter as it benefited from a strong third-quarter result and an investor update that showcased its latest product offering. The third-quarter result highlighted ongoing growth in installed data centres, customers and ports thanks to its global footprint and high-quality network. As a result, MP1 delivered a 10% increase in underlying monthly recurring revenue, its second highest quarterly increase ever. Management noted that the strong demand had continued into the next quarter as the digital transformation accelerates. In June, MP1 showcased its latest evolution of the Megaport Virtual Edge (MVE), which covered: its SD-WAN solution, in collaboration with various industry leading vendors; case studies for both small and large enterprises; expected pricing; and MP1’s sales plan. With MP1’s network serving as the ‘underlay’ over which SD-WAN providers can sell networking services, and having already inked deals with four major vendors that account for ~50% of the SD-WAN market, MP1 is well-positioned to benefit from a fast-growing industry as enterprises increasingly use cloud-based technology.
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