The portfolio is well-positioned in cyclical growth, recovery growth, and high quality stocks that we believe will benefit as economic conditions continue to improve. We have tilted our positioning towards more domestic exposures to reflect the stronger economic performance of the Australian economy and as a result are now overweight domestic cyclicals. To fund these portfolio changes we have taken profit on defensive growth names and somewhat reduced exposure to offshore earners.

As a result of these shifts, as of the end of June 2021, by far our largest relative sector overweight position was in consumer discretionary, with more modest overweight exposures to communication services, health care, and IT. Our key underweights were in financials, materials, consumer staples, and energy.

Materials

We reduced the portfolio's exposure to materials over the quarter following strong rises in several commodities and input prices.� By the end of the second quarter, we had a sizeable underweight in the sector, with our focus on non-gold mining names�

• We eliminated the position in Amcor.� An increase in the cost of raw materials that are used as inputs in its packaging has dampened the outlook for Amcor. Additionally, its North American beverage profits have come under pressure partly due to poor performance from one of its key customers, Gatorade. We still see longer-term potential with the business once these impacts wash through, however for now we prefer opportunities elsewhere.
• We sold out of our holding in Rio Tinto. Multiples have risen to a point that suggest risk is now more negatively skewed. The largest risk factor from a macro perspective is an aggressive tightening of Chinese credit. This would threaten RIO's iron ore portfolio, which is a greater proportion of the commodity mix than that of BHP. We prefer BHP at this point given it has more operational stability and exposure to a late cycle earnings recovery via its oil assets.

Real Estate Investment Trusts (REITs)

The portfolio remains underweight the REIT sector but over the course of the quarter we narrowed this underweight via a very selective addition.

• We initiated a position in Goodman Group, which is leveraged to the global supply chain improvement thematic driven by e-commerce and global trade. This is because the bulk of its earnings are derived offshore and from development. The coronavirus pandemic has accelerated e-commerce fulfilment strategies and broader structural trends such as automation, modernisation and last-mile delivery. The REIT is also well-positioned via a strong balance sheet and ample liquidity to take advantage of any opportunities that arise.

Communication Services

We have an overweight position in communication services and over the quarter we increased our exposure to this space. We view the sector as offering several ways to play the economic recovery theme, including housing and consumer spending.

• We initiated a position in carsales.com.� We believe the outlook for the stock has improved in the near-term thanks to more supportive conditions in the used and new car market. Our estimates are also above consensus and we anticipate stronger margins than the market is currently pricing in. We believe a recent pull-back in carsales' share price has provided a good entry for a position. Over the medium-term we believe this is an attractive high-quality business that has potential to compound earnings at low double digits and at the same time offers a reasonable dividend yield.

Consumer Staples

As noted above, we continued to tilt the portfolio's exposure towards domestic cyclical companies that are more geared to the Australian economy. This shift included moving further underweight the consumer staples space.

• We eliminated our holding in supermarket group Woolworths. The stock has re-rated to expensive levels relative to history and peers, including its largest competitor Coles. We lack confidence in its ability to outperform with an absence of clear upside catalysts and therefore made the decision to exit our position.