Monthly Report

Monthly Report

January 2016

January 2016

Net Performance (After Fees) 1 Month 3 Month 6 Months 1 Year 3 Years 5 Years *Since inception (Annualised)
Concise Mid Cap Fund Return (%) (-3.02) (-0.45) 0.58 3.81 6.10 3.80 3.29
Mid Cap Masters Index (%) (-4.26) (-1.82) (-1.50) 2.95 5.97 3.21 0.70
Active Performance (%) 1.24 1.37 2.08 0.86 0.13 0.59 2.59

Market Performance

The past month saw volatility pick up in financial markets as investors digested the recent fed rate hike, a stronger USD, further weakness in the oil price and economic data suggesting continued moderation in economic growth across a number of emerging markets, including China. The S&P/ASX 200 Accumulation Index was down -5.48% in January, ahead of the Dow Jones Industrial Index (-5.50%) but behind the local currency return for the S&P500 Index (-5.07%). Asian markets underperformed with the Nikkei down -7.96% and China’s Shanghai Composite -22.65% lower.

Prices of major commodities remained under pressure. Crude oil traded below US$30 per barrel, the first time since 2008, on the back of news Iran is likely to introduce more supply into an already well supplied market. Base metals were broadly lower with the LME base metals index falling -1.58%. Similarly, bulk commodities fell. Iron ore was down 4.4% and coking coal and thermal coal were down -2.3% and -0.4% respectively. Safe haven assets outperformed, with gold trading up 5.3% to US$1,116 per ounce, while the yield on US 10 year treasuries compressed 35 basis points. The US dollar strengthened against a number of countries, including a 2.8% rise against the Australian dollar to finish the month at $0.71.

Economic data out of China pointed to continued moderation in the rate of economic growth. Q4 GDP growth slowed to +6.8% year on year (YoY) in 2015, the lowest level in 25 years. Rebalancing of the Chinese economy to a larger growth contribution from the consumer continues. Nominal retail sales were up +11.1% YoY in December and consumption contributed two thirds of 2015 GDP growth, up from approximately half in 2014.

In the US, initial estimates showed GDP growth slowed to +0.7% pa in Q4, making the calendar year growth rate +1.8% YoY.  Industrial activity slowed with headwinds in energy related activity and a stronger dollar impacting net exports.  The unemployment rate was steady at 5.0% for a third straight month.  Inflation remains stable with no sign of accelerating. Core inflation was 2.1% YoY and wage inflation (employment cost index) remains soft and was reported as +2.0% for the December.

Japan’s central bank (BoJ) intensified its battle against those with a deflationary mindset by setting negative interest rates for the first time which means financial institutions with surplus money at the BoJ earn negative interest. Australia’s central bank continues to judge that a 2.0% cash rate remains appropriate to foster growth in our economy.

Midcap news during January included Credit Corp (CCP) reported 1H16 underlying profit of $21.2m, up 5.5% on the previous corresponding period and upgraded the FY16 earnings outlook on the back of an increased number of debt ledger purchases. Greencross (GXL) received highly conditional proposals and expressions of interest from parties to acquire GXL but the board has not pursued these proposals due to attached conditions and a view that they under value GXL.

AWE Limited (AWE) agreed to sell its interest in the Sugarloaf energy project to Carrier Energy Partners II LLC for US$190m to repay debt.

Select Harvest (SHV) announced almond prices are down 10% to 15% from its FY15 pool price of $11.45/kg, driven by a larger US crop, weaker demand and instances of customer defaults.

Slater and Gordon (SGH) shares suffered another month of heavy falls after the company missed a self imposed deadline to update the market on its cashflow.

GUD Holdings (GUD) released its 1H16 result which illustrated strength in the auto market but highlighted tough conditions in the retail electrical appliance market. A consortium of investors led by Qube Holdings (QUB) made a binding A$9.17 proposal for Asciano (AIO).

Attribution Analysis for the month ended January 2016

Top 5 Bottom 5
JB Hi Fi Platinum Asset Management
Treasury Wine Estates Healthscope
ResMed Inc Nufarm
Star Entertainment Whitehaven Coal
Macquarie Atlas Henderson Group

Fund Performance

The Concise Mid Cap Fund returned -3.02% in January, 1.24% above the index return of -4.26%. For the rolling 12 months the fund has returned 3.81%, above the benchmark return of 2.95%.  Strong performers included Treasury Wine Estates (TWE), JB Hi-Fi (JBH) and Resmed (RMD) with Healthscope (HSO), Bendigo & Adelaide Bank (BEN) and Henderson Group PLC (HGG) the laggards.

Treasury Wines Estates (TWE) was a strong performer in January on the back of the company announcing 1H16 EBITS would be between US$140m to $150m, significantly above consensus estimates of US$120m. TWE also upgraded FY16 EBITS guidance to the upper end of its previous range of US$270m and $290m pre the contribution of the Diageo acquisition. TWE noted the first half result was strong across all regions and we suspect the strong performance of the 15 priority brands has continued in the second quarter, having already accelerated to drive 20% net sales revenue (NSR) in the first quarter. Collectively, this priority brand portfolio delivered only 13% NSR growth in FY15 and just 3% in FY14. Overall, the opportunities for TWE remain clear. Internally, value is being created by investment behind underperforming brands, taking costs out and selling high quality wine in global channels with attractive pricing.  The company is also benefitting from a number of external tailwinds, namely, strong double digit consumption growth in China, a rising Asian middle class and a weaker AUD/USD which provides both transactional and translation benefits. The recent Diageo acquisition is highly accretive on a standalone basis but also provides TWE with opportunities to drive further margin accretion by re-invigorating brands and selling wine into markets willing to pay higher prices for luxury wine. Plenty of opportunities remain for TWE to create value and our confidence has increased that TWE can reach its margin objective of high teens by FY20.

Vocus (VOC) and M2 Group (MTU) announced MTU shareholders gave their backing to a merged entity which is likely to enter the S&P/ASX 100 Index.  The merger provides the opportunity to create a vertically integrated trans-Tasman telco, extract $40m per annum of cost synergies, and provides a number of revenue upside opportunities which we believe are yet to be adequately recognised by investors. By combining MTU’s large customer base with VOC’s fibre assets, the merged business will be able to leverage VOC’s fibre assets.  Winning MTU business customers in buildings already connected to VOC’s network will provide earnings accretion as each new corporate customer comes on at higher margins. Bringing the infrastructure of the two telcos together enables the creation of new high margin products which can be sold through M2’s established channels. Other revenue opportunities include increasing consumer broadband net adds by lowering churn and leveraging MTU’s sales and marketing resources into VOC’s corporate business.

Outlook

As we have written about in prior monthly reports, global equity markets and indeed all risk assets have been driven higher over recent years supported by the actions of global central banks. We believe the continuation of adopted policies of central banks are proving less stimulatory as time passes leading to heightened volatility in equity markets. With this backdrop, investors are increasing their focus on companies delivering earnings growth as the days of equity markets being driven by expansion of earnings multiples appear more challenged.

Mid Caps are continuing to deliver superior returns to all other indices of the Australian share market. Market estimates show mid cap industrial companies are forecast to deliver earnings growth around 8% in 2016, significantly above the 3% expected for large cap industrial companies.  Accordingly, we expect mid caps to continue to outperform over the medium term.

As we head into the February reporting season we are particularly focussed on avoiding owning companies where current valuations are excessive in light of expected future earnings growth.  As outlined above we believe the outlook for momentum investing is becoming more difficult.

*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.