|Net Performance (After Fees)||1 Month||3 Month||6 Months||1 Year||3 Years||5 Years||*Since inception (Annualised)|
|Concise Mid Cap Fund Return (%)||4.63||0.69||9.96||0.73||8.04||4.21||3.71|
|Mid Cap Masters Index (%)||5.36||2.25||12.46||2.51||8.04||4.21||1.52|
|Active Performance (%)||-0.73||-1.56||-2.50||-1.78||0.00||0.00||2.19|
The Australian equity market, as measured by the S&P/ASX 200 Accumulation Index, was up +4.73% last month resulting in a -2.75% quarterly return. At the sector level, financials ex-REITs (+6.65%), information technology (+6.12%) and materials (+6.10%) led the market last month, while heath care (+0.30%), utilities (+0.82%) and industrials (+2.18%) were laggards. US markets were relative outperformers in March with the S&P500 and Dow Jones Industrial Index up +6.60% and 7.08% respectively.
March data out of the US continues to suggest the US economy is faring relatively well. Inflation is stable and employment growth continues. In remarks on the outlook for interest rates the Fed expressed caution. Against this backdrop the US dollar was weaker against a number of currencies including the Australian dollar which rose seven percent to close March at $0.77 AUD/USD. During March major central banks appeared to engage in another round of competitive currency devaluation to fight low growth and low inflation. Japan announced it could extend its negative interest rate policy into further negative territory and the European Central Bank (ECB) announced further quantitative easing. Despite these actions, the Euro and Yen weakened against the USD, as did a number of other currencies with the USD trade weighted index falling to November 2015 levels.
Economic data out of China continues to suggest relatively subdued activity. Industrial output slowed over the first two months of the 2016 year to +5.4% YoY, from +5.9% at the end of December. Retail sales remain solid (+10.2% YoY for February) while fixed asset investment (+10.2% for February, up from 8.3% at December) and property new floor space starts have rebounded on the back of weak comparative periods.
Commodity prices generally strengthened on the back of US weakness and markets speculating Chinese policy initiatives will boost demand for commodities. The base metals LME index rose +1.2% in March, led by copper (+3.2%). Steel related bulk commodities were also stronger with spot iron ore up +8.5% and coking coal up +11.8%.
Recent information on the domestic front continues to suggest a rebalancing of the economy away from mining investment continues but that overall growth continues to be below trend notwithstanding a strong services sector.
Mid Cap highlights in March included Aconex (ACX) announcing a capital raising and the simultaneous acquisition of key competitor CONJECT. Iron Mountain gained approval from regulators to acquire information management company Recall (REC). Fortescue Metals Group (FMG) announced a memorandum of understanding with Vale which provides a framework for potential investment in FMG and its assets. Orora (ORA) announced the acquisition of IntegraColor, a provider of point of purchase solutions in the US and Nufarm (NUF) reported 1H16 earnings above the mid point of company guidance.
Attribution Analysis for the month ended March 2016
|Top 5||Bottom 5|
|G8 Education||Tatts Group|
|Recall||Treasury Wines Estates|
|Platinum Asset Management||Duet Group|
The Concise Mid Cap strategy was up +4.63% for the month, resulting is quarterly return of +0.69%, below the benchmark return of +2.25%. Major contributors to performance for the month included Challenger (CGF), G8 Education (GEM) and Recall Holdings (REC). Biggest detractors for the month included Resmed (RMD), Tatts Group (TTS) and Treasury Wine Estates (TWE).
TPG Telecom (TPM) announced a solid 1H16 result in March with earnings beating market expectations on the back of higher corporate earnings and iinet synergies. We continue to believe the longer term story for TPM is underappreciated with numerous growth options available which will drive shareholder value creation with time. Corporate margins should continue to trend higher as low margin legacy phone revenue is replaced by very high margin on-net fibre revenue. Functional separation is expected to drive migration to TPG’s unique fibre-to-the-basement products. Organic growth on the corporate side of the business will also continue to be driven by innovative products sold to enterprise customers and TPG’s extension of its fibre infrastructure by about 4,000km is a significant on-netting opportunity created by a near doubling of its metro fibre footprint. On the consumer side of the business share gains in fixed broadband, along with a number of new high quality and high margin products are expected to underpin consumer earnings and help defend margins.
Orora (ORA) made a number of announcements over the quarter which demonstrated its growth potential beyond the B9 paper mill synergies and share gains in the North American packaging solutions market. ORA committed to invest $42m in additional glass bottle forming lines with volume underpinned by the domestic wine industry which has benefited from a deprecation of the Australian dollar. In March, ORA announced the acquisition of IntegraColor, which provides a new platform for bolt-ons and an earnings stream in North America consistent with its strategy to move further up the value chain. Our investment thesis on ORA remains intact. The company has an attractive double digit earnings profile over then next few years, has ample balance sheet headroom and no cross selling included in its synergy targets.
For the quarter the strategy’s underperformance was driven primarily by the underweight position to Resources and its overweight position to Financials. While the performance of the Resource sector for the quarter was extremely volatile and in our opinion led by aggressive short covering, we are of the belief that many mid cap resource companies are still too heavily burden with debt. Furthermore, free cash flow generation remains weak, despite an improvement in some base metal prices. The Mid Cap Financial sectors quarterly performance in part was driven by the negative segment and poor share price performance from the four major Australian banks. Through the quarter we maintained our core holdings in the Financial sector, and where appropriate took advantage of oversold share prices to top up preferred companies at attractive prices.
A good example of how extreme share price movements have been over the quarter are with three stocks in the portfolio (see below). During this period each of these stocks delivered results that were inline with expectations for the half year ended Jan 2015 and have provided no news or guidance that would suggest wild swings in their earnings. Despite this backdrop each of these stocks have endured a volatile quarter. As a long term fundamental investor our role is to look through short term noise and to invest in quality businesses that generate growing cash flows.
|Company||Perf % Jan 16’||Perf % Feb 16’||Perf % March 16’|
We believe the Fund is well placed to generate positive returns in rising markets but importantly continue to outperform in falling markets. 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 and healthcare and we remain underweight property trusts. We believe that Mid Cap companies will continue to outperform the broader markets as displayed by the strategy’s excess positive return of 0.69% over the quarter versus the ASX 200 -2.75% decline.
*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.