We moved to a cautious stance in our portfolio close to six months ago and maintain this positioning, with a strong exposure to quality and more defensive names. However, more recently we have taken the opportunity to add to growth companies we believe are oversold based on near-term inflation fears and higher interest rates. Having taken profit on these positions during the course of 2021, we have ample scope to take these positions higher. In our view, this sets up the portfolio to perform well once we move beyond the current market fears and focus back on the key issue (slowing growth) that we believe will come to dominate markets as we move through 2022.�

As a result of these changes, as of the end of Mach 2022, by far our largest relative sector overweight position was in consumer discretionary, with more modest overweight exposures to IT, health care and communication services. Our key underweight positions were in financials, materials, energy, and real estate.

Materials

Over the quarter we modestly increased our exposure to materials, although we retain an overall relative underweight position.

• We bought a position in Rio Tinto on the view that the outlook for the company has improved and its valuation represents a buying opportunity. This is because a significant portion of its mining revenues are tied to iron ore, which we expect will receive greater support going forward. This stems from improved stability in the Chinese property market and stimulus from policy makers in China. The miner has a high-quality balance sheet and generates substantial free cash flow. We note that some of these positives exist alongside potential risks from challenges to its development pipeline.
• We initiated in Allkem, formerly Orocobre.� We believe the company possesses a globally significant, long-life, low-cost lithium asset, which is leveraged to a growing demand for lithium-ion battery technology and energy storage.

Health Care

The portfolio retains an overweight position in health care, reflecting our cautious outlook. However, we remain mindful of relative valuations and have selectively trimmed our exposure. Our preferred areas within the sector include medical equipment and hospital management.

• We eliminated Fisher & Paykel Healthcare. Higher freight costs have persisted for longer than anticipated and have not been passed onto consumers. This has reduced the potential return for the business and its shares now look fairly valued.

IT

In the first quarter of 2022 we increased the extent of our overweight position in the IT sector.

• We added to our existing position in Computershare, the global provider of services in share registry, employee equity plans, corporate trust, stakeholder communications, and corporate governance. In our view, the business generates high free cashflow, has good and improving return on equity and its earnings are currently undervalued given their more defensive quality. We believe there is also further upside in a rising rate environment.

Financials

We made a number of adjustments within our financials holdings over the quarter to reflect relative valuations. Overall, we reduced the portfolio's exposure to banks, and moved further underweight the financials sector.

• Westpac is embarking on a cost reduction and asset divestment program. However, revenue headwinds could prevent it from earning its targeted return on equity of 9-10% in the medium-term, in our view. Without evidence of revenue stabilisation and an unappealing valuation, we chose to divest exposure to the business.

Consumer Discretionary

Consumer discretionary remains the portfolio's largest relative overweight position; we made a number of adjustments to our sector holdings over the quarter.

• We took advantage of price weakness to top up our existing position in Domino's Pizza. We believe the business is very well-placed to win market share and return to previous high growth rates after all the pandemic-related impacts wash through.
• We eliminated the position in Star Entertainment. We believe the investment thesis has deteriorated, due to increasing regulatory scrutiny and challenges. The business is undergoing two regulatory reviews, which have also brought negative media attention to the stock. The reputational damage now has the potential to hurt earnings, in our view. The two possible impacts are a delay of slot machine expansion and the potential enforcement of fines.

Consumer Staples

Over the review period, we moved further overweight the consumer staples sector, identifying what we believe to be a compelling investment opportunity. ��

• We initiated a position in Treasury Wine Estates. Following the China tariff on Australian wines, we believe the redeployment of attention to other markets will be more profitable than other investors expect. This is against a backdrop of earnings tailwinds as consumption of wine on-premises improves post-pandemic. We also believe there is longer term upside on market share gain in North America.