Adjustments to the Blended Australian Equity Portfolio
Reduced BHP Group (BHP), Commonwealth Bank (CBA) & News Corporation (NWS) - Bolstered by news of the potential of vaccine treatments for COVID-19 equity markets have rallied strongly in November. We think in the short-term valuations now adequately reflect this optimism and investors need to be mindful of the gap before vaccines are widely available to communities in 2021. Investors have now sufficiently priced in bottom-of-the-cycle earnings. Taking advantage of the recent buoyancy in share prices we have reduced our weights across 3 of our largest holdings, namely BHP, Commonwealth Bank and News Corporation. Sold Xero Limited (XRO) - We have divested Xero following the release of its 1H21 result. Xero has a compelling subscription business model that has benefited from its market leadership in cloud-based accounting software. Xero delivered a strong EBITDA result in a challenging environment as it deftly managed its cost base. Subscriber growth held up well in Australia and the UK, however, this was offset by subdued growth in US and the Rest of the World. Xero has not provided guidance for FY21 given the uncertainty around COVID-19 particularly in its northern hemisphere markets of the UK and US. While we continue to remain positive on Xero’s long- term growth, we believe its valuation is too demanding trading at ~20x EV/Sales and ~66x EV/EBITDA.
Adjustments to the Australian Equity Income Portfolio
Sold ASX Ltd (ASX) - We have sold ASX Ltd from the Income portfolios. ASX’s defensive earnings quality and strong capitalisation remain attractive, while its growth is modest (less than 5%) and its circa 2.8% yield is reliable. The valuation at more than 20x EV/EBITDA (33x PE) reflects its infrastructure characteristics rather than the valuations of any financial services peers, though by historic standards this is currently high (~30% above 5-year average). Its interest income will continue to be under pressure low interest rates and limited prospect for change of RBA monetary policy. In addition to portfolio construction reasons, ASX has recently suffered four IT outages across four different aspects of its business, including equities trade, provision of market information, CHESS settlements and the launch of its new website. With the CHESS settlements replacement introduction delayed by two years to 2023, these incidents have increased the IT risk associated with ASX.