Buying back an ASX tech stock and avoiding CBA: Inside Elston's Aussie large cap fund

Ever wanted a deeper insight into how fund managers are seeing markets, and the first-hand thinking behind what they've been adding and removing from their portfolios?

In this new series, Inside the Portfolio, we're looking to do just that. We ask a fund manager to take us under the hood of their portfolio, explaining all the big recent changes - the ins, the outs, the overweights and underweights - as well as how they're thinking about markets more broadly.

This week, we spoke to Elston Asset Management's Bruce Williams on the current market dynamics driving a local steel name, the interesting mix of stocks driving performance right now, and why it, like many others, remains underweight CBA.

What was the most notable addition to the portfolio recently and why?

The most notable addition this quarter was Xero Limited (ASX: XRO). 

The share price had been heavily sold off over the past nine months due to an initially high earnings multiple, the Melio acquisition at 13.4x revenue, and concerns that AI tools (such as Claude for Small Business) could increase competition.

At current levels, we see a strong investment case supported by:

• Strong market positions in Australia and the UK.
• Operating leverage potential, particularly as international markets scale.
• Lower AI disruption risk for very small business clients, given product stickiness and low relative cost.
• Monetisation opportunities from Melio’s payments capability.
• Improving business quality, with lower churn, lower acquisition costs and higher lifetime value.

What was the most notable sell or downsize in the portfolio recently?

We exited Challenger Limited (ASX: CGF) this quarter. 

Recent price strength reduced the expected total return, and the benefits from lower capital requirements and buybacks now appear priced in. In addition, the shift toward longer-dated annuities is progressing more slowly than we had hoped, which is likely to cap margins in the near term.

What’s your most notable overweight and why?

Our largest overweight is Bluescope Steel (ASX: BSL). 

As a cyclical business it requires close monitoring, but current market dynamics are favourable.

Key positives include:

• US tariff policy is supporting Northstar, their US operation. Higher landed costs for imported steel—particularly from Canada—are lifting US steel prices (see chart below). Current US steel spreads are well above FY27 expectations, and consensus EBIT does not reflect this. Consensus assumes US HRC at US$1,035/t for FY27; spot is US$1,125/t. This implies around A$385m of additional earnings, or EBIT ~30% above consensus.

• Strong growth in higher margin products such as Colourbond and Trucore.
• Cost out program underway to improve margins through the cycle.
• Takeover interest from SGH Holdings/Steel Dynamics.
• Despite the takeover, US peers have materially outperformed, reflecting higher steel spreads.

What’s your most notable underweight and why?

Our largest underweight is Commonwealth Bank (ASX: CBA).

While it remains the strongest of the major banks, we cannot justify its valuation. The challenges are sector wide and include:

• Macro headwinds from fiscal settings, central bank decisions and the recent FWA ruling — slowing loan growth, potential house price declines, rising unemployment and higher staff costs.
• Cyclically low bad debt provisions, which have boosted earnings but are likely to rise as unemployment increases and growth slows.
• Deposit margin pressure with Macquarie and AMP offering higher rates and consumers becoming more rate sensitive.
• Declining core profitability with ROE trending lower for several years.
• Operating expenses growing at or above revenue growth.

What’s been one of your most notable performers recently?

Several holdings performed well this quarter, including:

• Treasury Wine Estates (ASX: TWE) — navigating multiple headwinds; outlook improving under the new CEO but execution remains key.
• Bluescope Steel — strong operations, tariff tailwinds, margin expansion and takeover interest.
• James Hardie (ASX: JHX) — recovering after governance issues and the AZEK acquisition; US housing cycle remains a future tailwind; AZEK integration progressing well.
• BHP (ASX: BHP) — strong operations, with performance driven by copper exposure.
• Aristocrat Leisure (ASX: ALL) — recent update indicates growth can be maintained, ahead of consensus expectations.
• Macquarie Group (ASX: MQG) — strong full year result with all divisions contributing; commodities division rebounded after weaker years.
• AMP Limited (ASX: AMP) — share price recovery following buyback announcement and improved North platform cash margins under the new CEO.

What themes and trends are dominating discussions right now?

Current discussions are dominated by the following: 

• Interest rates, inflation and the health of the Australian consumer.
• AI, including the speed of adoption, particularly where labour substitution is limited; whether hyperscalers can monetise the significant capex underway; and the degree of disruption to software-based business models.
• Market structure and index concentration — with rising index investing, the largest index components are driving returns based on flows rather than fundamentals. This raises questions about how weight of money dynamics interact with underlying company performance.
  

Managed Fund

Elston Australian Large Companies Fund

Australian Shares

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