Summary of Fiscal 2016

Quest QThe Quest Australian Equities Concentrated Portfolio delivered a 3.7% pre fees return in fiscal 2016 which was ahead of the market return of 0.8%. While the first 6 months saw our portfolio well ahead of the index, the second half was more challenging as a poor performance from Surfstitch, an under-weight position in resources and the Brexit referendum eroded some of our earlier gains. While macro influences on sentiment did not suit us since January, the number of successful investments in the portfolio suggests our process continues to pick stocks that can be held for 3 to 5 years over a range of market conditions.

During the year our leading invested companies included Galileo Japan Trust (up 53%), CSL (up 32%), Viralytics (up 29%), AGL (up 28%), Stockland (up 21%), Vista Group (up 21%), Ramsay Healthcare (up 18%) and APA Group (up 17%). The market accumulation return was only 0.8% this year.

Quest avoided National Bank and Woolworths which both fell 12%.

Our 3 stage process has had a few enhancements over the last 20 years. We have made subtle changes based on our experiences along the way but the core of the process has been consistent. Our stage 1 is all about learning how companies work; visitation and cross checking to unlock the business drivers are critical. Valuation is second, a bespoke integrated model that takes a long term view with an emphasis on cash flow and understanding the drivers of the business. The third and final stage is portfolio construction.

It was therefore disappointing when a previously successful investment, specifically Surfstitch Group, produced a surprise downgrade before admitting that previous accounts were inaccurate. We sold the stock immediately given we could no longer rely on published information however the loss detracted more than 2% from our performance in the fiscal year.

We did not have enough money in resources stocks this year with our holdings in BHP and Orecobre unable to keep pace with a broader resource run that we did not anticipate. The gold stocks, Newcrest and a gaggle of smaller stocks, performed very well and with hindsight we should have had more money in this sector.

Our best sectors were Healthcare thanks mainly to holdings in CSL and cancer immunotherapy biotech Viralytics, Oil and Gas where Origin Energy performed well and Utilities thanks to AGL Energy and APA Group.