The third quarter saw both the RBA and the Fed cut interest rates. We are of the view that this recent monetary stimulus, coupled with fiscal measures from the Australian government, will stabilize the country's economic growth as we progress through 2020. As a result, over the past quarter we began to invest in businesses that we expect to benefit from an improvement in the domestic economy. We raised the exposure to both the consumer discretionary and staples sectors. Within financials, we remain heavily underweight, but within this, our view of the relative attractiveness of banking versus insurance has shifted; we raised our exposure to banks while reducing our insurance positions. We also identified an opportunity within the real estate sector. These purchases were funded in part through a significant reduction in industrials and business services names.

We remain overweight to high-quality companies with good structural growth prospects and to those that have direct exposure to stronger overseas economic environments, particularly the U.S.

As of the end of September 2019, our largest relative sector overweights were in consumer discretionary and staples and utilities. Our key underweights were financials, real estate, energy, and materials.

Consumer Discretionary and Staples

Our more optimistic view on the domestic Australian economy led us to raise the portfolio's exposure to consumer discretionary and staples over the quarter. For example, we added to our existing holding in Wesfarmers and initiated a position in JB Hi-Fi.

• Wesfarmers: We believe this Australian conglomerate is in a good position to benefit from an improving domestic economy as the vast majority of Wesfarmers' earnings are consumer-related, more specifically to hardware retailing in the Bunnings chain and in Coles, the leading supermarket in Australia.
• �JB Hi-Fi: A new position, JB Hi-Fi is a leading retailer of technology and consumer electronics. Its latest full financial year (FY 2019) results were better than expected, and the company provided good sales guidance for FY 2020.

We also raised our exposure to the consumer staples space, adding to existing positions in Treasury Wine Estates, a2 Milk, and Woolworths.

Financials

As the September quarter began, we were significantly underweight financials, and our overall position in the sector remains broadly unchanged. Within this, however, we believe that the relative attractiveness of banking versus insurance names has shifted in favour of the former. We expect that the stimulative monetary and fiscal policies implemented in recent months could lead to an improvement in the domestic economy, which would benefit the banking sector. We added to our existing holding in innovative global diversified financial Macquarie Group and added to our position in Westpac. In addition, with the conclusion of the Royal Commission into financial services having now concluded its investigations and early signs of a recovery in house prices, banks look more attractive.

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At the same time, we continued to reduce the portfolio's exposure to the insurance industry, eliminating our position in Insurance Australia. Although the non-life insurers are benefiting from a backdrop of rising premiums, there are some concerns as to the prospects of improving insurance margins, as well as by rising regulatory costs. We believe there are more compelling opportunities in other industries.

Industrials and Business Services

Over the course of the third quarter, we significantly reduced the extent of our exposure to the broad industrials and business services sector, moving from a significant overweight to an underweight. This was mainly as a result of eliminating our position in Brambles and reducing SEEK.

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• Brambles: We sold out entirely from this provider of pallet and reusable plastic crate pooling services. Its full-year results were disappointing, highlighting increased costs across the group and operational issues in Canada and Latin America. Moreover, margins in its U.S. business are improving less quickly than expected, and we were concerned by management's cautious outlook for FY 2020.

• SEEK: This company owns the dominant job-listing website in Australia, as well as job-listing websites in China, Southeast Asia, Brazil, and Mexico. Recent data from the company highlighted negative momentum, due to weakening volume trends, both in Australia and China. The spectre of slowing topline momentum, combined with cost pressures, led us to reduce the size of our holding.

Health Care

Over the quarter, we booked profits in some health care names that had performed well in recent months and redeployed the proceeds into new investment opportunities. We reduced the size of our holdings in both CSL and ResMed. As a result, the extent of the portfolio's overweight to the health care sector was lowered.

• CSL: This global specialty biopharmaceutical company researches, develops, manufactures, and markets biotherapies to treat and prevent a range of human medical conditions. We believe the base business remains well placed to continue to take market share, and CSL has been successful in responding quickly to meet strong demand, which some of its rivals have struggled with. We took advantage of recent share price strength to trim our position.
• ResMed: A key holding in the portfolio, this respiratory medical device manufacturer has been a consistent contributor to performance. We trimmed our holding in order to manage the position size and to raise cash to redeploy into those stocks that will likely benefit from an improving outlook for the Australian consumer.

Real Estate

At the start of the review period, the portfolio had no exposure to any companies within the real estate sector. However, the lowering of interest rates by the RBA and the first tentative signs of a pickup in Australian property prices led us to look for opportunities in housing-related names. Last quarter, we started building a position in online property listings business REA Group (categorised as a communication services sector stock), and in the most recent quarter, we initiated a position in Scentre, an internally managed, vertically integrated retail property company that owns, develops, and manages shopping centres in Australia and New Zealand. Valuations for Scentre are at close to historical low levels without capturing the durability of its earnings growth as with other domestic cyclicals.