MFG Asset Management High Conviction Quarterly Update

(Please find CPD quiz below)

In a quarter marked by market volatility and shifting global dynamics, Nikki Thomas shares her perspective on the MFG Asset Management High Conviction Fund’s investment approach. She highlights standout performers, recent portfolio adjustments and how the fund is positioned for long-term growth. Drawing on insights from her recent visit to the US and the UK, Nikki also explores emerging market opportunities and outlines her outlook for 2025.

Key Takeouts

 

Can you give us a brief update on what’s been happening over the past quarter?

It was a highly volatile quarter, with the US market swinging from bear market lows to all-time highs. Two major developments stood out for long-term investors: the unexpected scale and breadth of the new US tariffs, which will have lasting implications; and Europe’s shift on fiscal policy, marked by significantly increased infrastructure and defence spending plans in coming years. Additionally, the speed of progress in AI-driven transformation continues to be a key theme shaping market dynamics.

 

Can you give us some insight and key takeaways from your recent overseas trip?

The trip through New York, San Francisco and Europe highlighted the rapid and tangible progress in AI innovation, especially in Silicon Valley. Companies are racing to capitalise on emerging technologies, and the innovator’s dilemma is something some will need to grapple with. This is likely to see larger firms acquiring smaller, innovative players or to spend more on smaller subsidiaries to stay ahead or address the risks for the incumbent businesses.

In Europe, fiscal spending is ramping up significantly, especially in infrastructure and defence, as companies we spoke to our optimistic about the new opportunities this will bring. Some are already seeing strong backlogs, though investing in the opportunity can be difficult due to the often capital-intensive nature of these industries.

One key concern is China’s cost competitiveness, especially in areas targeted by its ‘Made in China 2025’ strategy. China’s success in executing this plan continues to influence global markets and remains a factor to watch closely amid broader structural shifts.

 

Do you have any level of exposure to emerging markets, and have there been any recent developments or opportunities worth noting in those regions?

Emerging markets are showing diverse and promising developments across regions like India, China and Latin America. In India, government investment in infrastructure is driving digital transformation and consumer growth, particularly in mobile and quick commerce. High Conviction has exposure through L’Oréal, which is well-positioned to benefit from this trend, with strong growth expected in its Indian and Middle Eastern operations.

China is seeing renewed support for private enterprise, with signs of recovery in consumer sentiment. While long-term challenges like demographics and deflation remain, companies like Yum China offer attractive opportunities through store expansion, strong execution and excellent cash flow generation, and so looks very attractively priced even with a still cautious consumer.

In Latin America, Mercado Libre stands out as a tech-driven, well-managed company with exposure to key markets like Argentina, Mexico, and Brazil. While emerging markets can offer some exciting prospects, its important to be selective in the companies invested in.

 

With most central banks lowering interest rates over the past year while the US has held steady, where do you see rates heading next, and what investment opportunities might arise as a result?

The outlook for US interest rates remains uncertain, largely dependent on how inflation and growth evolve. While tariffs may cause short-term disruption and a bump up in US prices, they’re expected to be looked through by markets over time, similar to Australia’s GST introduction. Lower rates, when they eventually arrive, would generally support equities, especially with strong tailwinds from AI and corporate profitability. One standout stock in the portfolio is Intercontinental Exchange, which benefits from current market volatility and offers future upside through its mortgage business, providing both strong present performance and long-term optionality.

You’ve previously mentioned financial market deregulation and the growth of alternative assets. Where do things currently stand in that area, and what opportunities are you seeing or holding in the portfolio?

The portfolio includes exposure to financial market deregulation and alternative assets through Morgan Stanley and Brookfield Corporation. Brookfield is a leading player in private capital markets, benefiting from strong tailwinds like rising power demand and forecasting 20% annualised cash flow growth in coming five years. Morgan Stanley, meanwhile, we see as undervalued, with significant upside potential driven by cyclical recovery, AI-related M&A activity, and improving capital buffer ratios. We believe both companies offer strategic opportunities in
a complex and evolving financial landscape.

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