Monthly Report

Monthly Report

February 2015

February 2015

Net Performance (After Fees) 1 Month 3 Month 6 Months 1 Year 3 Years 5 Years *Since inception (Annualised)
Concise Mid Cap Fund Return (%) 6.81 11.46 6.09 10.50 8.19 4.17
Mid Cap Masters Index (%) 6.85 12.42 6.86 13.71 8.92 1.34
Active Performance (%) -0.04 -0.96 -0.77 -3.21 -0.73 2.83

Market Performance

February was a strong month for Australian equities with the S&P/ASX 200 Accumulation Index up 6.9%, the strongest monthly performance in over three years. The rally was broad based with most sectors participating. Materials (+11.9%), energy (+9.2%) and utilities (+7.8%) were the strongest sectors while telecommunications (+0.6%), consumer staples (+1.0%), and A-REITs (+3.7%) were relative underperformers. The domestic equity market generally outperformed offshore markets with the S&P 500 index (+5.5%), Dow Jones (+5.6%), Nikkei (+6.4%) and FTSE (+2.9%) all producing positive local currency returns.

The price of oil (+3.5%) stablised following weakness in recent months, as did bulk commodities including thermal coal (+1.9%) and iron ore (+0.6%). The LME base metals index was stronger (+1.4%) led by copper which was up 6.8% in February. Gold was weaker (-5.2%) while the Australian dollar was flat for the month, opening and closing the month at $0.78 against the US dollar. Data out of China continued to indicate a moderation in the rate of economic growth. The official PMI, an indicator of manufacturing activity, was below 50 in January which indicates contraction. The rate of money supply growth continued to slow and home prices were broadly weaker with 64 of 70 Chinese cities reporting lower month on month home prices. China’s central bank cut the official interest rate last November and responded again in February by cutting the required reserve ratio for banks in a bid to add liquidity to the economy and allow banks to extend more credit.

In the US, data released by University of Michigan showed consumer sentiment was below January’s expansion but well above levels 12 months earlier and remained at the highest levels in eight years. Jobs data was also strong with more than a quarter of a million jobs added in January.

In Australia, the number of people employed fell by 12,200 and pushed the unemployment rate to the highest level since 2002. Business and consumer sentiment has been lacklustre and economic growth below trend. In response the RBA cut the cash rate by 0.25% for the first time since August 2013.

Interim reporting season results dominated mid cap news in February. Highlights included Domino’s Pizza (DMP) delivering a strong 1H15 result and upgrading its FY15 earnings guidance. Sirtex Medical (SRX) reported strong double digit sales across major geographies. Flexigroup (FXL) and Sims Metals (SGM) both produced solid results against low market expectations. Genworth Mortgage Insurance Australia (GMA) announced that major customer Westpac intended to terminate its Lender’s Mortgage Insurance agreement with GMA. Iinet (IIN) delivered a weaker than expected 1H15 result due to higher than anticipated operating costs. Iress (IRE) delivered a CY14 result without any major surprises but guided the market to a moderated level of growth over the next year. In other news Tabcorp (TAH) announced a special dividend and Novion Property Group (NVN) and Federation Centres (FDC) announced a merger, unanimously supported by their respective boards.

Attribution Analysis for the month ended February 2015

Top 5 Bottom 5
Challenger Financial Bendigo & Adelaide Bank
Nufarm DUET
Sims Metal Management Transpacific
Flexigroup SEEK
Adelaide Brighton Platinum Asset Management

Fund Performance

In February the Concise Mid Cap Fund returned 6.81%, a fraction behind the benchmark return of 6.85%. Best performers for the month were Challenger (CGF), Nufarm (NUF) and Sims Metals (SGM). Major detractors were Transpacific (TPI), Seek (SEK) and Bendigo and Adelaide Bank (BEN).

Nufarm (NUF) announced its long time MD and CEO, Doug Rathbone, stepped down. NUF also announced €16m (A$23m) in cost savings as a part of a European restructure. The European initiatives are expected to be fully implemented by July 2016 and are part of a A$100m cost reduction program planned for the next 2-3 years which excludes the A$16m Australian restructuring program. Our positive investment thesis in NUF is underpinned by a number of opportunities which are now emerging; significant cost out opportunities, structural growth in international markets, a weaker AUD, a cyclical recovery in Australia and an improved funding position on the balance sheet.

Adelaide Brighton (ABC) reported CY14 profit of $166.5m, ahead of previous guidance. Cashflow was strong and de-levering of the balance sheet is occurring ahead of expectations. We remain optimistic on ABC given a number of growth drivers remain available; price increases, volume growth in cement and lime, operating efficiencies to be realised through restructure and a solid balance sheet which provides management with the ability to pursue capital management or M&A.

Outlook

The overall profit results in the February reporting season were in line with expectations. Consensus profit growth forecast of FY15 remains at 6.4% (FY14 profit growth was 4.7%). The strong performance of the market in February was driven by a rerating with the ASX 200 trading on 15.3x pre February and 17.1x post February. In the small cap space particularly, costs out, which was a large driver to profits in the past, is now becoming more difficult. Furthermore, top line revenue growth in many domestic sectors looks challenging for small companies.

In this environment we are of the view that many mid cap companies are well placed to continue to generate above average profit returns versus small cap companies. Concise believe that Mid Caps companies provide a conservative alternative to Small Caps. History has shown a direct correlation between the health of the domestic economy and the performance of Small Cap companies (see chart below). In a period of benign domestic growth it is our opinion that Mid cap companies are well positioned to outperform that of smalls. Mid Cap companies are often industry leaders, have more diversified earnings streams and deliver a superior yield profile to that of Small Caps. Moreover, Mid Caps are less exposed to the struggling resources sector and are at the forefront of M&A activity.

*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.