Dear Investor
The ELMRI ANZ Conviction Fund returned 2.6% in August, while the ELMResponsible Investments Global Fund returned 7.8%.
August was characterised by a volatile reporting season, with material share price movements across both Australian and global equities as investors reassessed earnings expectations, outlook statements and valuation multiples. The moves were often greater than the underlying changes in business fundamentals, highlighting the importance of maintaining a long term perspective through periods of elevated market sensitivity.
During August, investor sentiment towards a number of previously beaten down SaaS and platform businesses improved as reporting season again showed that underlying demand remains resilient. Results across the sector generally pointed to continued revenue momentum, strong customer retention and improving operating leverage, while several companies indicated early signs that growth could accelerate as AI features, new products and value based pricing models are adopted more widely. This is encouraging after a period in which share prices had often reflected broad concerns about AI disruption rather than company specific fundamentals. While the pace of any reacceleration will vary by business and remains dependent on customer adoption and the broader economic environment, we believe the reporting season reinforced the value of high quality software platforms that are deeply embedded in customer workflows and can use AI to improve both their products and internal efficiency.
The ANZ Fund’s performance was led by a recovery in selected software as a service and healthcare technology holdings, including Xero, WiseTech Global and Pro Medicus. Life360, HUB24 and Sigma Healthcare were the principal detractors. The Global Fund benefited from strong contributions from ServiceNow, Moderna and Tesla, while AMD and Ørsted detracted.
Market outlook
Since month end, attention has shifted towards the outlook for US interest rates. US non farm payrolls increased by 162,000 in August, ahead of expectations, while the unemployment rate remained steady at 4.1%. The data suggests a more resilient labour market than recent months had implied and has kept the prospect of an interest rate increase at the September Federal Reserve meeting in focus.
Changes in interest rate expectations can influence market sentiment and short term valuation multiples, particularly for long duration growth assets. However, they do not alter the fundamental drivers of long term investment returns. Our focus remains on the earnings power, competitive position, cash generation and reinvestment opportunity of the businesses we own.
August results again demonstrated how quickly market prices can move when expectations for revenue growth, margins or capital allocation change. At ELM our focus is on whether a result changes our assessment of a company’s competitive advantage, long term earnings trajectory or intrinsic value.
Across the portfolio, we continue to focus on businesses with mission critical products, high switching costs, recurring revenue, large addressable markets and the capacity to reinvest capital at attractive returns. The month’s leading contributors, including Xero, WiseTech Global, Pro Medicus and ServiceNow, each illustrate aspects of this framework.
The macroeconomic backdrop remains important. Interest rates affect the discount rate applied to future cash flows and can therefore influence equity valuations, even where underlying operating performance is unchanged. Monetary policy expectations can also move rapidly and are difficult to forecast with confidence.
Over time, however, investment returns will be driven by a company’s ability to grow revenue, expand margins, generate free cash flow and reinvest effectively than by short term changes in market expectations. We remain focused on bottom up analysis and the long term progress of the businesses we own.
NVIDIA: A broadening ecosystem
NVIDIA’s acquisition of Hugging Face is strategically significant because it extends the company’s role in AI beyond chips and data centre infrastructure into the model, software and developer layers that will increasingly shape commercial adoption.
Hugging Face has become a central platform for the open source AI ecosystem, giving developers and enterprises access to models, datasets, libraries and deployment tools. The rationale is not simply to own a repository of AI models. It is to reduce friction between a developer discovering or fine tuning an open source model and an enterprise deploying it reliably and efficiently at scale.
CUDA remains important in this context. NVIDIA’s software platform for AI workloads is supported by a large ecosystem of libraries, tools and developer expertise. If open source models on Hugging Face can integrate seamlessly with CUDA, NVIDIA inference software and its broader hardware platform, customers will be able to move more easily from experimentation to commercial/enteprise deployment. In practical terms, an enterprise could identify an open source model through Hugging Face, adapt it for a specific use case and deploy it through NVIDIA’s optimised infrastructure.
The strategic rationale is therefore to strengthen NVIDIA’s ecosystem beyond hardware and to make its platform a more seamless route for enterprises deploying open source models. Both outcomes can support demand for NVIDIA’s broader ecosystem by increasing the number of commercially deployed AI applications running across its accelerated computing, networking and software stack.
Company Spotlight: Moderna (NASDAQ: MRNA)
Moderna is a biotechnology company developing medicines and vaccines based on messenger RNA technology. Its platform seeks to make drug development more repeatable by applying common capabilities across mRNA design, lipid nanoparticle delivery, clinical development and manufacturing.
The COVID 19 vaccine provided the first large scale proof of Moderna’s commercial and manufacturing capabilities. The company’s longer term value, however, will depend on whether it can build a broader portfolio across respiratory vaccines, oncology and other therapeutic areas.
Its collaboration with Merck is an important part of that opportunity. Intismeran autogene is an individualised mRNA neoantigen therapy designed around the specific mutations present in a patient’s tumour. The therapy is being developed in combination with Keytruda, Merck’s established immunotherapy.
The positive Phase 3 melanoma result was a meaningful clinical milestone, demonstrating statistically significant and clinically meaningful improvements in recurrence free survival and distant metastasis free survival compared with Keytruda alone. If successfully developed and approved, this approach could establish an important new treatment option for high risk melanoma and create a foundation for expansion into other tumour types.
The market is increasingly receiving evidence that Moderna’s platform may have applications beyond its original COVID 19 vaccine. Its ability to translate that potential into a diversified and commercially successful product portfolio will be central to the long term investment case.
Company Spotlight: Cochlear (ASX: COH)
Cochlear is a global leader in implantable hearing solutions, serving people with hearing loss through cochlear implants, bone conduction solutions and related services. Its market is supported by significant unmet clinical need, an ageing population and growing recognition of the health and quality of life benefits associated with treating hearing loss.
Cochlear’s FY26 result reflected a challenging operating environment but also the resilience of its underlying franchise. Sales revenue increased 2% in constant currency to $2.34 billion, while underlying net profit was $322 million, at the upper end of the company’s revised guidance range. The result was affected by lower gross margins, driven by sales mix, manufacturing overhead absorption and foreign exchange. However, revenue growth improved in the second half, cash generation strengthened and management expects low single digit constant currency revenue growth in FY27, alongside underlying net profit of $330 million to $350 million.
The long term opportunity rests on Cochlear’s ability to expand access to treatment among a large and underpenetrated patient population. Improved referral pathways, greater awareness, clinical capacity and continued product innovation should all support this objective over time.
Cochlear remains a core holding in the ANZ Conviction Fund. We believe its global scale, specialist distribution network, installed base and history of innovation provide a strong foundation for long term value creation. We will continue to monitor implant volume growth, pricing and reimbursement, margin recovery and adoption of new products.
Conclusion
August demonstrated again that equity markets can move sharply as expectations change around earnings, interest rates and the economic outlook. These developments matter, particularly because interest rate expectations can influence sentiment and valuation multiples in the short term. However, they do not alter the central discipline of our investment process.
We continue to seek businesses with durable competitive advantages, strong management teams, large addressable markets and attractive opportunities to reinvest capital at high rates of return. NVIDIA, Moderna and Cochlear are examples that illustrate the range of long term opportunities we seek: companies with differentiated technology, important positions within their industries and the potential to create value over many years.
Our focus remains on the underlying progress of our holdings rather than reacting to short term market movements. While volatility is an unavoidable feature of equity markets, it can also create opportunities when market prices diverge from our assessment of long term business value.
We remain disciplined, patient and focused on compounding capital for investors over the long term.
Thank you for your continued partnership and trust in ELM Responsible Investments.
Kind regards,
Jai Mirchandani
Founder, CIO and Portfolio Manager
ELM Responsible Investments
This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).
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This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.
ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.
Past performance is for illustrative purposes only and is not indicative of future performance.