September Report

Market Review

Global equity markets declined in September in local currency terms, with weakness evident across nearly every region and sector. For unhedged Australian investors, a weaker Australian dollar supported returns. Japan was the strongest major market, supported by a rise in its Financials sector after the Bank of Japan raised interest rates to 1.25%, the highest level the country has seen in more than three decades. The move supported bank profits and marked a further step away from the very low interest rate policy that had defined the Japanese market for a generation.

European equities were among the weakest performers. France and Germany led the declines within the eurozone, while the Nordics and Sweden lagged in the wider region. European markets faced a combination of pressures, including a sharp rise in energy prices tied to the ongoing US-Iran conflict, higher interest rates, and rising government bond yields as investors sold bonds across global markets, pushing prices down and yields higher.

Information Technology was the strongest sector, recovering from a decline in semiconductor and AI-related shares in the middle of the month to finish higher. Materials was the weakest, pressured by a fall in gold prices which weighed on mining companies. Consumer Discretionary and Real Estate also underperformed, reflecting investor concerns around persistent inflation and the impact of higher interest rates.

Portfolio Commentary

September presented a mixed backdrop for the Portfolio, with broad market weakness offset by strong contributions from a number of individual holdings.

While AI-related companies continue to dominate the headlines, the Portfolio also holds businesses whose growth is drawn from other sources of demand, qualities that should prove durable even if AI-related spending slows. HEICO, the US-based supplier of replacement parts to the aerospace industry, has grown profits at an annualised rate of around 25% over the past three years and is on track for a similar outcome this year, as airlines facing cost pressures increasingly turn to its more affordable parts.

Compass Group, the UK-based global food-services company, continues to win new contracts and take market share as more businesses outsource their catering. Couche-Tard, the Canadian convenience store operator, recently announced the acquisition of Poland’s largest convenience store chain, a deal that should deliver meaningful cost savings and add scale across its European operations.

During the month, the Portfolio exited its positions in Deere, the US industrial equipment manufacturer, and Booking Holdings, the US online travel website. In Deere’s case, a strong run in the share price lifted its valuation above the level that could be justified. For Booking, the long-term investment case had weakened, as consumers increasingly using AI assistants to help plan travel may undermine the company’s broader strategy of building a connected ecosystem spanning flights, hotels, ground transport, and dining.

Turning to individual holdings, Lenovo, the Chinese personal computer and enterprise infrastructure provider, was a leading contributor, benefiting from strong growth in its server and storage business driven by AI-related demand from large cloud providers. Meta Platforms also contributed after shares rose on the release of its new AI assistant Muse, which quickly became one of the most downloaded apps on the Apple App Store. In contrast, shares of Adobe, the US-based creative software company, declined despite reporting strong year-on-year revenue growth, as investors focused on softer guidance for the final quarter.

The month was a useful reminder that durable growth can come from many sources, not just the areas currently dominating headlines. The Portfolio’s exposure to companies drawing on a wide range of structural growth drivers is designed to deliver more consistent outcomes across a variety of market conditions.