Monthly Report

Monthly Report

April 2016

April 2016

Net Performance (After Fees) 1 Month 3 Month 6 Months 1 Year 3 Years 5 Years *Since inception (Annualised)
Concise Mid Cap Fund Return (%) 1.26 5.13 4.65 3.63 8.19 4.65 3.83
Mid Cap Masters Index (%) 2.76 9.75 7.74 5.70 9.22 5.32 1.85
Active Performance (%) -1.50 -4.62 -3.09 -2.07 -1.03 -0.67 1.98

Market Performance

Global share markets were broadly higher during April with the MSCI World Index posting a positive +1.4% return for the month. US markets rose with the Dow Jones and S&P 500 up +0.5% and +0.3% respectively. European indices were stronger with the FTSE 100 (+1.1%), French CAC40 (+1.0%) and German DAX (+0.7%) all higher. In Asia, the Nikkei fell -0.6% and the Shanghai Composite was -2.2% lower.  Australia’s S&P/ASX 200 Accumulation Index outperformed materially with a +3.4% gain, underpinned by strong gains in the resources sector. A review at the sector level shows major gains were posted by materials (+14.2%), energy (+7.7%) and healthcare (+3.3), while consumer discretionary (-1.5%), utilities (-0.4%) and telecommunications (+0.5%) were the detractors.

Base metals posted solid gains with the benchmark indicator, the LME Index, up +6.3%. Bulk commodity prices advanced for the third straight month with USD spot iron ore up +23%, coking coal up +14% while thermal coal prices were flat. A weaker US dollar and speculative capital flows resulted in gold prices improving for the fourth straight month (+4.5%), while the price of crude oil continued its rebound (+21%).

US economic data pointed to some sluggishness in the rate of growth for the US economy. The initial estimate for first quarter GDP growth was +0.5% and was a further deceleration from the fourth quarter 2015 estimate of +1.4% which, when combing the two data points, indicates annualised economic growth of less than 1% over the past two quarters. Overall industrial production fell -0.6% in March, while the PMI indicator showed 12 of 18 major industries reported growth in March, a high since January 2015. Consumer confidence was a mixed report with the lowest expectations in over two years but improvement in views of current labour market conditions to a post GFC cycle high. The lack of inflationary pressure continues. Wage growth remains subdued with the employment cost index showing a +1.9% year on year rise, which was a two year low but in line with the 2% trend since 2010. The Fed’s preferred measure of inflation, the core PCE price index, was +1.6% year on year and continues to run below the Fed’s 2% inflation target.

Economic data released in China over the month was patchy. First quarter GDP growth slowed to +6.7% year-on-year (YoY) and the headline CPI inflation remained unchanged at +2.3% YoY in March. Generally, data on the traditional growth engines for the Chinese economy (manufacturing, infrastructure and property) was stronger. The official PMI was 50.1, above 50 for the second month in a row in April and signals modest expansion in the countries manufacturing sector. Industrial production growth YoY picked up to a nine month high and fixed asset investment growth was stronger in March led by infrastructure and property investment. Overall monetary conditions continue to remain accommodative.

Data on the performance of the Australian economy also remains inconsistent. Business confidence and business conditions improved in March. Conditions in non-mining industries lifted to their equal highest level since 2008 led by performance in the services sector and an improved performance in construction and manufacturing. The unemployment rate fell to 5.7%, its lowest level since September 2013. In contrast, retail sales growth is stable at +3.3% YoY but at its slowest pace in two years. For the last two months consumer sentiment has been at a level where pessimists outnumber optimists and the consumer price index has slowed with the latest data point the lowest CPI reading since 2008.

Nine Entertainment (NEC) issued a poor trading update with television revenue down circa 11% year on year in the third quarter. GUD Holdings (GUD) shares rallied after the company announced it had come to an agreement to divest its poor performing Sunbeam business. Broadspectrum (BRS) shares had a volatile month with directors initially recommending shareholders reject the revised takeover offer from Ferrovial before doing an about face after uncertainty arose regarding the immigration contract in Papua New Guinea.

Blackmores (BKL) share price was hit by negative sentiment after the Chinese government announced a number of policy initiatives aimed at improving quality control of imported food and health products. BKL released its third quarter results late in the month which showed a very strong third quarter with strong sales and record margins. Investors in Investa Office Fund (IOF) rejected a takeover proposal from Dexus Property Group (DXS) and Pacific Brands (PBG) announced it had agreed to a $1.15 per share takeover offer from US based HanesBrand.

Attribution Analysis for the month ended April 2016

Top 5 Bottom 5
Recall Mantra
Fletcher Building JB Hi Fi
Challenger Nufarm
Bank of Queensland TPG Telecom
Orora Platinum Asset Management

Fund Performance

The Concise Mid Cap strategy was up +**% for the month, below the benchmark return of +2.76%. Major contributors to performance for the month included Iron Mountain (INM), Fletcher Building (FBU) and Challenger (CGF) while major detractors were Mantra Group (MTR), JB Hi-Fi (JBH) and Nufarm (NUF).

At a sector level, resources proved to be a headwind over the month with the S&P/ASX Mid Cap 50 Resources Index rallying +15.4%, a large outperformance relative to industrials (MidCap50 industrials were +1.27% and small industrials were +0.50%).

Early in the month Southern Cross Media (SXL) announced that it had agreed to a regional affiliation deal with Nine Entertainment (NEC). This effectively means on 1 July 2016 SXL will switch its signal from Network Ten programming to WIN programming. This is a positive development which should lead to incremental revenue by applying NEC’s industry leading market share to the advertising revenue pool in the QLD, Southern NSW and Victorian regional markets. We continue to hold the view that the earnings rebound underway at SXL is yet to be adequately recognised by investors with the trajectory of sales and earnings lagging improving ratings.  We continue to see further upside with an attractive valuation underpinned by an improving earnings cycle supported by market conditions and good management execution.

 

Outlook

Australian underlying economic conditions remain difficult with confidence remaining subdued and opportunities for meaningful revenue growth being limited. The prevailing low inflation backdrop has resulted in the RBA cutting the cash rate for the 11th       time since adopting an easing bias in November 2011.  Notably, in May 2016, the RBA advised its view that underlying inflation is to remain systemically lower than previous forecasts.

The steady decline in the cost of capital has been supportive of global equity markets in recent times. However, many industrial companies are now trading on record high earnings multiples at a level where the risk of capital loss is high. In an ever more challenging economic environment many of these companies are trading on multiples reflecting past earnings growth and less reflective of future earnings drivers. In the last 4 years the Small Cap Industrials Index 12MF PE has grown from 11x to in excess of 15x.

Despite this, opportunities still exist to identify companies well positioned to deliver future earnings growth operating within a favourable industry structure. Our investment team continues undertaking an extensive visitation program to identify these companies.  We have recently initiated positions in several companies favourably disposed to this dynamic.

*The Mid Cap Masters Index is a price and accumulation price, free float adjusted index calculated daily for Concise on behalf of S&P. The constituent universe of index is the S&P/ASX 200 excluding the S&P/ASX 50. * The CMCF commended on the 16th of April 2008. The since inception figure is annulaised.

This publication is intended to provide general information only and has been prepared by Concise Asset Management (ABN 62 126 975 282) and (AFS Licence No. 320497), the issuer of the Fund, without taking into account any particular person’s objectives, financial situation or needs. Investors should before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. Your investment is subject to investment risk, including possible delays in repayment and loss of income and capital invested. The repayment of capital or income is not guaranteed by Concise Asset Management. Offers of interests in the Fund are contained in a current Product Disclosure Statement (‘PDS’). A copy of the PDS is available from our website: www.conciseam.com.au or contact Client Services on (03) 9642 8968. You should read the PDS and seek professional advice before making any decision about whether to acquire or continue to hold an investment in the Fund.