The First Sentier Imputation Fund invests in a broad selection of Australian listed companies, with between 30 to 40 stocks typically held in the portfolio. The manager believes stronger returns are achieved by investing in growing companies that generate consistent returns and reinvest above their cost of capital. In-depth industry, stock and valuation analysis is the foundation of their process.
The Wholesale Imputation 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 hotelier services company SiteMinder (SDR) and cloud connectivity services company Megaport (MP1). A strong trading update and guidance upgrade in late July saw SiteMinder (+59.6%) rally over 20% on the day, with investors increasingly more confident that the Company can achieve its profitability goals in FY24. Positively, the update revealed that SDR had delivered a neutral operating cash flow for the first time in 4Q23 evidencing the Company’s operating leverage and the benefits of its latest cost-out program. SDR is now expecting to be EBITDA and FCF positive for 2H24 (previously guided to 4Q24). Optimism continued to grow in August following a robust FY23 earnings release with the result underpinned by improving profitability and unit economics, both of which bode positively for the coming year. Group revenue for the year rose by +27.3% (constant currency, organic) consisting of growth between 25% – 35% delivered across all regions. Subscription (+15.9%) and transaction (+61.2%) revenue was also pleasing to see with underlying gross margins improving considerably in both divisions. We were encouraged to see ARPU increase, churn stabilise, lower customer acquisition costs (CAC) and higher lifetime value (LTV) with LTV/CAC improving from 3.2x to 4.1x for the year and ending the half at 4.8x. The result strengthened our conviction for SDR as they remain on track for strong top line growth through solid travel demand and product development as they leverage the value and new opportunities presented by their latest Smart Platform and continue to work towards cash flow neutrality and profitability. Notably, Management suggested that two of their new products due for release in mid-2024 will be material drivers of revenue and enlarge their total addressable market, bolstering their growth pipeline.
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 Imputation CFS Wholesale Imputation is an Managed Funds investment product that is benchmarked against ASX Index 200 Index and sits inside the Domestic Equity - Large Cap Dividend 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 Imputation has Assets Under Management of 604.56 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 Imputation has returned 2.27% in the last month. The previous three years have returned 8.68% annualised and 13.46% each year since inception, which is when the CFS Wholesale Imputation 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 Imputation first started, the Sharpe ratio is 0.41 with an annualised volatility of 13.46%. The maximum drawdown of the investment product in the last 12 months is -7.54% and -44% 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 Imputation has a 12-month excess return when compared to the Domestic Equity - Large Cap Dividend Index of 3.16% and 0.04% 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 Imputation has produced Alpha over the Domestic Equity - Large Cap Dividend Index of 0.24% in the last 12 months and 0% since inception.
What are similar investment products? For a full list of investment products in the Domestic Equity - Large Cap Dividend Index category, you can click here for the Peer Investment Report.
What level of diversification will CFS Wholesale Imputation provide? CFS Wholesale Imputation has a correlation coefficient of 0.97 and a beta of 1.05 when compared to the Domestic Equity - Large Cap Dividend 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 CFS Wholesale Imputation and its peer investments, you can click here for the Peer Investment Report.
How do I compare the CFS Wholesale Imputation with the ASX Index 200 Index? For a full quantitative report on CFS Wholesale Imputation compared to the ASX Index 200 Index, you can click here.
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Performance Commentary - June 30, 2023 The Wholesale Imputation Share Fund outperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the June quarter.
Contributing to the Fund’s outperformance were overweight positions in cloud accounting solutions provider Xero (XRO) and logistics solutions services company WiseTech Global (WTC). Xero rallied +33.0% higher in the June quarter with positive momentum stemming from a robust FY23 result (March Year End) that surpassed consensus expectations. A key highlight was the strong top line growth with revenue increasing +28% YoY supported by solid subscriber growth (+14% to 3.74m) and 10% lift in average revenue per user (ARPU). ARPU was supported by price increases, upgrades and strong uptake of platform adjacent products such as payroll and payments. Despite macro challenges faced in the past year, average monthly churn remains low at 0.9%, a testament to the sticky and vital services XRO provides and pleasingly, free cash flow also rose from FY21 NZ$2m to FY22 NZ$102m. We are of the belief that the new CEO’s focus on profitability and disciplined cost controls are evident in XRO’s target for operating expenses to fall from 82% to 75% of revenue in FY24 supporting further margin expansion, higher profits and greater free cash flow.
Similarly, WiseTech Global continued on its upward trend rising +22.5% for the quarter. 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 also reinforced our conviction in the WTC as a dominant market leader with a long growth pipeline.
Somewhat offsetting these positive contributions were the Fund’s overweight positions in global mining giant BHP Group (BHP) and hotelier services company SiteMinder (SDR). Although rallying +7.1% in June, lower iron ore prices for the quarter coupled with the release of a mixed trading update in April resulted in BHP lowering -4.7% through the quarter. Disappointingly, copper production came in lower than expected with geotechnical issues at Escondida resulting in utilisation of lower grade stock piles however, stronger performances from Olympic Dam and Pampa Norte, which are now both expected to reach the upper end of their production guidance ranges, meant group copper guidance was maintained for the full year. WAIO production was generally in-line with market however, industry-wide cost pressures were evident in the result with Management guiding full year WAIO and Escondida costs to the upper end of its guided range. We remain attracted to the high quality miner given their strong capital management, diversified growing suite of commodities which has been further bolstered by the recent completion of BHP’s acquisition of Oz Minerals and the Company’s robust operational performance which will allow BHP to navigate shorter term volatility. We are of the view that BHP’s acquisition of Oz Minerals is consistent with its strategy to expand its growing suite of ‘futurefacing’ commodities allowing BHP to be better positioned to service the clean energy transition.
Performance Commentary - March 31, 2023 The Wholesale Imputation 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 real estate advertising company REA Group (REA) and cloud accounting solutions provider Xero (XRO). REA Group steadily rose +25.4% over the quarter, benefiting largely from improving investor sentiment given growing evidence of a moderating housing downturn and media speculation that the Company may be putting large price increases through the business. Recent CoreLogic Home Value Index (HIV) data indicated a deceleration in housing price falls with January falling -1.0%, February falling -0.14% and March rising +0.6%. The latter ending 10 months of consecutive decreases to national home values with tight rental supply providing support for the property market. In REA’s half year result, Management also cited accelerating migration, robust wage gains and low unemployment as supportive tailwinds for the business which should help bolster earnings. We remain attracted to REA given their dominant market leadership across all key domestic regions, retaining their title of number 1 property site in Australia with 117.6m average monthly visits as well as presenting solid growth across international regions such as India. We believe REA is better placed to offset headwinds with higher yield growth driven by price increases and increased uptake and penetration of diversified premium products such as Premiere+.
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.
Performance Commentary - December 31, 2022 The Wholesale Imputation Share Fund underperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the December 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 essential human services provider APM Human Services (APM) and medical device company ResMed (RMD). APM Human Services (-19.6%) underperformed in the December quarter following concerns regarding FY23 earnings forecasts given the slower-than-expected ramp up of the UK restart employment programme and higher borrowing costs following recent interest rate rises. We remain attracted to APM’s strong growth pipeline within their core divisions with many of the government programmes such as Workforce Australia, in their early phases of multi-year opportunities, as well as continued investment and development in other growth areas including Allied health and their Disability and Aged Care Support Services business. We are of the view that APM faces a number of tailwinds in the medium term including benefit from 15,550 Disability Employment Services (DES) participants being relocated from underperforming service providers, as new Workforce Australia and Canadian contracts ramp up and recent acquisitions including Equus and Everyday Independence make contributions. Therefore, APM’s strong organic and inorganic growth coupled with accelerating scale as the constituent expands within existing and new geographical markets should bolster profit growth in 2H23 and FY24.
Performance Commentary - September 30, 2022 The Wholesale Imputation 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 the electronic software company Altium (ALU) and logistical solutions software provider WiseTech Global (WTC). Altium rallied +28.9% on the back of a solid full year earnings result and optimistic FY23 outlook, underpinned by increased uptake of higher value products, robust cost control management, increased term-based licenses and accelerating demand for electronic search engine Octopart. Octopart revenue increased by 75% for the year as supply chain bottlenecks and electronic part shortages particularly within the semiconductor industry boosted demand and helped lift ALU’s market position. Other factors driving the +23% increase in group revenue included the reduction of promotional activity and growing customer transition to Pro Subscription and Nexus. We were also encouraged to see evidence of Altium 365’s growing adoption demonstrated by an increase of monthly active users yoy. We believe Altium are well positioned to maintain positive growth momentum as they benefit from the emerging EV transition and growth in 5G communications, supporting demand for their platform and product ecosystem in the medium and long term.
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.
Somewhat offsetting these positive contributions were the overweight positions in the commercial and industrial property manager Goodman Group (GMG) and travel management and services company Webjet (WEB). The rising rate environment and corresponding poor sector sentiment drove Goodman Group – 11.6% lower in the quarter. The acceleration of the e-commerce and logistics industry remains a long term structural tailwind for GMG’s business and strong demand coupled with low supply should continue to underpin strong rental growth to help combat rising costs. We were encouraged by evidence of this in GMG’s full year results in August which detailed double digit increases to operating profit and EPS growth at 25% and 24% respectively as well as an average 99% occupancy rate. Management also indicated rental reversion to the market for North America (40%), Australia and New Zealand (20%), Europe and UK (18%) and Asia (4%), highlighting significant opportunity for growth. We believe that GMG maintains a good level of liquidity and cash to allow for a nimble approach, providing the flexibility to react to a volatile environment as well as leverage their strong global position to capitalise on new opportunities.
Performance Commentary - June 30, 2022 The Wholesale Imputation 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 global fintech Block (SQ2) and cloud connectivity services provider Megaport. Block (-51%) continued to de-rate in the June quarter alongside other tech and payment names. A slight miss in the Square ecosystem’s 1Q22 Gross Profit Volumes (GPV) versus consensus expectation accelerated SQ2’s downward trajectory, dismissing stronger-than expected performances from Cash App, which record quarterly inflows and recording 10 million accounts as of the end of the March quarter. We maintain an optimistic outlook for SQ2 given it is a dominant player in the merchant and payments space and best positioned to deliver double digit compound growth and return on invested capital despite the broader economic slowdown. SQ2 approximate it has less than 3% penetration in a ~US$190bn TAM illustrating further growth potential through international expansion and further upmarket penetration within the US market. We were further encouraged by the avenues for unlocking greater levels of penetration as outlined in SQ2’s Investor day in May, including Square Omni-channel expansion, increasing monetization and cross-selling of products and increasing Cash App’s monthly active users through Peer-to-Peer (P2P) engagement. $0 $50,000 $100,000 $150,000 $200,000 $250,000 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 Fund Benchmark $0.00 $0.05 $0.10 $0.15 $0.20 $0.25 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 0.00% 0.50% 1.00% 1.50% 2.00% Fund Benchmark First Sentier Wholesale Imputation Fund 30 June 2022. Similarly, poor sector sentiment has placed Megaport under short term pressure resulting in the Informational 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%.
Somewhat offsetting these negative contributions were the overweight positions in the insurance broker and underwriting agency Steadfast (SDF) and biotech CSL Limited (CSL). Despite no new trading updates being during the June quarter Steadfast rose by 5%. The current inflationary environment has been conducive to an acceleration in commercial insurance premium growth, benefitting the insurance company. We expect ongoing premium growth to help bolster earnings whilst forgoing the cost of general inflation and increased natural peril costs. We remain attracted to SDF’s defensive qualities and ability to generate strong inorganic growth through continued momentum from their accretive acquisition strategy
Performance Commentary - March 31, 2022 The Wholesale Imputation 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 The Wholesale Imputation Fund underperformed its benchmark, the S&P/ASX 300 Accumulation Index, in the December 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 Australia’s leading BNPL company Afterpay (APT) and the international pizza chain company Domino’s Pizza (DMP). The prospect of increased regulation in Australia and the US combined with the growing expectation of rising interest.
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