Chester High Conviction aims to outperform the S&P/ASX300 Accumulation Index by 500bp (before fees) over a rolling 3-year time frame. The Fund will invest in a diversified portfolio of stocks predominantly comprising of listed companies in the S&P/ASX 300 Index (up to 100% of the Fund), a non- index position in stocks listed outside Australia (between 0-20%), while cash allocation can be between 0%-20%.
In March 2006, we attended the Credit Suisse Asian Investment conference in Hong Kong. We were living there at the time, which coincided with the annual Hong Kong 7’s Rugby tournament. It was traditionally the biggest week of the year in Hong Kong and in 2006, as China was industrialising rapidly, there was no better city to be. The peak in irrational exuberance was still a good 12-18 months away, but the mood was very bullish. The IPO market was hot, there was money to be made. We had a very positive disposition on the commodity markets at the time given we (felt at least) had a front row seat to the accelerating demand of Chinese steel production. Every quarter, Shanghai was changing, and you had to be on the ground to feel it. We felt we had an edge being so close to the coal face.
At this particular conference we listened to a talk that had a profound impact on the way we think about investing. The speaker stood up and asked the audience to think of a number between 1 and 100. This task was easy enough. He then asked us to assume what the average number chosen by all the people in the room (roughly 200 or so investors) would be. Relatively straight forward. Finally he asked us to write down a number, that we thought would be 2/3rds of the number the average audience member wrote down. He repeated this 3 times so it sunk in. Write down a number that is 2/3rds of what the rest of the room would write down.
This task was infinitely more complex given the assumption that every investor is then second guessing what everyone else is writing down. Now this is the essence of how a market functions. Often it’s not first order thinking (pick a number), or even second order thinking (what consensus thinks). Actually investing involves the complexities of a room (or market) full of incredibly well educated people, using third order (or fourth order) thinking, and trying to get ahead of the pack by extending that thinking even further. Using the example above. The actual answer most investors gave was around 14. That is, if the average number between 1 and 100 is 50 (consensus), then most investors assumed that 2/3rds of 50 is 33, but that is what everyone else wrote down, so the next derivative is 22 (2/3rds of 33). However extending that thinking again, arrives at the number 14 (2/3rds of 22). We found this fascinating as a (relatively) young portfolio manager thinking about expectations and market psychology. This talk was given by widely regarded financial author Michael Mauboussin, who later wrote the book Expectations Investing, amongst many other widely acclaimed books.
Successful investing often requires a different train of thought to consensus thinking, and often outliers tend to be the most successful investors, by extending their thinking the furthest. This shouldn’t be confused with complexity of a business model, as many of the most successful investors keep the company fundamentals relatively simple. In 2023, this third and fourth order thinking can be observed in the AI space, the GLP-1 space (weight loss drugs), the energy markets, the lithium market and at a macro level, the USD, inflation expectations and the inverted yield curve (recession watch). Much of our process tends to try to understand what consensus thinks, and where (if at all) we have a different view than the crowd. It’s not difficult to find sectors where the crowd has pushed expectations too high (or too low), and what that ultimately means for allocating capital at a point in time. The obvious missing link here is having a high conviction view on what an assessed valuation should be versus what is being priced in.
What is Chester High Conviction Chester High Conviction 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 Chester High Conviction has Assets Under Management of 70.17 M with a management fee of 0.95%, a performance fee of 0.00% and a buy/sell spread fee of 0.6%.
How has the investment product performed recently? The recent investment performance of the investment product shows that the Chester High Conviction has returned 3.17% in the last month. The previous three years have returned 8.86% annualised and 13.64% each year since inception, which is when the Chester High Conviction 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 Chester High Conviction first started, the Sharpe ratio is NA with an annualised volatility of 13.64%. The maximum drawdown of the investment product in the last 12 months is -4.64% and -24.25% 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 Chester High Conviction has a 12-month excess return when compared to the Domestic Equity - Large Growth Index of -4.35% and 1.91% 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. Chester High Conviction 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 Chester High Conviction provide? Chester High Conviction has a correlation coefficient of 0.92 and a beta of 0.8 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 Chester High Conviction and its peer investments, you can click here for the Peer Investment Report.
How do I compare the Chester High Conviction with the ASX Index 200 Index? For a full quantitative report on Chester High Conviction compared to the ASX Index 200 Index, you can click here.
Can I sort and compare the Chester High Conviction to do my own analysis? To sort and compare the Chester High Conviction financial metrics, please refer to the table above.
Has the Chester High Conviction 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 Chester High Conviction? 
How do I get in contact with the Chester High Conviction? 
Comments from SMSF Mates SMSF Mate does not receive commissions or kickbacks from the Chester High Conviction. All data and commentary for this fund is provided free of charge for our readers general information.
Performance Commentary - August 31, 2023 During the month the fund returned -1.5% relative to the -0.7% fall in the ASX300. The strong performers in August were led by Aussie Broadband (ABB), demonstrating exceptional cash flow growth and continued momentum in residential broadband connections. Expectations, like many strong August performers, were cautious heading into the result. The pipeline of business or enterprise customers augurs well for continued FY24 growth. News Corp also performed strongly through August by demonstrating the resilience of earnings stemming not just from the realestate.com.au investment, but the Dow Jones business unit, which we view as a very strong franchise. The implied multiple for Dow Jones (if we strip out the NWS stake in REA) is circa 4-5x, while we believe the business should be valued closer to 11-12x EV/EBITDA, which continues our belief that the conglomerate structure of NWS materially undervalues the organisation.
Underperformers for the month were led by Resmed (RMD), which has becomes one of the most polarising valuation arguments we can recall. While the RMD quarterly was a slight disappointment from a gross margin perspective, the stock has fallen 28% since the result in response to the powerful narrative around weight loss drugs.
The thesis being that these drugs (Ozempic, Wegovy, Mounjaro) if taken consistently over a 12-18 month period, can materially reduce obesity, and therefore the addressable market for Obstructive Sleep Apnea (OSA) will be significantly reduced in the coming 5-7 years, with obesity being linked to OSA. We will discuss this in more detail in the next quarterly, suffice to say, weight loss drugs are still very early in the lifecycle with many side effects still misunderstood. Mr Market has declared that RMD is guilty until proven innocent in terms of the medium term growth rates attached to OSA. At this stage, we tend to view this price weakness more as an opportunity than a threat. Austal (ASB), we continue to view as an asymmetric investment case below AUD2.00. Without question we have found it frustrating with a book value above AUD2.50 and a very strong revenue growth trajectory over the next 5 years given the recent contract wins that see the ASB order book at record highs. While FY24 guidance was slightly softer, it is a transition year as they ramp up towards the 2 new programs starting in mid 2024. We also note that guidance for FY24 was using an AUD currency of 0.72 vs the spot rate at 0.64. All else being equal, this would be a 15% eps upgrade at spot, but we are quite sure that no one is looking. The market remains materially below our own FY26 forecasts, which unfortunately, requires more patience.
Performance Commentary - July 31, 2023 During the month the fund returned 1.5% relative to the 2.9% gain in the ASX300. The strong performers in April were led by Beach Petroleum, which had been derated over the past 12 months on the back of some challenging quarterly production numbers. The June quarter result showed a stronger pricing outcome than expectations, while some operational delays (Waitsia and Thylacine) have not derailed the simple story around a 50% increase in production over the next 2 years, while trading on less than 2.0x EV/EBITDA in FY25, which equates to a FCF yield of >20%. AGL was also a strong performer. On our numbers AGL continues to trade on ~5.2x EV to EBITDA 1 year forward vs an average of NZ Gentailers on ~13x EBITDA. We see AGL as an energy transition arbitrage as they generate strong cash flow from thermal assets to fund battery and renewable investments effectively replacing the lost earnings which hopefully provides opportunity for a multi year re-rate to that of their Trans-Tasman peers.
Underperformers for the month were led by Austal Limited (ASB). ASB updated the market in July regarding their US Towing, Salvage and Rescue Ships (T-ATS) contract, with a further downwards adjustment of AUD60m against that program and amid uncertainty to the timing of any reasonable equity adjustments (REA). The drop in ASB’s market cap (~AUSD120m) has been ~ double the extra provision of a 2 year program. I.e., the market is skeptical of the corporate activity resulting in a takeover and/or is extrapolating the underperformance in the T-ATS contract (their first steel contract) against the subsequent steel contract wins OPC and TAGOS. We don’t share these concerns, believing that even if the corporate interest evaporates, the OPC and TAGOS contracts include design by ASB and have different structures than the T-ATS contract, and believe the operational efficiencies of running 2 large scale multi year contracts in Alabama, combined with the ongoing ramp up in annuity style sustainment earnings, places the FCF generation of ASB over the next 5 years as materially underappreciated.
CSL was also weaker during July after competitor Argenx released top line data of its phase III trials of Vyvgart, for use in patients with CIPD (neurological disorder involving weakness and reduced senses in the arms and legs). The trial showed a similar response rate and relapse rate to IVIG studies, thus while a competent alternate therapy, it doesn’t appear to be a material game changer for CIPD patients in switching away from current IVIG therapies. Note Vyvgart has been used in Myasthenia Gravis (MG) patients for several years, with 7-8% penetration rates of market share.
Performance Commentary - May 31, 2023 During the month the fund returned 0.7% relative to the 2.5% fall in the ASX300. The strong performers in April were led by Austal (ASB), which had actually been a frustrating investment thesis since announcing a US3.5bn contract with the US Coast Guard last July. For a variety of reasons ASB retraced all its gains from last September to May, trading on just 0.6x PB. In May ASB announced the award of a design contract for the T-AGOS surveillance ship, which is highly likely to convert to a US3.2bn 7 ship program. This would effectively see ASB have a full order book for the next 10 years at their Alabama facility, while creating more certainty around the sustainment (maintenance) program. Post this contract, ASB will have an order book of around AUD11bn which suggests (to us) the market cap of AUD800m is mispriced. Recent press speculation suggests we are not alone. We added AGL to the portfolio in the first quarter, acknowledging the tailwinds in the electricity market remain highly cash flow positive for AGL, while recognising AGL has to be a key participant in the energy transition in Australia over the next 10 years. Allkem (AKE) is also a recent addition as we watched the lithium price retrace much of its 2022 gains, while remaining believers in the structural EV story.
We were attracted to the relative maturity of the AKE assets and the production growth to come over the next 3 years, while being pleasantly surprised by the merger with Livent group. This merger creates a vertically integrated EV player of scale with both geographic resource and product diversification.
The underperformers for the month were led by Aussie Broadband (ABB), which stands to benefit (as do all telcos) from a revised pricing structure with the NBN. The ACCC draft submission effectively delayed the prospect of a pricing tailwind, but this is still likely to eventuate over the next 6-12 months. Those telcos more exposed to higher end plans (ABB) should see the cost of connection to the NBN fall in aggregate (eventually). QBE was also softer in May after a strong 6 months, after guiding to a higher catastrophe claim outlook in CY23 than we (or the market) had hoped. While we believe QBE is doing a far better job of controlling the controllables, unfortunately they have yet to devise a plan to control the weather, which is perhaps why it is trading on an FY24 PE of 8.8x. Imdex (IMD) has been a long term position that we have reduced over the course of 2023, being slightly cautious around exploration spend of their customers over the next 12 months.
Performance Commentary - April 30, 2023 During the month the fund returned 0.9% relative to the 1.8% rise in the ASX300. We have continued to see 90% of the portfolio behaving as we would hope, while the past 4-6 months has seen several idiosyncratic challenges with our stock selection. The strong performers in April were led by Genesis Mining (GMD), which restructured its acquisition of St Barbara’s Gwalia gold mine in the Leonora district. While optically this has both strong shareholder support from GMD shareholders and the SBM board has endorsed the deal (scheduled for a June EGM), we note that in recent days Silver Lake (SLR) has made an offer to SBM for the same assets at (optically at least) a superior bid. We will watch carefully as this unfolds, but again, given the SBM board’s approval of the GMD bid, we are hopeful that the necessary approvals are met by the end of the quarter. CSL had a stronger month with the tailwind being a site visit to the CSL European operations, which demonstrated strong fixed cost leverage with the new fractionation processing facility and the operational readiness for the new CSL-112 product, which promises to be an exciting cash flow driver over the medium term.
Synlait (SM1) had another tough month after reporting a further downward revision to infant formula demand from key customer A2M causing a further (NZD20m) hit to profit guidance, placing them at approximately breakeven for FY2023. Management remain confident in SAMR approval for A2M in Q4 FY23 and delivery of strong double digit growth in Advanced Nutrition sales volumes when the new multinational customer commences. SM1 is now trading on 0.4x book value per share and 6x FY25 PE, with optionality around its asset base. One for deep value contrarians. Mineral Resources (MIN) also underperformed with the quarterly showing challenges in all 3 divisions leading to downgrades. Mining Services production volumes were lower following completion of 2 external mining contracts. Iron Ore costs were revised to the top end of guidance and lithium production at Mt Marion suffered higher costs and lower spodumene and hydroxide sales. MIN’s quarterly is somewhat a reflection of the tougher labour market in WA, a softer period seasonally for lithium and some timing issues. Develop (DVP) was also softer on the back of weaker commodity prices despite some impressive drill results at Woodlawn.
Performance Commentary - February 28, 2023 During the month the fund returned -1.1% relative to the -2.5% fall in the ASX300. Our broad assessment of this outcome being, we got the micro drivers right (individual company positions), while we felt the impact of macro headwinds (rising USD hurt our gold positions). Origin Energy (ORG) led the outperformers, after informing the market of a revised bid from the Brookfield consortium at AUD8.90 per share. Heading into this outcome we had felt the equity market had all but given up on a formal bid (trading at AUD7.00 per share), which seemed at odds with all previous public commentary from Brookfield regarding their commitment to the energy transition of the Australian electricity grid. Brambles (BXB) appears to us to be in a sweet spot, for it offers a very basic service (pallets) facilitating the logistics of FMCG distribution. Given how capital constrained the world is, owning 360m pallets globally with a replacement cost of USD30-35 per pallet is an asset base that is incredibly hard to replicate. BXB has demonstrated pricing power with pallet shortages from its competitors, leading to higher demand for its reliable service. This pricing power has seen earnings revised upwards, with the strong tailwinds having further to play out over the next 12-18 months. The Lottery Corp (TLC) also delivered a strong result leading to eps upgrades. While TLC is well understood, the scope for pricing levers to continue over the next 12-18 months suggest a very predictable cash flow profile ahead of it.
Jervois (JRV) has been problematic for the fund over the past 4 months, which has been heavily influenced by the 35% fall in the cobalt price over this period. Given more than 70% of cobalt is produced from the DRC (Democratic Republic of Congo) and less than 9% is produced by OECD nations, the visibility of what drives the short term pricing dynamics is opaque. Our thesis for JRV was predominantly driven by its strategically relevant position as having the largest cobalt mine in the US. A USD16/lb cobalt price is unhelpful, hence our focus is the cobalt market dynamics from this point. Westgold (WGX) retraced much of its January strength through February, as the USD gold price softened on USD strength. We understand the logic of this relationship, but keep one eye firmly on the upcoming US debt ceiling debate, the increase in deficit spending in the US, and the Eastern Bloc’s firm desire to remove the influence of the USD on global trade.
Performance Commentary - January 31, 2023 During the month the fund returned 3.8% in a relatively strong month for the ASX, with most sectors seeing gains led by consumer discretionary names, while only utilities lagged (ORG). Outperformers for the month were led by Westgold (WGX), a recent position purchased in the 4th quarter. As gold rallied on the back of a declining USD, most gold names rose, with WGX demonstrating a strong operational turnaround is under way. The operating costs should continue to trend lower in CY23, while the hedge book rolling off will see strong margin expansion for WGX in FY24. Mineral Resources (MIN) continues to offer exponential earnings growth through new projects, with a compelling gas project in the Perth Basin adding to its medium term appeal. Imdex (IMD) was a stock we spoke to in our recent note “Return of the Developer”, where we see IMD well placed to benefit from an elongated cycle and new technologies. The recent equity raising to fund the purchase of Norwegian mining services company Devico was received well, as IMD also delivered a robust 1H FY23 result at the same time. Valuing IMD closer to international peers suggests the rerating has further to go.
Austal was a material underperformer in January as they revised down FY23 earnings after increasing the provision for an onerous contract with the US Navy. This specifically relates to the US Towing Salvage and Rescue Ships (T-ATS) whereby the initial fixed price contract was met with variations and modifications by the US Navy, and as such, ASB will possibly incur a loss on this program. The word possibly is used, as ASB has submitted requests for equitable adjustments (REAs) in respect of the changes to the initial contracts. As it is too early to assess whether the US Navy reimburses ASB for the higher costs of the program, the provision was taken in FY23. This announcement was accompanied by press that several republican senators in the electorate of Eastern Shipbuilders (an ASB competitor) voiced “concerns” that ASB may be the source of military secrets being leaked to the Chinese. With poor sentiment and some redemption selling, ASB is now trading on just 0.6x PB value, with net cash and an exciting pipeline of opportunities in front of them. We think it is heavily oversold, and completely unloved.
Performance Commentary - November 30, 2022 During the month the fund returned 5.2% in a relatively strong month for the ASX, with the other barbell of the market, Metals and Mining delivering 18% (BHP 22%, FMG 32%) after the Banks’ 15% return in
October.
Outperformers for the month were led by Origin Energy (ORG) which was the subject of a takeover bid at AUD9/share; the 3rd but first disclosed to the market, from a combination of Brookfield Asset Management and MidOcean Energy. We had added ORG to the portfolio mid 2021 at ~80% of its book value with conviction that the assets were being underappreciated and undervalued. Although regulatory risk has the potential to alter terms of the deal, we place a high probability on the transaction completing, hence remain holders.
Mineral Resources (MIN) continues to offer exponential earnings growth through new projects, with a compelling gas project in the Perth
Basin adding to its medium term appeal. Our gold holdings performed well throughout the month with recent addition Northern Star (NST) rising 22% during the month. Our current view is that gold equities offer meaningful upside in 2023 in a world where many companies are either fully valued or face earnings headwinds as economic conditions bite.
Jervois (JRV) was and continues to remain weak after a large USD150m equity raise to fully fund restart of Sao Miguel Paulista (SMP) nickel + cobalt refinery (Brazil), Idaho Cobalt mine restart (USA) and a study of the expansion of their Kokkola cobalt refinery (Finland). Notwithstanding its weakness we believe JRV represents one of the more reasonably priced exposures to battery materials with a highly credentialled management team and now strengthened balance sheet. Lendlease, in what has now become somewhat of a frustrating pattern delivered a further downgrade during the month. LLC now trades on <0.8x book value and ~9x fy24 earnings, on expectations that have dramatically reduced over the past 18 months. it is definitely unloved.
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