Monthly Report

Monthly Report

February 2017

February 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 (%) 1.06 4.23 (-3.24) 16.31 7.42 7.27 4.56
Mid Cap Masters Index (%) 1.64 4.49 (-0.04) 20.15 10.09 8.68 2.88
Active Performance (%) -0.58 -0.26 -3.20 -3.85 -2.67 -1.41 1.68

Market Performance

The Australian share market rose +2.25% in February with defensive sectors generally outperforming. Consumer staples (+6.17%), A-REITS (+4.15%) and financials ex-REITs (+4.11%) posted the strongest gains, with sector laggards coming from materials (-3.18%), telecommunications (-3.13%) and energy (-2.06%). Global markets generally performed well with the MSCI Accumulation Index (+2.77%), S&P500 (+3.72%) and Dow Jones Industrial Average (+4.77%) all posting gains.

Economic data out of the US suggests the world’s largest economy has growth momentum. The Conference Board’s consumer confidence index rose to 114.8 in February, the highest level since 2001. US unemployment ticked up to 4.8%, however the employment to population ratio rose to a post GFC high. Core CPI inflation increased to 2.3% from 2.2% and existing home sales rose 3.3% to 5.69 million units annualised, a new cycle high. Fourth quarter 2016 GDP was reconfirmed as 1.9%, however consumption in Q4 was notably revised up to 3.0% from 2.5%, a very healthy rate that will continue to underpin US economic growth if it continues growing at a 3% annualised pace.

Data out of China suggests the economy has kept a stable pace. The official manufacturing PMI continues to suggest modest expansionary activity and trade data was favourable over the month.
With this global backdrop in major global economies, commodity prices generally pushed higher. The LME base metals index rose +1.1% led by nickel (+9.9%) and aluminium prices (+4.1%). Energy prices rose with crude oil up (+2.5%) and thermal coal (+0.5%) higher. Steel intensive commodities were mixed with iron ore (+9.6%) continuing its run of rises in contrast to coking coal which fell for the third consecutive month (-4.9%).

In Australia, stronger bulk commodity prices resulted in a surging trade balance with the December trade surplus a record $3.5bn. The stronger terms of trade helped push the AUD/USD higher to $0.77 by month end.

Releases of interim financials for the 2017 year dominated mid cap news flow in February. Highlights included Bluescope Steel reporting a good cost performance and second half guidance 6% above market expectations. Downer EDI (DOW) reported an increase in work in hand and raised profit guidance to $175m. Costa Group (CGC) reported a solid result driven by increasing blueberry volumes and upgraded profit growth guidance to circa 25% growth inclusive of its avocado acquisition. Other stocks which beat interim earnings expectations included Next DC (NXT), Orora (ORA) and Aristocrat Leisure (ALL).

Graincorp (GNC) also upgraded its full year earnings guidance at its AGM which was held during February. Companies which missed expectations included Spotless Group (SPO), Blackmores (BKL), Altium (ALU), IOOF (IFL) and Ardent Leisure (AAD). Isentia Group (ISD) was the weakest stock (-41%) in the mid cap index during February with the company lowering the outlook for its King Content business as well as highlighting a pick up in competitive intensity resulted in higher client churn along with an inability to recover a rise in publishing costs.

Attribution Analysis for the month ended February 2017

Top 5 Bottom 5
Worley Parsons Ardent Leisure
Aristocrat Leisure Fletcher Building
Super Retail Group Southern Cross Media
REA Group Graincorp
Challenger Tabcorp Holdings

Fund Performance

The Concise Mid Cap Fund returned +1.06% in February below the benchmark return of +1.64%. Outperforming stocks during February included WorleyParsons (WOR), Aristocrat Leisure (ALL) and Super Retail Group (SUL). Detractors included Ardent Leisure (AAD), Fletcher Building (FBU) and Southern Cross Media (SXL).

WorleyParsons (WOR) reported its 1H17 financial result which showed its significant cost reduction program is improving margins. There are signs the cycle is improving with WOR’s qualitative commentary on the outlook more positive and employee numbers showing stabilization. Nonetheless, the market received the result with disappointment as the focus fell on slow cash collection from four major accounts. We see this as a temporary issue and process related rather than a recovery issue. WOR has the potential for a materially improved earnings profile ahead as the hydrocarbons engineering cycle turns. This was highlighted by DAR Group (a private Dubai based contractor) late in the month when it secured a ~13% interest in WOR at a premium.

Outlook

As we have written about several times before, valuation is back in vogue. Momentum factors which have driven markets higher in recent times are now being given secondary consideration as investors focus on valuation fundamentals. Over the last few years earnings multiples have expanded aggressively driven by consistently falling bond yields. High beta stocks with a steady outlook of earnings growth were rewarded with aggressive repricing of the multiple investors were prepared to pay as it became widely accepted that low rates and cheap capital were here to stay.

As with all investment cycles we have experienced and studied, nothing lasts forever and this time is never different. As we experienced during the GFC asset purchases priced on the assumption of low bond yields forever, only deliver low or negative returns over the medium to long term. A belief fundamental to the investment philosophy at Concise Asset Management.
History shows many occasions where the prevailing investment cycle was driven by momentum and growth at any price. However, like musical chairs, no one knows when but the music has to stop. Only then do investors look to valuation to fall back on and reflect on what price they are paying for ostensibly the same asset base as two years prior. A consistent and disciplined focus on valuation survives all investment cycles.

In the last few months, the US 10 year bond rate has started trending back toward ‘normal’ levels, central banks globally are rolling back quantitative easing questioning the effectiveness of taking on so much debt and investors are bringing valuation back in vogue. Whatever the rate of change from here, the catalyst of forever falling bond yields and cheaper capital over the last three years is now gone.

*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.