|Net Performance (After Fees)||1 Month||3 Month||6 Months||1 Year||3 Years||5 Years||*Since inception (Annualised)|
|Concise Mid Cap Fund Return (%)||1.98||9.20||8.54||8.45||9.06||4.21||3.74|
|Mid Cap Masters Index (%)||2.82||9.99||7.35||10.33||9.31||3.73||1.28|
|Active Performance (%)||-0.84||-0.79||1.19||-1.88||-0.25||0.48||2.46|
In the December quarter the S&P/ASX 200 Accumulation Index rallied +6.5% helping the Australian equity market to post a modest 2.6% gain for the 2015 calendar year. Industrials (+8.1%) outperformed resources (-25.2%) over the past 12 months. For the month, gains were driven by the consumer staples (+7.1%), consumer discretionary (+6.7%) and telecommunication (+4.2%) sectors, whereas energy (-7.5%), industrial (-0.5%) and healthcare (+0.5%) were the major detractors. The Australian market outperformed global markets in the month of December, posting a +2.7% return compared to negative monthly return in most other major markets including the US S&P500 (-1.8%) and Nikkei in Japan (-3.61%).
Commodity prices were mixed. Base metals were generally stronger with aluminium (+4.5%) and copper (+2.3%) prices both rising. Iron ore prices stablised (+1.4%), coking coal (3.7%) strengthened while thermal coal prices were weaker (-5.5%). Oil prices sold off again (-11.0%) as oversupply continues to mount and news OPEC will not cut production in the face of the current glut. Yields on US 10 year treasury bonds (+6bps) rose for the third consecutive month and the AUD/USD also posted its third monthly gain to finish the year at AUD/USD $0.73.
Economic data out of the US supported the economic recovery. The housing market continues to recover with housing starts rebounding to a 1.173m unit annual rate in November, up 16.5% year on year. As expected by financial markets in December, the US Federal Reserve raised the target range for the federal funds rate by 25 basis points. Data out of China suggests the overall economy is continuing to experience sluggish underlying momentum, characterised by slowing fixed investment growth but rising consumption growth. Domestically, growth is running at a moderate pace with business conditions continuing to vary. Weakness is being experienced in the mining and manufacturing industries, while housing, services industries and retail are contributing to growth and above average business conditions. Monetary policy remains accommodative at a 2.0% cash rate.
Attribution Analysis for the month ended December 2015
|Top 5||Bottom 5|
|Treasury Wine Estates||ResMed Inc|
|Aristocrat Leisure||Macquarie Atlas Roads|
|Mantra Group||Southern Cross Media|
The Concise Mid Cap strategy was up +1.98% for the month, resulting in a quarterly return of +9.20%, below the benchmark return of +9.99%. Major contributors to performance in December included Carsales.com (CAR), Treasury Wine Estates (TWE) and Adelaide Brighton (ABC). Laggards for the month were Whitehaven Coal (WHC), Resmed (RMD) and TPG Telecom (TPM).
Recall (REC) underperformed in December on the back of investor concerns regarding regulatory outcomes and a stronger Australian dollar which reduced the implied value of the Iron Mountain (IRM) consideration. IRM is working closely with the ACCC and the UK’s Competition and Markets Authority and we fully expect IRM to address the issues raised and remain committed to making any required divestments or undertakings to obtain competition approvals for the merger. The deal is highly earnings accretive for IRM with material upside on stated synergies, including IRM building in anti-trust friction into their bid price. IRM has estimated that US$155m pa of net synergies can be fully realised. This compares to REC management estimates of circa US$250m pa of synergies from an IRM/REC combination. Cost synergies alone account for 25% earnings accretion with a higher number likely to come from other areas which are yet to be quantified including real estate leasing and revenue synergies. Post completion of the deal, this material upside to synergies, as well as double digit earnings and cashflow accretion, an improved capital structure and better geographic spread make IRM shares attractive. Nevertheless, the REC business is attractive should the proposed merger be voted down. REC is highly cash generative, has defensive cashflows and a sound growth strategy of pursuing accretive bolt-ons and driving increased operating leverage through implementation of a number of efficiency initiatives.
Mid cap news in December included Domino Pizza Enterprises (DMP) announced the acquisition of German pizza chain, Joey’s Pizza, via a joint venture with UK listed Domino’s Pizza Group PLC. Spanish company Ferrovial announced a $1.35 cash per share bid for Broadspectrum (BRS), the company formerly known as Transfield. Austal (ASB) shares fell heavily on news earnings from its US shipyard will be lower than the previous year and Spotless (SPO) shares halved after announcing a number of factors were set to impact margins.
As investors head into 2016 on the backdrop of rising US interest rates, credit market wobbles, a transitioning Chinese economy, emerging market weakness and benign inflation, the next 12 months looks set to be volatile.
For the first time in 11 years the US Federal Reserve raised interest rates in December. While the rate increase was well signaled by the Federal Reserve it did not stop a sell-off in the high yield debt markets in December and has prompted fears of a broader repricing of debt in the coming year. China 2016 looks similar to 2015 – an economy which is switching to a consumption based economy with overcapacity in state industries continuing to create headwinds. Emerging markets growth rates are still heavily tied to both China and the US and thus will continue to ebb and flow throughout 2016. Europe could surprise on the upside as green shoots seen in 2015 look likely to continue into 2016.
The Australian economy looks set to continue to trend below its long term average with forecast of 2.6% growth in 2016. Although employment growth remains steady, wage growth remains subdued due to excess capacity within the economy. Inflation is expected to remain below 2% in 2015. The above outcomes will enable the Reserve Bank to continue to support an accommodative monetary policy in 2016.
The Fund remains weighted towards companies which can grow profits and generate excess cash flows in the prevailing low growth economic environment. We remain overweight selective consumer discretionary companies in both gaming and telecommunications but remain underweight to retail and media. We have selective exposure to diversified financials (Platinum and Henderson Group) and remain underweight property trusts. We are positioned to benefit from healthcare companies that generate attractive returns well above their cost of capital.
In 2015 the fund outperformed the ASX 200 by 6.1%. We are of the view that the mid caps will continue to outperform the ASX 200 and the fund is well positioned to continue outperforming the broader market. Mid Cap companies are often industry leaders, have more diversified earnings streams and deliver a superior yield profile to that of small caps. Mid Cap companies typically have self-funding business models from internal cash flows and are a significant player in the M&A market given they are small enough to be acquired and yet large enough to complete accretive acquisitions.
*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.