|Net Performance (After Fees)||1 Month||3 Month||6 Months||1 Year||3 Years||5 Years||*Since inception (Annualised)|
|Concise Mid Cap Fund Return (%)||(-7.72)||(-7.84)||(-0.09)||1.03||9.54||2.83|
|Mid Cap Masters Index (%)||(-8.48)||(-6.61)||2.78||6.44||10.91||0.37|
|Active Performance (%)||0.76||-1.23||-2.87||-5.41||-1.37||2.46|
The S&P/ASX 200 Accumulation Index fell -5.3% in June, resulting in a June quarterly return of -6.55% and an annual financial year return of +5.68%. Volatility increased in the June quarter and was influenced by a number of occurrences including the general impact of rising bond yields. The market dealt with a slightly larger than normal earnings revisions impact caused by some sizeable earnings disappointments as part of ‘confession season’. Disappointing updates came from Metcash (MTS), Virtus Health (VRT), Seek (SEK), Flight Centre (FLT), REA Group (REA) and Nine Entertainment (NEC).
Late in June negotiations between Greece and its major creditors broke down which led negative impacts on investor sentiment as a result of Greece having to shutter its banks and impose capital controls ahead of a July 5 referendum on creditor proposals. Australia underperformed US indices over the quarter with the S&P500 and Dow Jones down -0.23% and -0.88% in local currency returns respectively. Relative performance against European indices was better with the German DAX and the French CAC40 down -8.53% and -4.84% respectively. The FTSE fell -3.72% for the quarter and the Nikkei in Japan returned +5.36%. Prices for base metals remained under pressure over the quarter while bulk and energy prices fared better, having bounced off recent lows. The LME Index fell -5.5% over the quarter with aluminium (-8.0%), nickel (-6.3%) and copper (-5.5%) all driving weakness in the base metals index. Iron ore bounced off April lows (+15.7%), while coal prices were mixed with thermal coal (Newcastle) up +6.0% and hard coking coal down -14.5%. West Texas crude rose 23.8% to $59 per barrel, while gold prices were relatively flat at US$1,172 an ounce (-0.94%).
Macroeconomic conditions in the June quarter were generally unsupportive of the commodities complex with a deceleration in the rate of global GDP growth and global industrial production growth. In China industrial production remained at six year lows over the quarter with growth running at +6.2% year on year in May. Alternative measures of industrial activity in China such as electricity production also highlight subdued industrial conditions with 0% growth in May, down from +1.0% year on year in April. Late in the June quarter the People’s Bank of China (PBOC) announced the fourth interest rate cut in the current easing cycle, cutting the one year lending rate by 25bps to 4.85% and the one year deposit rate by 25bp to 2.00%. Late in June, the central bank also cut the required reserve ratio applied to banks with a focus on rural and SMEs loans by 50bp and that on finance companies by 300bp. The latest cuts come as broad M2 money supply growth rebounded in May to +10.8% from a record low of +10.1% in April but remains below the official annual target growth rate of +12%.
The US economic recovery continues albeit at a rate of growth that is yet to warrant a significant change in monetary policy. US GDP progressed at a lower than expected -0.2% during the first quarter with a stronger dollar impacting net exports and weakness in the oil price resulting in lower Q1 oil and gas investment without a significant offsetting boost to consumption materialising in Q1. In May personal spending showed encouraging signs after the boost to real income from lower oil prices with spending rising +0.9% in May, the largest gain in six years. Consumer confidence also improved over the June quarter with the University of Michigan’s Consumer Sentiment Index at 96.1 in June, close to the January cycle high and significantly above last June’s 82.5.
In Australia, annualised GDP is running at a sub trend 2.3% and is being held back by flat public sector spending and an insufficient amount of non-mining capex to offset the reduction in mining investment. In May the RBA cut the cash rate by a further 25bps to 2.0% in response to subdued conditions. Initially consumer sentiment posted a solid rise in response to the Federal budget and the RBA rate cut. However in June, consumer sentiment retraced all gains to a point were pessimists again outnumber optimists. Low interest rates continued to support the housing sector throughout the quarter however business conditions continued to vary greatly across industries.
Attribution Analysis for the month ended June 2015
|Top 5||Bottom 5|
|Challenger Financial||Flight Centre|
|Aristocrat Leisure||Qube Holdings|
|DUET Group||Illuka Resources|
|Investa Office Fund||Transfield Services|
The Concise Mid Cap Fund was down -7.72% for the month, above the index return of -8.48%. Performance over the quarter was -7.84%, below the benchmark return of -6.61% for the Mid Cap Masters Index. Major contributors to performance over the month included Challenger Ltd (CGF), TPG Telecom (TPM) and Aristocrat Leisure (ALL). Major detractors included Flight Centre (FLT), Flexigroup (FXL) and Qube Holdings (QUB).
News on portfolio stocks included;
Challenger Limited (CGF) upgraded earnings expectations at its investor day. The investor day highlighted CGF’s spread margins earned on new annuity sales have improved and that higher margins, notwithstanding a slightly lower book growth rate, are expected to see earnings for FY15 land in the upper end of its stated guidance range. CGF’s annuity book continues to be exposed to positive long term structural tailwinds. An ageing population, increasing life expectancy, an under allocation of private client portfolios to defensive assets and a growing awareness of longevity risk should continue to create value by driving both demand and tenor of annuity products.
Flight Centre (FLT) provided an update on trading conditions that disappointed with revised guidance below our and the markets expectations. While the offshore businesses are performing well and it was not surprising the Australian leisure and corporate travel business is experiencing some headwinds given macroeconomic softness, the commentary on market share loss was more concerning. FLT’s group earnings are for the most part leveraged to Australian total transactions value (TTV) growth despite growth in the offshore businesses. The underlying cost base of the Australian business continues to grow with higher wages, network expansion and ongoing investment in marketing. This serves to increase the importance of TTV performance to ensure acceptable organic group earnings growth. FLT noted its share of leisure travel recovery has not kept pace with the market with Australian leisure growth slowing to +2.7% year-on-year. Based on our analysis and understanding of the earnings mix, cost base pressures and consumer conditions, a continuation of current market share trends and slowing TTV growth represents further downside risk which we were not willing to accept. Consequently FLT has been removed from the portfolio.
The global outlook for growth remains unclear for both emerging and developed countries. While the developed economies have improved over the last 12 months, pressure points in Europe (Greece default), the US (lower oil prices) and China (leverage equity markets) has seen heightened volatility and uncertainty across numerous asset classes over the June quarter. Market expectations still remain that the Federal Reserve will move rates higher in September. We are of the view however, that a slowing US economy, muted wage growth and an uncertain global economic outlook could see any rate increases pushed out until 2016.
The last 12 months have clearly been a difficult year for fundamental value style investing. Market performance has been driven by stocks displaying earnings momentum where valuation discipline was given secondary consideration. Macro economic influences have driven market performance, with global quantitative easing driving capital costs lower as central banks sought to stimulate inflation and economic growth. Against this backdrop of fiscal easing, global economic growth remains subdued. Both business and consumer confidence continues to remain low, businesses are reducing capital spend as visibility of satisfactory returns from any capital commitment is limited. Consumers remain wary around job security and when coupled with stagnant wages, consumers are largely only prepared to spend on items ‘on sale’.
Our investment process remains the same. We remain committed to our investment philosophy that companies with growing cash flows will deliver superior returns to shareholders over the medium term. These companies will generate adequate cash flow to continue reinvesting back into their business, in either people or Property Plant & Equipment, will maintain a sound balance sheet, will pay a progressive dividend to shareholders and deliver progressive return on equity. We maintain a rigorous approach to understanding the industry within which companies operate. We continue to meet regularly with all listed players in each industry together with unlisted competitors.
*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.