Monthly Report

Monthly Report

December 2014

December 2014

Net Performance (After Fees) 1 Month 3 Month 6 Months 1 Year 3 Years 5 Years *Since inception (Annualised)
Concise Mid Cap Fund Return (%) 2.99 3.68 1.12 2.92 9.46 3.05
Mid Cap Masters Index (%) 2.54 3.39 3.56 7.15 9.75 (-0.01)
Active Performance (%) 0.45 0.29 -2.44 -4.23 -0.29 3.06

Market Performance

The S&P/ASX 200 Accumulation Index rose 2.1% last month, resulting in a December quarterly return of 3.1% and a 2014 calendar year return of 5.6%. The ASX Industrial sector (+6.0%) posted the strongest monthly return. Other contributors included Healthcare (+5.6%) and A-REITs (+4.5%) with major detractors being Consumer Discretionary (-2.4%), Energy (-1.7%) and Staples (-0.8%). Australia outperformed global markets last month with the S&P500 and Dow Jones down 0.3% and 0.42% respectively. European indices were weaker. The FTSE 100 fell 2.3%, the German Dax was down 1.8% and the French CAC40 index fell 2.7%.

Commodities were broadly lower. Crude prices were down sharply and reached five year lows in December. West Texas crude closed the month at US$53.7 per barrel, down 18.6%. Base metals were generally lower with the LME Index down 3.6%. Bulk commodities stabilised with thermal coal (Newcastle) up 0.2% and iron ore down 0.1%. Gold outperformed and was up 0.7% for the month. Global government bond yields broadly continued to grind lower. Yields on five year Australian government bonds fell below the 2.5% RBA cash rate, contracting 31bps to finish December at 2.26%. Five year German bunds closed the year with a negative yield (-0.01%) and ten year US treasuries were flat in December finishing 2014 with a yield of 2.17%, down from yields in excess of 3% at start of the year. The Australian dollar finished the year at USD$0.82, down 4.0% for December and has now fallen in four of the past six months to be at levels not seen since 2009.

Global economic data released over the quarter showed growth in the US has positive momentum, whereas other major global economies achieved more subdued performance. The US economy grew at a 5% annual rate in the third quarter, the strongest pace in 11 years and much better than expected. Data out of China was representative of a moderation in the rate of economic growth. Industrial production was up 7.2% in November, having slowed from a rate of 9.2% in June and real GDP growth for the third quarter was 7.3%, down from 7.8% in the previous corresponding period.

In Australia, economic growth has slowed but remains moderate. Business conditions continue to improve steadily in trend terms however sentiment remains lacklustre. Consumer sentiment has weakened in recent months and is now at its lowest level since August 2011 and business confidence is back to levels pre the election jump in mid 2013. The unemployment rate has climbed to a 12 year high of 6.3% and in December the projected budget deficit for the current fiscal year was downgraded from $29.8bn to $40.4bn. The Reserve Bank is holding the cash rate stable based on current indications and expects the current accommodative stance to drive stronger growth over time.

Attribution Analysis for the month ended December 2014

Top 5 Bottom 5
Sims Metal Management Flight Centre
Caltex Transfield Services
Resmed Inc Western Areas
James Hardie Industries Transpacific Industries
Boral G8 Education

Fund Performance

The Concise Mid Cap Fund was up 2.99% against the benchmark return of 2.54%. This resulted in a quarterly return 3.68%, 0.29% above the benchmark return of 3.39%. Major contributors to performance for the month included Sims Metal Management (SGM), Caltex (TXC) and Resmed (RMD). For the quarters the biggest winners were Resmed (RMD), Caltex (CTX) and Sims Metal Management (SGM). Major detractors for the month included Flight Centre (FLT), Transfield Services (TSE) and Western Areas (WSA). For the quarter the biggest losers included Flight Centre (FLT), Challenger Financial Group (CGF) and Whitehaven Coal (WHC). News on portfolio stocks included;

In early December, G8 Education (GEM) provided a CY14 EBIT guidance range, stating EBIT will exceed consensus of $101m by at most 5%. The company also upgraded the quarterly divided from 5cps to 6cps. GEM’s earnings growth is primarily driven by the announcement of child care centre acquisitions. We expect the fragmented child care industry to experience further consolidation and GEM’s ability to continue to drive acquisitive and accretive growth should continue to be a positive catalyst for the stock.

Caltex (CTX) provided CY14 NPAT guidance of $450m to $470m which was more than 10% above consensus estimates. Higher refiner margins were the primary surprise to the market, with refiner margins benefiting from the steep drop in oil prices. CTX’s marketing business is performing to expectations and CTX flagged its Marketing business to contribute EBIT of around $810m, which represents a 6% growth rate on the previous corresponding period. We continue to see potential for the Marketing business to grow at a mid single digit rate over the next few years. This in conjunction with the absence of refining losses and savings related to the project “Tabula Rasa” cost and efficiency review underpin our positive investment case.

Outlook

The outlook for 2015 both internationally and domestically looks mixed across several fronts. While the US continues to strengthen with GDP forecast to grow ~3% in 2015, it looks the only beacon of light across the global economy as Europe, the UK, Japan and even China are expected to drag global growth lower in 2015. After two years of trying to ignite inflation, Japan is once again on the verge of recession and deflation, while Europe struggles to grow with its largest economy, Germany, now only expected to grow 1% in 2015. China and its neighboring economies and trading partners are adjusting to lower growth. As the Chinese economy switches from investment heavy to a more mature consumption led economy, negative ramifications are been felt within the Asian region. The rapid decline in the oil price is a boon for consumers at the petrol pump, it is a worrying concern for oil producing economies such as Russia and fragile developing nations in South American and Africa. While global financial conditions remain very accommodative it is causing negative implications in exchange rates.

Domestically the Australian economy remains subdued. Declines in commodity prices, particularly in iron ore and coal, are impacting Government revenues and as such Fiscal stimulus is expected to remain restrained, while private investment continues to remain open to only a select few industries. Revenue growth for a number of industries looks scarce and as such reducing costs and maximising procurement savings will make up the majority of the earnings growth in 2015. The fall in the oil price in the second half of 2014 will benefit some industries such as Transport. While we expect consumers to get an immediate benefit from the drop of the fuel price at the pump, countering this will be the continued slackness in the employment market which will hamper any real wage growth. As such we remain cautious on the retail sector. We continue to keep our overweight position to US earnings where companies will benefit from the growing US economy and with the cost of funds remaining low, we expect that mergers and acquisitions will continue to be prevalent. Furthermore, while the share market remains supportive, we would also expect further IPO’s in 2015.

The investment team will continue to travel both domestically and overseas throughout 2015, as we continue to ramp up our research effort. Our focus remains on meeting with management, focusing on a company’s ability to generate free cash flow (after payment of interest, tax and maintenance capex) that can be used to pay dividends and reinvest into growth projects while maintaining a healthy balance sheet.

*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.