Perpetual Wholesale Concentrated Equity aims to provide long-term capital growth and income through investment predominantly in quality Australian industrial and resources shares and outperformance the S&P/ASX 300 Accumulation Index (before fees and taxes) over rolling three-years periods. Perpetual researches companies of all sizes using consistent share selection criteria. Perpetual’s priority is to select those companies that represent the best investment quality and are appropriately priced.
The portfolio’s largest overweight positions include Insurance Australia Group Ltd, Orica Limited and Origin Energy Limited. Conversely, the portfolio’s largest relative underweight positions include ANZ Group Holdings Limited, Macquarie Group Ltd (not held) & Commonwealth Bank of Australia.
The overweight position in mining royalty firm Deterra Royalties Ltd (+7.64%) contributed to relative performance. Deterra Royalties performed strongly as Iron ore prices remained resilient through the month defying other commodities which in large ended the month lower. Despite BHP’s Q3 operational review reporting a decrease in production of 3.9% compared to the prior quarter, in general MAC continues to ramp up as expected with full production expected to be reached by end FY24. The company receives an ongoing royalty of 1.232% of Australian dollar-denominated quarterly free on board revenue from the MAC royalty area. The business has growth levers through M&A however they are yet to execute on any to date.
Santos contributed to performance in the month (+3.00%) as the price of oil rallied. In addition, Santos sold an initial of 2.6% of PNG LNG (Papua New Guinea Liquefied Natural Gas) to Kumul with an option for Kumul to acquire another 2.4%. The total consideration from the 2.6% is $576 million cash and the assumption of approximately $160 million of project finance debt. Santos is our favoured oil and gas producer with material growth prospects that are attainable. Santos is a global energy company with strategic assets across Australia, Papau New Gunea, Timor Leste and the United States of America that aims to play a key role in helping the world decarbonise to reach net-zero emissions through reliable, affordable and sustainable energy.
The overweight to Healius detracted from performance in September (-17.86%) as the market continued to speculate that the bid by smaller rival ACL could be blocked by the ACCC. Healius’ assets have attracted interest from private equity and there are activist investors on the register. With the combined value of Healius’ radiology and pathology businesses estimated to be around $2.6 billion this represents a substantial uplift from the current market capitalisation of $1.7 billion. We are encouraged with the progress Healius has made with improvements in their radiology business under new leadership. Pathology segment continues to track below what the business could achieve given in person GP visits are still around 20% below pre pandemic, which leads to lower pathology requests. We believe some of the co-pay introduction are deterring GP visits, consumers continue to defer and there are evidence that primary care screenings are being deferred. We believe GP visits and Pathology volumes will re-bound in the future and that we will start to see pathology segment margins improve from here.
The overweight position in casino operator Star Entertainment Group (-34.02%) detracted from relative performance. The stock ended the month lower after the casino operator engaged the equity markets to raise $750m priced at $0.60 a share following Star also recently securing a $450 million debt package with the aim of paying off Star’s existing loans and handling costs at Queens Wharf in Brisbane. The raise has provided further clarity on the balance sheet and we are still seeing value in Star’s conservatively stated net tangible asset value.
What is Perpetual Wholesale Concentrated Equity Perpetual Wholesale Concentrated Equity is an Managed Funds investment product that is benchmarked against ASX Index 200 Index and sits inside the Domestic Equity - Large Value 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 Perpetual Wholesale Concentrated Equity has Assets Under Management of 458.03 M with a management fee of 1.1%, a performance fee of 0 and a buy/sell spread fee of 0.15%.
How has the investment product performed recently?
The recent investment performance of the investment product shows that the Perpetual Wholesale Concentrated Equity has returned 1.89% in the last month. The previous three years have returned 8.18% annualised and 12.97% each year since inception, which is when the Perpetual Wholesale Concentrated Equity 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 Perpetual Wholesale Concentrated Equity first started, the Sharpe ratio is NA with an annualised volatility of 12.97%. The maximum drawdown of the investment product in the last 12 months is -4.48% and -41.39% 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 Perpetual Wholesale Concentrated Equity has a 12-month excess return when compared to the Domestic Equity - Large Value Index of -2.07% and 0.83% 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. Perpetual Wholesale Concentrated Equity has produced Alpha over the Domestic Equity - Large Value 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 Value Index category, you can click here for the Peer Investment Report.
What level of diversification will Perpetual Wholesale Concentrated Equity provide?
Perpetual Wholesale Concentrated Equity has a correlation coefficient of 0.96 and a beta of 0.97 when compared to the Domestic Equity - Large Value 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 Perpetual Wholesale Concentrated Equity and its peer investments, you can click here for the Peer Investment Report.
How do I compare the Perpetual Wholesale Concentrated Equity with the ASX Index 200 Index?
For a full quantitative report on Perpetual Wholesale Concentrated Equity compared to the ASX Index 200 Index, you can click here.
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Comments from SMSF Mates
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Performance Commentary - August 31, 2023 The Fund’s largest overweight positions include Insurance Australia Group Ltd, Orica Limited, and Santos Limited. Conversely, the Fund’s largest relative underweight positions include Macquarie Group Ltd (not held), ANZ Group Holdings Limited & CSL Limited.
The overweight to Premier Investments (+16.14%) strongly contributed during August. Premier like most retail has struggled with its share-price since early May as pressures on the consumer increased resulting in negative industry sales, not aided by significant cost headwinds. All while cycling very strong comparative trading outcomes. Market analysts were very uncertain about just how bad FY23 & FY24 outcomes might be. PMV has long been part of our core retail investments- it is a quality business, supported by a particularly strong net cash balance sheet and overseen by engaged and experienced executive leadership personnel. The business also has future growth potential across several offshore geographies with the retail sector normalising post the widespread 2020/2021 covid restrictions.
The overweight to Goodman Group contributed strongly to performance in August (+13.73%) as the company reported a solid result and provided an upbeat update highlighting their current and potential investments into data-centre development. We took the opportunity to establish a position in Goodman Group late last year when the market was generally worried about large property groups’ performance in a rising rate environment. However, Goodman’s focus on the Industrial & logistics segment has delivered strong results driven by tenants’ ecommerce expansion and supply chain optimisation in an environment of limited supply of modern and well-located warehouses. We believe that Goodman will continue to grow earnings across its global portfolio supported by profitable development and ongoing rental increases with a conservatively geared balance sheet.
The overweight to Brambles (+6.40%) contributed during August. We believe this was driven by the company’s better-than-expected FY23 result and associated outlook commentary. More specifically, the result demonstrated Brambles’ significant pricing power, to ensure that CHEP’s increased cost-to-serve was being more than recovered (e.g. CHEP Americas reported an 18% rise in revenue from Price/Mix benefits during the period). In addition, improved working capital management as well as lower capex/sales ratio, drove a Free Cashflow increase of US$412m to US $498m in FY23 – thus addressing what has been a key analyst/investor concern, Brambles’ historic poor track record of Free Cashflow generation. Finally, FY24e guidance for underlying earnings growth in cc-terms of 9-12%, plus Free cashflow of US$450 – $550m, positively surprised non-holders.
Iluka Resources fell -16.54% during August due to growing concerns over the health of the Chinese property market and destocking from global pigment producers. This comes after an exceptional rise in the share price over the past few years. Iluka is the worlds largest producer of rutile that is used to produce pigment (paint) and zircon that is used to produce ceramics (tiles etc). These minerals generate the earnings and cashflow for the company currently, and the company has responded to soft near-term demand by idling some production to avoid inventory and working capital build. Iluka has a very strong balance sheet (net cash) and also owns a valuable stake in Deterra Royalties, which was spunoff in an IPO, so is able to buffer these periods of demand distortion that is a feature of these markets.
The funds overweight to Costa Group detracted from performance as the stock fell 13.9% during August as a profit warning due to the wet and cold weather impacting its citrus crop and weak tomato pricing sparked speculation that potential acquirer Paine Schwartz may cut or walk away from its $3.50 bid. Costa is the leading producer in several agricultural categories including mushrooms, tomatoes and has best-in-class genetics in the berries segment (especially blueberries). We recently visited China where we believe Costa has substantial growth prospects, especially in the blueberry market where consumption per capita is a fraction of US and Australian levels and where its IP gave it superior product versus peers.
The funds overweight to Endeavour Group (-8.28%) detracted from performance over the month. Endeavour has struggled over recent months as it matures into its standalone status after demerger from Woolworths, faces into continuing erratic selldown of the residual WOW shareholding, cycles inconsistent covid impacted trading in its retail and hotel divisions and mostly remains vulnerable to numerous erratic political responses to gaming regulation. Given all these mixed headwinds it has been difficult for the market to discern what normalised future trading might look like. For its part, Endeavour has struggled to articulate its actions, and at this still early stage, to demonstrate outcomes around its existing asset base. As an active investor we purposefully interact and engage with the company, particularly around capital allocation and return hurdles and will continue to do so. Regardless Endeavour possesses significant assets, capable management, and a solid balance sheet.
Performance Commentary - July 31, 2023 The Fund’s largest overweight positions include Insurance Australia Group Ltd, Orica Limited, and Santos Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, Macquarie Group Ltd (not held) and ANZ Group Holdings Limited.
The potfolio’s overweight to Costa Group contributed to performance over the month as the stock rose 21.7% during July following a bid from private equity. This certainly vindicated our view that there was substantial value in this agricultural name. We had noted that Paine Schwartz had been creeping up the register and that its attractive asset base made it a potential target for private equity. Costa is the leading producer in several categories including mushrooms, tomatoes and best-in-class genetics in the berries segment (especially blueberries). We had recently visited China where we believe Costa has substantial growth prospects, especially in the blueberry market where consumption per capita is a fraction of US and Australian levels and where its IP gave it superior product versus peers. The portfolio’s overweight to Orica contributed to performance over the month as the company rose 6.2% over the month. We have been bullish on the stock with the company trading at a significant discount to previous peaks. Our favourable view of the worlds biggest supplier of commercial explosives is driven by our analysis that they would be able to drive contract re-pricing to more than offset inflation. Indeed we saw this in May when the company reported a 31% increase in first revenue to $4 billion. Earnings rose 32% to $323 million, topping forecasts of a 25% lift. We also think that lower gas and ammonia costs are helping to improve margins. Orica is also looking to benefit from Digital Solutions through the acquisition of Axis Mining Technology and growth in the number of Electronic Blasting Systems (EBS) sold as miners look for productivity gains.
Iluka Resources fell -8% during July, although this comes after an exceptional rise in the share price over the past few years. Iluka is the worlds largest producer of rutile and zircon. These minerals generate the cashflow underpinning the bulk of the current valuation of the company. Iluka also owns a valuable stake in Deterra Royalties, which was spun-off in an IPO, as well as a substantial amount of cash. Iluka is also the recipient of a non-recourse loan of more than $1 billion from the federal government to develop a fully integrated rare earths refinery, making it one of only two outside of China. We believe that this will be the key driver of future value for the company in the decade ahead. Healius fell -9.8% in July as the market speculated that the bid by smaller rival ACL could be blocked by the ACCC. Healius’ assets have attracted interest from private equity and there are activist investors on the register. With the combined value of Healius’ radiology and pathology businesses estimated to be around $2.6 billion this represents a substantial uplift from the current market capitalisation of $1.7 billion.
Performance Commentary - May 31, 2023 The Fund’s largest overweight positions include Insurance Australia Group Limited, Orica Limited, and Iluka Resources Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, Commonwealth Bank of Australia, and Macquarie Group Ltd (not held).
The overweight position in insurance provider Insurance Australia Group Ltd (+4.2%) contributed to relative performance. The stock finished higher after being upgraded to ‘overweight’ from ‘neutral’ at JPMorgan, with its target price increased to A$5.75 from A$5, representing a 20% upside to its price at the time of the upgrade.
The overweight position in oil and gas producer Santos (+3.1%) contributed to relative performance. During the month, the company announced that its Moomba CCS project was 60% complete and is on track to start storing CO2 next year. Once complete, the project is said to support Santos in reducing its own emissions, in addition to working with other hard-to-abate sectors to look at ways of using Moomba CCS to help reduce their emissions as well. According to the company, in the next six weeks, there will be a direct air capture facility being installed at the project and that will work for nine months trialling the company’s new technology for direct air capture.
The overweight position in mineral sands miner Iluka Resources (+2.5%) contributed to relative performance. The stock price rose sharply after being upgraded to ‘outperform’ from ‘neutral’ by Macquarie analysts, with its target price increasing to A$12.30 from A$12, representing a 12% upside to its price at the time of the upgrade.
The overweight position in gold and copper miner Newcrest Mining (-11.7%) detracted from relative performance. The stock was hampered after announcing that its Cadia mine was under investigation regarding its management of emissions of dust and other pollutants. Newcrest’s Cadia Holdings mine in Central West NSW has been issued with a draft pollution Prevention Notice and a draft licence variation regarding the management of the emissions of dust and other pollutants as part of a new investigation commenced by the NSW Environment Protection Authority. The EPA has also written to the NSW Chief Health Officer requesting a full health risk analysis to determine if mine dust is impacting the health of the community.
Performance Commentary - April 30, 2023 The Fund’s largest overweight positions include Insurance Australia Group Limited, Orica Limited, and Santos Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, Commonwealth Bank of Australia, and Macquarie Group Ltd (not held).
The underweight position in iron ore miner BHP Group (-6.0%) contributed to relative performance. A March-quarter production report shows it missed consensus estimates for copper production but produced slightly more iron ore than expected. Its nickel, met coal, and energy coal production was also lower than expected. Despite this, production guidance for FY23 remains unchanged for iron ore, metallurgical coal, and energy coal, while total copper production guidance remains unchanged, and its full-year unit cost guidance remains unchanged.
The overweight position in insurance provider Insurance Australia Group Ltd (+6.2%) contributed to relative performance. The stock finished higher on speculation that IAG is in talks to acquire RACQ’s insurance business. The Australian notes that RACQ’s insurance operations were purchased for ~A$500M. However, sources indicate that RACQ may offload the division for ~A$200M. The overweight position in building and construction materials provider Boral (+17.0%) contributed to relative performance. On Thursday, 20 April, Boral was reinstated as a ‘buy’ recommendation by sell-side analyst Bank of America, with a target price of A$4.41 per share, representing a 13% potential upside.
The overweight position in healthcare technology solutions provider Healius (-5.4%) detracted from relative performance. The stock ended the month lower following denial by The Takeovers Panel to conduct proceedings on an application from Healius relating to its takeover bid by Australian Clinical Labs. Healius alleged in its submission to the panel that ACL’s letter of offer to merge the two ASX-listed diagnostic companies was “misleading, including by omission, and inadequate in a number of respects”.
The overweight position in mining royalty firm Deterra Royalties Ltd (-4.2%) detracted from relative performance. Deterra Royalties ended the month lower after acknowledging BHP’s Q3 operational review, which reported that its Mining Area C royalty achieved production for the March quarter of 29.7 million wet metric tonnes, a decrease of 3.9% compared to the prior quarter. The company receives an ongoing royalty of 1.232% of Australian dollar-denominated quarterly FOB revenue from the MAC royalty area.
The overweight position in dairy producer a2 Milk Company (-6.5%) detracted from relative performance. In light of NZ milk company Synlait’s guidance downgrade, a2 Milk has confirmed that its FY23 outlook remains largely unchanged. The company still expects around 10% revenue growth, aligning with their previous low double-digit growth projection. While the IMF revenue for the English market is estimated to decrease by mid-single digits, a2 anticipates double-digit growth in China.
Performance Commentary - March 31, 2023 The Fund’s largest overweight positions include Insurance Australia Group Limited, Orica Limited, and Iluka Resources Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, Commonwealth Bank of Australia (not held), and Macquarie Group Ltd (not held).
The overweight position in gold and copper miner Newcrest Mining (+33.0%) contributed to relative performance. Newcrest and Newmont Mining have reportedly agreed to terms for talks after Newcrest rejected the latter’s $22.4B takeover offer. Reports indicated that Newmont has decided to engage in talks and standstill agreements during the quarter, allowing the two companies to meet and better understand why Newcrest rejected the prior acquisition proposal. The agreements also facilitated discussions about the potential price that Newcrest and its Board might be willing to consider proceeding with official due diligence. The overweight position in supply chain services provider Brambles (+12.8%) contributed to relative performance. Brambles reported an underlying first-half NPAT (from continuing operations) of $334.5M (vs consensus $321.9M), and an underlying profit of $548.8M (vs consensus $511.4M). Management guided full-year sales revenue (to June 2023) of 12% to 14% year-on-year (at constant currency) and underlying profit guidance of 15% to 18% year-on-year at constant currency. Free cash flow after dividends is expected to improve in FY22 but remain a net outflow with a dividend payout ratio of 45-60% of underlying profit after finance costs and tax. The overweight position in Iluka Resources (+13.5%) contributed to relative performance. The mineral sands miner announcing a December-quarter combined zircon, rutile, and synthetic rutile production of 157Kt (vs consensus estimate of 155kt). Specifically, zircon production of 76.3kt beat consensus of 70kt, and rutile production of 16.6kt beat consensus of 14kt. Synthetic rutile production of 63.9kt, however, missed consensus of 67kt, whereas ilmenite production came in at 151.1kt (vs consensus estimate of 130kt). Mineral sands revenue of $415.2M fell short of a $423M consensus, however, its full-year unit cash production costs fell in line with previous guidance.
Performance Commentary - October 31, 2022 The Fund’s largest overweight positions include Santos Limited, Insurance Australia Group Limited, and Orica Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, CSL Limited, and ANZ Bank. The underweight position in iron ore miner BHP Group (-3.0%) contributed to relative performance. The stock price came under pressure during October, with headwinds coming from falling iron ore prices (down 5.4% over the month) and sinking to a two-year low. The iron ore weakness was primarily driven by falling demand from China, which struggled with renewed lockdowns due to its COVID-zero strategy and waning real estate market.
The overweight position in Entertainment, hospitality and leisure company EVT Ltd. (+15.2%) contributed to relative performance. The stock was boosted by its first-quarter trading update, reporting normalised EBITDA (ex-AASB 16 leases) of A$70.6M (vs a $15.5M loss from a year-ago). Normalised EBITDA from its Entertainment businesses (including CineStar Germany) increased to A$10.0M from A$5.3M in Q1 FY19, Thredbo normalised EBITDA rose +41.7% from Q1 FY19, and Hotels EBITDA rose +5.7% from Q1 FY19. Consolidated revenue was down (0.3%) on the pre-COVID FY19 year, and Thredbo revenue was up +27.7% vs Q1 FY19.
Not holding Iron ore miner Fortescue (-12.6%) contributed to relative performance. The stock also fell on the back of weakening iron ore prices over the month as demand for the steel-making ingredient from China slowed. Increasingly bearish sentiment from the broker community also impacted the stock after Fortescue released its decarbonisation plans for the Pilbara and aims to reach net zero emissions by 2030, which is considered to impact its dividend payments over the coming years.
Performance Commentary - September 30, 2022 The Fund’s largest overweight positions include Santos Limited, Insurance Australia Group Limited, and Orica Limited. Conversely, the Fund’s largest relative underweight positions include BHP Group Ltd, CSL Limited, and ANZ Bank.
The overweight position in copper and gold miner Oz Minerals (+45.6%) contributed to relative performance. The stock rose sharply after receiving an unsolicited, conditional, and non-binding indicative proposal from BHP Group to acquire 100% of its shares for $25.00 per share in cash via a scheme of arrangement. The Oz Minerals board, however, has unanimously determined that the Indicative Proposal significantly undervalues the company and is not in the best interests of its shareholders. The company noted that it has a unique set of copper and nickel assets, all with strong long-term growth potential in quality locations and that it does not consider that the proposal from BHP sufficiently recognises these attributes.
The overweight position in insurance provider Insurance Australia Group Ltd (+6.7%) contributed to relative performance. The stock rallied hard late in the quarter to recover most of its earlier losses incurred leading up to the release of its preliminary full-year financial results. While IAG’s growth of 5.7% was in line with its mid-single digit growth guidance, its reported insurance profit margin came in at 7.4%, down 6.1% year-on-year and missing its 10% to 12% guidance. Management blamed the miss on its net natural peril costs of $1.119B, which were $354M above the original allowance of $765M.
The overweight position in dairy producer A2 Milk Company (+23.0%) contributed to relative performance. During the quarter, the company reported a 19.8% increase in its full-year FY2022 revenue to NZ$1.446.2M, leading to a 42.3% jump in net profit after tax to NZ$114.7M and beating the market consensus estimate of NZ$113.9M. This was driven mainly by double-digit infant formula sales growth from both its China and English label products, reflecting A2’s significant increase in marketing investment, which prompted further gains in brand health metrics and record market shares. Investors were further pleased with the announcement of a NZ$150M on-market share buyback.
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