Reflections on the past financial year

The 2024 financial year was another strong one for share markets, resulting in a return of 9.2% for our Balanced option  (10.3% for tax-free pensions). Two themes dominated the positive sentiment being (i) disinflation and (ii) the “craze” surrounding artificial intelligence. Against this backdrop it is unsurprising that the big six tech champions (NVIDIA, Apple, Microsoft, Alphabet, Meta, Amazon) emerged as big winners. However, there were also surprising winners and inevitable losers.

With our funds under management now approaching $140 billion, our big investments are typically confined to large companies. Accordingly, in this report the discussion will be confined to those companies in which we invest greater than $1 billion. The Defined Benefit (DB) will be excluded from the discussion as movements in share prices impact the DB portfolio returns but do not affect members balances’ given the (formula-driven) way in which benefits are determined. Note that all returns quoted include dividends.

Best performing companies (of significance to UniSuper)

NVIDIA

Leading the pack with a return of over 191%, first place goes to NVIDIA, the current poster child of all things A.I. NVIDIA produces the most advanced microchips used to power applications like ChatGPT. With first mover advantage, the company has more demand for its product than it can currently supply resulting in gross profit margins of over 70%. Over the past five years the company has seen an incredible 18-fold increase in profits which are expected to top more than $US 70 billion next year. With the likes of powerful companies such as Intel also developing their chip capability, competition is on its way. However, NVIDIA is not standing still, investing heavily in an effort to fortify its lead, and investors believe they will.  

Goodman Group

Amid the woes experienced in various sectors of the property market on the back of rising interest rates, it would have been near impossible to predict the c. 75% return of Goodman Group. The company is best known as a global leader in the development and management of industrial property. It is now becoming synonymous with the development of digital infrastructure. Data centres now account for around 40% of the company’s development pipeline. Accordingly, Goodman is arguably the best example of an Australian company leveraged to the A.I revolution and the growth in cloud computing. While structural tailwinds look like they could last for some time, its current valuation is not cheap, so a good story looks fully priced.

CBA and NAB

While not qualifying for a top two position, the (surprising) performance of our major banks is certainly worth mentioning. Our two largest holdings are in CBA and NAB (returning 32% and 45% respectively). Despite the rise in interest rates, the Australian household and corporate sectors remain in good shape and resulting in high profits and low levels of loan delinquencies. The foreseeable future looks like more of the same, although another year of exceptional returns seems unlikely. At time of writing CBA’s net dividend yield of 3.4% (4.8% including franking), suggests that the shares are priced to perfection.       

BHP

After making our top three for the prior two financial years, the Big Australian underperformed in the 2024 financial year with a flat total return. BHP’s recent share price performance can largely be attributed to the movement in commodity prices (particularly iron ore) and sentiment towards China. With the Chinese economy languishing, so too has BHP’s share price. Another consideration was BHP's bid for Anglo American PLC. While BHP showed admirable discipline by “walking away” from the deal when the price looked too high, the process added a further element of uncertainty in investors' minds. It would be fair to say that over the past couple of decades BHP (and RIO) have destroyed a lot of capital with poor acquisitions. Fortunately, current Chair Ken McKenzie appears to have ushered in a new era of capital discipline; let’s hope it lasts. BHP has some of the highest quality (iron ore and copper) reserves in the world, is a low-cost producer and is highly profitable. Barring a further deterioration in the Chinese economy, its valuation looks on the cheap side.       

Transurban 

The giant toll road operator has been one of our largest investments for over a decade and has generally achieved our return objectives. However, the 2024 financial year saw a disappointing return of -9%. Over the past few years Transurban has had to endure a series of storms, starting with the negative impact of the lockdowns. The company has then been buffeted by rising rates, and politics has also played a part. The ACCC (on the urging of the Victorian Government) opposed Transurban’s potential bid for the Eastlink toll road in Melbourne on anti-competitive grounds. More recently, the NSW Government conducted a review into road pricing in Sydney where the Company has a stake in 11 of the 12 toll roads. While the media has put a negative spin on the outcome, the expectation is that the Government must, and will, honour contractual obligations. 

We remain positive on Transurban’s outlook given its strong competitive position, and an earnings profile that is linked to inflation. Additionally, Transurban’s growth prospects, including the ability to expand routes as demand rises, are often underestimated.

Best performing investment options

International Shares and Global Companies in Asia

The US market (S&P500) recorded a gain of 24.5% and the big six tech champions accounted for over 50% of the gain. Adding Eli Lilly to the list (producer of Mounjaro – one of only two new weight-loss wonder drugs), the contribution of the seven companies accounted for about 57% of S&P500’s total gain. The two options with the highest exposure to these companies were International Shares and Global Companies in Asia with returns of 17.3% and 16.5% respectively. The results add to the excellent long-term performance of both options, returning above double-digit annualised returns over the past ten years.

Whether the run can continue only time will tell. With exposure to tech companies likely to remain high, the options will benefit from the tailwinds supporting the sector. The major headwind is likely to be high valuations. The tech sector now accounts for about one third of the total US market, resulting in levels of concentration we haven’t seen for decades. As investors get more comfortable with the outlook for inflation and interest rates, we may see a rotation out of the relatively expensive tech sector, into lagging sectors that look relatively cheap (such as small companies). 

Worst performing investment option

Global Environmental Opportunities

GEO invests in companies that earn at least 40% of their revenues from environmental themes, so the universe of eligible companies is relatively small (less than 300); hence the volatility. Looking forward there are positives: the universe of eligible companies is expected to expand, the de-carbonisation theme is strong and secular, and valuations have fallen considerably from their stretched levels of a few years ago. The key risks remain hyper-competition (particularly from the Chinese), and political uncertainty in the US. Suffice to say that Trump’s exhortation to “drill, baby, drill” does not augur well for the renewables sector.