Monthly Report

Monthly Report

August 2017

August 2017

Net Performance (After Fees) 1 Month 3 Month 6 Months 1 Year 3 Years 5 Years *Since inception (Annualised)
Concise Mid Cap Fund Return (%) 3.08 3.28 7.03 3.56 8.39 10.97 5.07
Mid Cap Masters Index (%) 1.53 2.34 6.83 6.79 10.23 12.32 3.45
Active Performance (%) 1.55 0.94 0.20 -3.23 -1.84 -1.35 1.62

Market Performance

Major global equity markets edged higher in August. The MSCI World Accumulation Index rose +0.14%, underpinned by US equity market gains where the S&P500 and Dow Jones Industrial Average rose +0.05% and +0.26% respectively. The Australian equity market was a relative outperformer with the S&P/ASX 200 Index returning +0.71%, whereas the Nikkei in Japan (-1.40%) was the laggard.

In Australia, Mid Cap ex-50 stocks fared much better than the broader ASX200 over August with the Concise Mid Cap Strategy returning +3.08%, ahead of the Mid Cap benchmark return (+1.53%) and well ahead of the broader Australian market (+0.71%), which was held back by the performance of large cap ASX50 stocks (+0.50%). By sector, Energy (+5.7%), Consumer Staples (+5.3%) and Industrials (+4.6%) were strong contributors in August. Major detractors included Telecommunications (-7.4%), Financials ex REITs (-2.2%) and the Consumer Discretionary (-1.5%) sector.

In commodity markets, an encouraging global growth backdrop helped drive base metals and bulk commodities higher. Aluminium (+11.0%), copper (+7.0%), iron ore (+7.1%), coking coal (+16.4%) and thermal coal (+2.3%) all rallied. Gold was up (+4.0%) on rising geopolitical risk. Oil prices pulled back in August (-6.2%) after a strong July (+8.3%).

The US economy remains robust. July ISM manufacturing data was 56.3 on the index, well above the 50 level which signals expansionary activity. The US unemployment rate (4.3%) remains at a 16 year low and is below the Fed’s non-accelerating inflation rate of unemployment which suggests at this point in the cycle labour markets should be tight and placing upward pressure on wages and inflation. Wage growth, however, continues to remain patchy and doesn’t appear to be accelerating yet despite low unemployment. Average hourly earnings growth to end July was flat at +2.5% year on year (YoY).

Key indicators of Chinese economic activity remain healthy but moderated in July. Fixed asset investment (+6.9% YoY), industrial production (+6.4% YoY) and retail sales (+10.4% YoY) growth rates slowed from the month prior. Export data remains healthy with year to date tracking at +8.3% YoY, consistent with the theme of global trade picking up in recent months.

Domestically, economic data releases continue to show the economy appears to be tracking at a satisfactory pace. Business conditions are generally healthy and rose to the highest level since early 2008. On the other hand, consumer confidence continues to track below the key 100 mark, indicating pessimists outnumber optimists.

Most companies reported FY17 profit results in August with noticeable outperformance by firms exposed to infrastructure and capex spending; CIMIC Group (CIM), Downer EDI (DOW) and WorleyParsons (WOR). Healthcare was a notable underperformer with cost pressures and negative leverage impacting the outlook for aged care and hospital operators Healthscope (HSO), Japara Healthcare (JHC) and Regis Healthcare (REG). Mid Cap companies exposed to the US economy, such as Orora (ORA), Reliance Worldwide Corporation (RWC) and Boral (BLD) delivered solid earnings results.

As is typically the case, companies which did not deliver to market expectations underperformed with negative surprises coming from Mayne Pharma (MYX), Isentia (ISD), Domino’s Pizza Enterprises (DMP), Bluescope Steel (BSL), Qube Holdings (QUB) and Australian Pharmaceutical Industries (API). Equally, earnings beats typically delivered the highlights with Orora (ORA), IOOF Holdings (IFL), Janus Henderson Group (JHG), Bendigo and Adelaide Bank (BEN), Mineral Resources (MIN) and Iluka Resources (ILU) all beating expectations.

Other news during the month included Vocus Communications (VOC) announced takeover discussions with both private equity groups, KKR and Affinity, have ceased. Webjet (WEB) announced a capital raising alongside the acquisition of JacTravel Group, a global business-to-business travel group based in Europe. Sims Metal (SGM) announced the departure of its Managing Director and CEO Galdino Claro and CFO Fred Knechtel with immediate effect.

Attribution Analysis for the month ended August 2017

Top 5 Bottom 5
Worley Parsons Bluescope Steel
Downer EDI JB Hi Fi
Mineral Resources REA Group

Fund Performance

In August the Concise Mid Cap Strategy was up +3.08%, 1.54% basis points above the benchmark return of +1.53%. Best performers for the month were WorleyParsons (WOR), Downer EDI (DOW) and IOOF Holdings (IFL). Detractors from performance were Bluescope Steel (BSL), JB Hi-Fi (JBH) and HT&E Ltd (HT1).

News on portfolio stocks included;

Orora Limited (ORA) reported a solid FY17 profit of $186m, 14% ahead of the previous corresponding period and 3% above consensus expectations. Key performance metrics were good across the business. Margins rose despite cost input headwinds, cash conversion was solid, leverage ratios improved, acquisitions are contributing in line with expectations and underlying revenue growth met or exceeded targets. Going forward, ORA is well placed to deliver on its blueprint for creating shareholder value. ORA’s high rate of cash conversion and solid balance sheet has allowed the business to comfortably increase its capital spending target to $150m to $200m per annum and we believe there is scope for larger capital allocations above these levels.

Downer EDI (DOW) rallied 11% for the month after it delivered a $180m Net Profit for FY17 which was 3% above expectation. The company also said that its FY18 Net Profit will be $190m pre consolidating Spotless profit and synergies. We acquired a position in Downer in May this year after the company bid for Spotless in March. DOW was trading as high as $7.20 pre its Spotless bid and subsequently was sold off ~25% to $5.50 after shareholders questioned management’s decision to bid for the underperforming Spotless. After several meetings with DOW management in April and May we were confident that they would be able to extract the stated synergies of $20-40m. We are of the view that Downer still offers value through its core business and through merging Spotless into its business units.


With the end of August seeing the completion of the FY17 reporting season there was a negative bias to earnings heading in FY18. Of the companies that did revise FY18 guidance, 43% downgraded earnings expectations while only 24% upgraded earnings expectations. On a sector basis Energy and Materials saw revision upgrades while Healthcare and Telco’s have seen consensus downgrades.

The outlook into FY18 is mixed across sectors. We are starting to see real capex spend in the Mining sector as higher price is encouraging more production, which will benefit the Mining Services sector. Consumer Discretionary still remains challenged to generate top line growth, while margins continue to be supported by costs out measures. US earners still remain well placed to benefit from US economic growth with the top line translating into expanding margins.

On a stock basis we are of the view that what we have seen over the last 3 months, value over momentum, is set to continue within the mid cap universe. We expect volatility to continue, allowing us take advantage of oversold prices while investing with a superior margin of safety. We continue our extensive company visitation program post reporting season and as always look for companies that exhibit 1. Superior cash flow that can be reinvested for higher returns, 2. Appropriately priced with a margin of safety and 3. Display conservative Balance Sheets

*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: 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.