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Australian Shares Core Managed Account PortfolioQuarterly Performance Update: Q2 2016
Returns Relative to Benchmark
As of Date: 30/06/2016
3 month YTD 1 year 3 years 5 years Since Incp % p.a.
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
3.1
-0.6
-2.5
3.2
6.17.2
1.1
3.9
8.07.47.7
0.6
Australian Shares - Core S&P/ASX 200 TR AUD
Retu
rn
Investment Growth of $10,000
Time Period: 01/07/2004 to 30/06/2016
10,000.0
12,500.0
15,000.0
17,500.0
20,000.0
22,500.0
25,000.0
27,500.0
Australian Shares - Core S&P/ASX 200 TR AUD
Top Holdings
Weighting %
Cash Account
ResMed Inc DR
Telstra Corp Ltd
Westfield Corp
National Australia Bank Ltd
Platinum Asset Management Ltd
QBE Insurance Group Ltd
Australia and New Zealand Banking Group Ltd
CSL Ltd
Westpac Banking Corp
9.8
6.3
5.7
5.0
4.7
4.2
4.2
3.9
3.9
3.8
Joel BloomerHead of Discretionary Equities+612 9276 [email protected]
Market Commentary
Resources rebounded, large capitalisation financials languished, and yield remained in fierce demand. In short, the rotation prevalent in the first quarter largely continued in the second. Another way to analyse recent trends is to consider that the S&P/ASX 20 has substantially underperformed the S&P/ASX Small Ords thus far in 2016 - by about eleven percentage points (-4% versus +7%). The big four banks were the primary difference as was BHP’s relatively tepid response to higher commodity prices. In contrast, many small cap resources companies have doubled or more in a short timeframe.
The bank headwinds we summarised in our last quarterly letter still apply and seem to be slowly gaining steam: “Bad debts have bottomed, provisions are thin, regulatory capital requirements are on the rise, and the residential market is showing signs of age.” We can add rising funding costs as negative comments from credit rating agencies suggest Australia is at risk of a rating downgrade. This filters down to the perceived credit worthiness of the big four which need attractive wholesale funding rates in order to keep margins high, lending rates to customers reasonable, or both. Bank tailwinds are hard to find these days. As long as they struggle, the larger Aussie equity indexes will too. We have exposure to the banks, but have been underweight for a while and reduced our exposureduring the quarter which contributed positively to performance. However, our performance overall has been subpar.
How the Portfolio Performed
The Core Portfolio total return in the quarter was 3.1% compared to 3.9% for the S&P/ASX 200. For the trailing year, our total return was -2.5% compared to a slight gain of 0.6% for the index, underperformance of 3.1%. Since inception our returns are 7.2% compared to 8.0% for the benchmark, after fees but before franking credits. At June month-end, the portfolio’s net dividend yield was 3.9%, and gross about 5.1%, representing attractive income in a low return world. The Core Portfolio has underperformed primarily due to resources exposure along with a few stock specific issues. We were unfortunately too early in seeing value in energy and materials which have been a drag on performance. Outside of resources there were three stock specific challenges worth shedding more light on: Platinum, QBE Insurance and Computershare. Their performance should improve but it’s taking longer than we expected.
Platinum is a high quality company with excellent leadership and a long track record. We’re also drawn to its capital allocation policy which includes paying virtually all excess capital to shareholders as dividends. However, its flagship international strategy has underperformed its benchmark for several years which has weighed on asset flows and thus earnings and the share price. The longer Platinum underperforms, the riskier it becomes as investors lose patience. Underperformance has been driven by an underweightexposure to the U.S. equity market. While this has not been a good decision so far, our own capital markets team sees U.S. equity as overvalued, so we’re inclined to believe this will normalize, improving Platinum’s relative performance. We also like the diversification Platinum brings because it’s not materially affected by the Australian economy and should benefit over time as savings rise.
QBE has struggled for a number of years due to less than stellar strategy and more recently due to Britain voting to exit the European Union, or “Brexit”. The company was quick to estimate possible impacts from Brexit on its U.K. earnings, but the market is sceptical, and justifiably so given QBE’s extended period of disappointments and the inherent uncertainty of the situation. While Brexit will likely be a negative for earnings and a distraction for management, we see the headwind as sufficiently priced into QBE shares and expect streamlining over the last few years and eventual higher interest rates on its investment portfolio will reveal an undervalued company.
Computershare has two headwinds in common with QBE – higher interest rates always seeming a few years away and Brexit. The company holds large deposits, primarily in the U.S., related to its shareholder services businesses, which normally earn interest income to supplement any fixed fees it charges. This revenue has been in decline for the last several years as higher rate fixed income investments roll-off into lower interest rate replacements. Eventually this should normalise. Exposure to the U.K., its potential recession, and sharply weakened currency have compounded the challenges as has less than expected performance of its mortgage servicing rights business. The list of challenges is long but that’s usually often where opportunity is hidden.
In the plus column, opportune purchases of Dexus, Vicinity Centres, and Ozforex in January when the market swooned (“buy when others are fearful”) have been nice positive contributors to performance as has trimming our bank exposure in April. As we described at the time, we’re working to increase diversification in the portfolio and reducing large financials positions in favour of a greater variety of quality businesses is part of that process. We have some ground to make-up but given the overall quality and discounts to fair value of our current positions according to the Morningstar Research team, we see embedded value in the current portfolio and are excited about our improved positioning.
Outlook
We constantly challenge our assumptions and positions, looking for threats to future performance. With this in mind, we see a conundrum developing and will discuss our property investment for a moment, our second largest sector weight. The quest for yield has been a strong theme for several years, with the price people will pay for reasonably safe companies outpacing their earnings and dividend growth. The emergence of “low volatility” strategies that simply buy stocks whose prices haven’t fluctuated much in the past seems like a sure sign that we’re closer to the end of this ‘safety’ theme than the beginning. “Stability breeds instability”, as Hyman Minsky, an American economist once said. As this trend persists, the attractiveness of market darlings like property subsides and the potential for them to experience drawdowns (price declines) grows.
Given still reasonable dividend yields, a lack of stable contrarian yield plays (other than those we own), and an interest rate easing bias, our 15% property exposure seems like a good place to be for a while longer. As an important aside, we’ve avoided property companies with material exposure to apartment development in Australia which looks like an accident waiting to happen. Preserving capital first and achieving capital appreciation second remain etched at the top of our priority list. All else equal, we also aim to keep turnover low and franking credits high, but all else is rarely equal. With the imbalances present in markets globally today, keeping a sceptical eye on valuations is paramount, as there is rarely a consolation prize when overpaying for assets.
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECTThis document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Distribution Team on 02 9276 4550.
Australian Shares - Core As of 30/06/2016
Relative Weights
Health Care Equipment and Services
Real Estate
Software and Services
Retailing
Food and Staples Retailing
Diversified Financials
Commercial Services and Supplies
Insurance
Consumer Services
Food, Beverage and Tobacco
Automobiles and Components
Consumer Durables and Apparel
Pharmaceuticals and Biotechnology
Household and Personal Products
Capital Goods
Telecommunication Services
Media
Utilities
Transportation
Materials
Energy
Banks
-15.1 -10.1 -5.1 -0.1 5.0 10.0
5.0
3.7
3.6
2.3
1.6
1.5
0.9
0.5
0.2
0.1
-0.1
-0.1
-0.1
-0.2
-0.4
-0.8
-0.8
-2.4
-2.6
-3.7
-4.1
-12.9
Transactions in the Quarter
ANZ-AU Australia & New Zealand Banking Group Ltd DecreasedBHP-AUCCL-AU
BHP Billiton LimitedCoca-Cola Amatil Limited
DecreasedAdded
MYO-AU MYOB Group Limited AddedPTM-AU Platinum Asset Management Limited IncreasedTLS-AU Telstra Corporation Limited IncreasedWBC-AU Westpac Banking Corporation Limited Decreased
Equity Sectors (GICS)
Portfolio Date: 30/06/2016
%Materials 10.2Industrials 6.5Healthcare 13.8Consumer Discretionary 7.4Consumer Staples 9.7Financials 40.1Information Technology 6.1Telecom Services 6.3Total 100.0
Equity Region Exposure
Portfolio Date: 30/06/2016
%Australia 89.3New Zealand 3.8United States 7.0Total 100.0
Asset Allocation
Portfolio Date: 30/06/2016
%
Stock 90.2
Cash 9.8
Total 100.0
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECTThis document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Distribution Team on 02 9276 4550.
Australian Shares - Core As of 30/06/2016
Risk-Reward
Time Period: 01/07/2012 to 30/06/2016
Std Dev
0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Australian Shares - Core Australia OE Equity Australia Large Blend
Retu
rn
Multiple Investment Sector Exposure Chart
Portfolio Date: 30/06/2016
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0
Basic Materials
Consumer Cyclical
Financial Services
Real Estate
Consumer Defensive
Healthcare
Utilities
Communication Services
Energy
Industrials
Technology
Australian Shares - Core S&P/ASX 200 TR AUD
Performance Relative to Peer Group
Peer Group (5-95%): Open End Funds - Australia - Equity Australia Large Blend
Top Quartile 2nd Quartile 3rd Quartile Bottom Quartile
-10.0-7.5-5.0-2.50.0
3 Month CYTD 1 year 2 Years Since Incp %p.a
2.55.07.510.0
Australian Shares - Core S&P/ASX 200 TR AUD
Retu
rn
Market Performance
Time Period: Since Inception to 30/06/2016
Inv Bmk1
Up Period Percent
Down Period Percent
Best Month
Worst Month
Best Quarter
Worst Quarter -18.25
21.50
-12.61
7.98
36.81
63.1960.42
39.58
9.14
-12.71
23.25
-16.08
Risk
Time Period: Since Inception to 30/06/2016
Inv Bmk1
Return % pa
Std Dev
Max Drawdown -47.18
13.66
8.007.16
13.83
-48.58
Core Portfolio - Complete List of Holdings
Portfolio Date: 30/06/2016
CodeStyle
Box
TotalRet 3Mo
(Qtr-End)
PortfolioWeight
%
Cash AccountResMed Inc DRTelstra Corp LtdWestfield CorpNational Australia Bank LtdPlatinum Asset Management LtdQBE Insurance Group LtdAustralia and New Zealand Banking Group LtdCSL LtdWestpac Banking CorpWoolworths LtdBHP Billiton LtdBrambles LtdGoodman GroupTrade Me Group LtdCrown Resorts LtdWesfarmers LtdMYOB Group LtdAlumina LtdIluka Resources LtdComputershare LtdDexus Property GroupOzforex Group ltdAnsell LtdVicinity CentresQube Holdings LtdCoca-Cola Amatil Ltd
9.8RMD Ë 6.3TLS Ç 5.7
WFD É 5.0NAB È 4.7PTM Ë 4.2QBE È 4.2ANZ Ç 3.9CSL É 3.9
WBC Ç 3.8WOW Ç 3.6BHP Ç 3.6BXB É 3.6GMG É 3.4TME Ë 3.4CWN É 3.3WES È 3.2MYO Ì 3.0AWC Ì 3.0ILU Ì 2.6CPU Ë 2.5DXS Ç 2.4OFX Ï 2.3ANN Ë 2.3VCX È 2.3QUB Ë 2.3CCL Ç 1.9
11.71
10.59
6.61
-9.29
0.56
7.69
4.32
2.30
1.29
-4.40
10.62
10.78
-3.261.20
-5.48
-0.38-1.07
8.412.23
5.50
17.045.09
-6.36
-6.24
6.87
16.32
-6.90
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECTThis document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Distribution Team on 02 9276 4550.
Australian Shares - Core As of 30/06/2016
THIS REPORT HAS BEEN PRODUCED USING PRESENTATION STUDIO, A MODULE OF MORNINGSTAR DIRECTThis document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Distribution Team on 02 9276 4550.
