March Report

• Global share markets strengthened in March, led by large US tech stocks, but offset by weakness in the banking sector

• Australian dollar weakness supported share market returns in AUD terms

• The Portfolio returned 2.1% in March, while the benchmark returned 3.8%

Top Holdings (alphabetically)

Alphabet Inc

United States

Communication Services

Alphabet Inc. operates as a holding company. The Company, through its subsidiaries, provides web-based search, advertisements, maps, software applications, mobile operating systems, consumer content, enterprise solutions, commerce, and hardware products.

AMETEK Inc

United States

Industrials

AMETEK, Inc. is a global manufacturer of electronic instruments and electromechanical devices. The Company manufactures advanced instruments for process, aerospace, power, and industrial markets and is a supplier of electrical interconnects, specialty metals, technical motors and systems, and floor care and specialty motors.

Bank Central Asia Tbk PT

Indonesia

Financials

PT Bank Central Asia Tbk provides banking and related services. The Bank also provides custodianship, trusteeship, and management of pension funds of financial institutions. Through its subsidiaries, the Bank also provides leasing and consumer financing services.

Deere & Co

United States

Industrials

Deere & Company manufactures and distributes a range of agricultural, construction, forestry, and commercial and consumer equipment. The Company supplies replacement parts for its own products and for those of other manufacturers. Deere also provides product and parts financing services. Deere and Company extends its services and products worldwide.

Meta Platforms Inc

United States

Communication Services

Meta Platforms, Inc. operates as a social technology company. The Company builds applications and technologies that help people connect, find communities, and grow businesses. Meta Platform is also involved in advertisements, augmented, and virtual reality.

Microsoft

United States

Information Technology

Microsoft Corporation develops, manufactures, licenses, sells, and supports software products. The Company offers operating system software, server application software, business and consumer applications software, software development tools, and Internet and intranet software. Microsoft also develops video game consoles and digital music entertainment devices.

Schneider Electric SE

France

Industrials

Schneider Electric SE manufactures electrical power products. The Company offers car chargers, home security goods, light switches, access control, sensors, valves, circuit breakers, cables, accessories, signaling devices, fuse, motor starters, and voltage transformers. Schneider Electric serves customers worldwide.

Synopsys Inc

United States

Information Technology

Synopsys, Inc. supplies electronic design automation solutions to the global electronics market. The Company provides design technologies to creators of advanced integrated circuits, electronic systems, and systems on a chip. Synopsys also provides consulting services and support to its customers to streamline the overall design process and accelerate time to market.

UnitedHealth Group Inc

United States

Health Care

UnitedHealth Group Incorporated owns and manages organized health systems. The Company provides employers products and resources to plan and administer employee benefit programs. UnitedHealth serves customers in the United States.

Vertex Pharmaceuticals Inc

United States

Health Care

Vertex Pharmaceuticals Incorporated discovers, develops, and commercializes pharmaceutical products. The Company develops drugs for the treatment of cystic fibrosis, cancer, inflammatory bowel, autoimmune disease, and neurological disorders. Vertex Pharmaceuticals serves healthcare sector worldwide.

Market Review

Global equity markets rose in March, as investors grew more confident that interest rates would soon reach a peak. The MSCI World Total Return Index AUD returned 3.8% during the month. Share markets increased in all regions, despite the elevated stress in the banking industry across global financial centres and continued interest rate hikes by central banks.

Information technology and the tech-like communication services sectors made the strongest returns during March. Financials was the weakest sector by far, with real estate and energy also underperforming during the month.

Japan and the tech-heavy US were the strongest share markets, while stocks in the Pacific ex-Japan region underperformed the broader global market.

Since the start of this year, growth stocks have outperformed value, especially in the US market. This has been largely driven by the strong returns of a relatively small number of the largest technology stocks. Share prices of higher-quality companies across global markets – those with more stable returns and lower debt levels – in which the Portfolio tends to invest, have also outperformed.

Portfolio Comment

While the Portfolio’s focus on quality growth stocks strongly supported investment returns in March, relative returns were impacted by stock-specific issues in the US banking sector.

The Portfolio’s underperformance was mainly due to stock weakness in financials (SVB Financial Group and First Republic Bank). This was somewhat offset by strong stock performance in communication services (Meta Platforms and Alphabet), health care (Vertex Pharmaceuticals and Illumina) and information technology (Salesforce). Overweight positions in communications and information technology and underweight positions in financials, energy, real estate and materials also contributed to relative returns in March.

The Portfolio manager had maintained a position in SVB Financial Group (SVB) for more than a decade. It was considered to be a strong business, with sound liquidity and competent management, which managed risk in a considered manner. The company provided exposure to a niche area of banking that focused on the “innovation economy” of the venture capital ecosystem and its portfolio companies.

However, risks concerning the bank’s asset-liability duration mismatch and the industry concentration of depositors proved to be greater than had been expected. An unsuccessful recapitalisation brought a loss of investor confidence, which led to a rapid withdrawal of customer deposits that the bank was unable to survive. Regulators placed SVB into receivership in mid-March, causing a total loss of the Portfolio’s position in SVB.

The failure impacted other US regional banks, including First Republic Bank (FRB) in which the Portfolio held a position. FRB experienced some deposit outflows – despite a different business model and support from Federal agencies and the wider banking community – leading to it significantly underperforming. The position was subsequently sold. The holdings in the two banking groups were significant detractors from relative returns during March.

The Portfolio took advantage of the March rebound in share prices of high-priced growth companies to exit some of its more expensively valued and higher volatility holdings.

In March the Portfolio sold Align Technology which makes Invisalign clear aligners, online marketplace Etsy and Verisk, a data provider to the insurance market.

This capital was reinvested in more reasonably priced and less volatile stocks including AbbVie. This is a US drugmaker best known for Humira, a medicine which is used to treat a variety of autoimmune diseases. AbbVie is building upon its maturing blockbuster drug Humira by expanding its stable of autoimmune-disorder treatments. It has launched new products such as Skyrizi and Rinvoq, which have been well received and should support continued earnings growth.

Separately, the slowdown in venture capital funding is expected to foster increased collaboration between biotechnology companies with promising, early-stage pipelines and established large pharmaceutical companies. This may allow AbbVie to supplement its own drug development pipeline at cheaper valuation levels than biotech companies have commanded in recent years.

Meta Platforms, the US-based parent of Facebook, Instagram and WhatsApp outperformed the market when it continued to experience resilient user engagement levels. It also benefitted from its pledge to boost efficiency through a hiring freeze and laying off more staff. The company also announced a reduction in capital expenditure and increased share repurchases.

The overweight position in French cosmetics company L’Oréal contributed to relative returns when it outperformed the market. It announced organic revenue growth which outpaced that of the wider global beauty market in 2022.