Over the first quarter of 2019, we began to see some preliminary signs of economic improvement in China and the U.S. We are mindful of the economic and trade risks that still exist, but we hold the view that the two countries will be able to arrive at a positive outcome in their trade negotiations. Due to this more positive outlook for economic growth, over the review period we began increasing our weighting to high-quality mining names.

We remain overweight companies with good structural growth prospects and to those that have direct exposure to stronger economic environments, particularly the U.S. We also maintain our significant underweight to the banking sector where we remain concerned about the domestic economy and the housing market. Over the quarter, we reduced the extent of the exposure to insurers, selling down our positions in a number of key names. Our view of the Australian domestic economy is reflected in the strategy; we have very little direct domestic exposure.

As of the end of March 2019, our largest relative sector overweights were in industrials and business services, consumer staples, health care, and consumer discretionary. Our key underweights were financials, real estate, and materials.

Bought High-Quality Mining Names

As 2018 ended, the portfolio had a large underweight in materials, due to lower growth and inflation expectations. Over the first quarter, as noted above, our view of global economic growth has improved somewhat. There were some sector-specific issues, which also affected our investment decisions. As a result, over the period we rebuilt some of the portfolio's exposure to some high-quality names, although we retain an overall underweight stance relative to the benchmark.

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The most significant purchase was to add to our existing position in Rio Tinto. The diversified global miner's FY 2018 results were comfortably in line with expectations, while net earnings beat consensus. In our view, the company is an iron ore "cash cow," providing strong earnings and cash flow momentum, which is driving cash flow. We believe that Rio has the strongest balance sheet among the diversified miners.

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Elsewhere within the materials space, we continued to build an overweight position in James Hardie. We have seen mortgage rates and long-term yields come down, and, in our view, this will benefit this manufacturer of fiber-cement cladding and other building products.

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We partially funded these purchases through our sales of positions in other mining names, such as South32 and Independence Group, which had performed strongly and where we felt there was limited further upside for the share price.

Raised Exposure to Health Care

Over the course of the latest quarter, we moved from a broadly neutral weighting to an overweight in health care, largely due to stock-specific reasons. We continued to build on an existing position in CSL, a global specialty biopharmaceutical company that 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.

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We also took advantage of price weakness to add to our position in medical equipment specialist ResMed. Despite the latest results, which were below market expectations, we remain confident of the medium- to long-term growth prospects for the business. Its investment in data, digital, and software-as-a-service businesses has seen the company become a global leader in the treatment of sleep apnea, which we believe will provide many years of strong growth ahead for the company.

Increased Industrials and Business Services Weighting

Our cautiously more optimistic outlook led us to increase the portfolio's exposure to names within the cyclical industrials and business services space. To this end, we increased the size of our existing holdings in Brambles and Transurban Group and initiated a position in SEEK.

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The first of these, Brambles, is a leading global operator of pallet and reusable plastic crate pooling services, with operations in over 60 countries. In our opinion, this is a high-quality, durable business. Our recent meeting with the company and other players across the value chain in the U.S. validated the key points of our investment thesis that this is a trough year for earnings growth, with growth expected to accelerate, driven by pricing power, structural cost reduction initiatives, and moderating inflation.

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We also built the size of the position in Transurban, an owner, operator, and developer of toll roads. This is our preferred holding in the infrastructure space, and our recent call with the company's CFO confirmed our confidence in the company's reliable growth algorithm and development upside.

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The owner of a dominant job listing website in Australia, SEEK is a new addition to the portfolio. Its stock price has been weak in recent months offering an attractive entry point. We believe the company is executing well and seeing strong take up of its products in both its core Australia/NZ market and in its overseas markets, notably with strong growth for Zhaopin in China. Seek is a high quality, durable business, with a strong moat built up by network effects, pricing power and strong free cash flow generation.

Identified an Opportunity in Wine

In the first quarter of 2019, we took advantage of share price weakness to initiate a position in Treasury Wine Estates (TWE), one of the largest listed pure-play wine companies in the world. A leading player in Australia, the company also has meaningful positions in the U.S., Canada, the UK, and the Nordics. The management delivered encouraging half-yearly results, showing better-than-guided margins in its Asia business. The region represents, in our view, a significant opportunity for the company, and TWE is aiming to expand its distribution in China's cities by 50% over the next three years.

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Elsewhere within the consumer space, we continued to build a position in infant milk manufacturer a2 Milk, which was a new addition to the portfolio in late 2018. The company is a pioneer in the A2 milk segment and the leading player in the premium infant formula marketplace. We believe that the company has the potential to grow its market share in China. It has already moved into the U.S. in fresh milk, and the strategy in that market is to invest heavily and grow distribution, with the aim of eventually launching infant formula in the U.S. market.

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As a result of these purchases, the portfolio moved further overweight consumer staples over the course of the review period.

Cut Financials Weighting

The first quarter of 2019 saw us cut the portfolio's overall exposure to financial services names. We moved further underweight banks and shifted the insurance exposure from overweight to underweight.

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We trimmed our holdings in several major domestic banks, including ANZ, Commonwealth Bank, National Australia Bank, and Westpac. Both credit growth and house prices are falling in Australia. Margins are under pressure from both competition and rising wholesale funding costs. There is, in our view, a risk that margins will be under pressure if the central bank cuts the cash rate. In addition, most large Australian banks, particularly NAB and Westpac, have New Zealand operations, and the proposal of the Reserve Bank of New Zealand to materially increase capital requirement could see dividend cuts and capital raisings.

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We also significantly reduced the portfolio's exposure to the insurance industry. We sold out entirely from the position in Suncorp, while trimming the size of the holdings in Steadfast and 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 sectors.

Reduced Exposure to Star Entertainment on Competition Concerns

As mentioned above, we reduced the extent of the position in casino group Star Entertainment. This followed the announcement by the Queensland Government to take global expressions of interest for a new global tourism hub. Star currently operates the only casino, and there are concerns about the impact that a second casino could have on its Queensland site.