|Net Performance (After Fees)||1 Month||3 Month||6 Months||1 Year||3 Years||5 Years||*Since inception (Annualised)|
|Concise Mid Cap Fund Return (%)||2.94||2.66||0.28||14.43||8.40||7.66||4.86|
|Mid Cap Masters Index (%)||3.53||4.00||3.59||18.06||11.34||9.41||3.25|
|Active Performance (%)||-0.59||-1.34||-3.31||-3.63||-2.94||-1.75||1.61|
The Australian equity market (S&P/ASX 200 Accumulation Index) rose +3.32% in March and is now up +4.82% calendar year to date. Healthcare (+14.9%), consumer staples (+10.8%) and utilities (+10.7%) outperformed during the quarter, whereas telecommunications (-4.6%), A-REITs (-0.3%) and materials (+1.8%) lagged. Globally, equity markets remained resilient, supported by the optimism surrounding president Trump’s agenda for change as well as accommodative monetary policies and continued improvements in the fundamental economic backdrop for the global economy. The MSCI World USD Accumulation Index rose +6.4%, led by the US S&P500 (+5.5%), German DAX (+7.3%) and French CAC40 (+5.4%). Asian markets underperformed with the Shanghai Composite up +3.83% and the Nikkei down -1.1%.
In interest rate markets, the Fed increased the US overnight cash rate by 25 basis points at its March meeting, taking the lower bound of the fed funds rate to 0.75% and the upper bound 1.00%. In bond markets, the US yield curve flattened throughout the quarter as expected Fed reserve cash rate hikes are putting upward pressure on the short end of the treasury yield curve. The US one year bond rose 20 basis points to 1.02%, whereas the 10 year rate actually contracted to 2.38%. Notwithstanding higher short term interest rates in the US, the US dollar actually weakened against the Australian dollar over the quarter (AUD/USD rose 5.6% to $0.76), due to higher commodity prices supporting the currencies of commodity exporters including Australia.
The spot price for iron ore rose +1.9% to $80.4US/t over the quarter whereas coal prices were weaker. Gold was up +8.7% while crude prices fell -5.8%. Base metals generally posted solid gains. The LME base metals index rose +7.5% last quarter with aluminium (+13.6%), zinc (+8.6%) and copper (+6.3%) all rising having benefited from stronger demand associated with fixed asset investment in China.
In China, data on commodity intensive areas of the economy has surprised to the upside so far in 2017. Industrial production is up +6.3% year on year (YOY) to the end of February and fixed asset investment has accelerated to +8.9% year to date YoY, from +8.3% in November 2016. The March monthly official manufacturing PMI rose to its highest level since 2012, suggesting overall industrial activity growth has continued.
In Australia, higher commodity prices have driven the trade surplus to a near record $3.6bn in February. Business conditions remain above average levels with mining conditions strengthening and non-mining business investment rising over the past year. Labour conditions remain relatively subdued and the RBA’s decided to keep the cash rate at 1.5%.
US economic data remains encouraging. The composite ISM index rose to 57.7 in February, the highest level since 2014. Housing starts rose 3% to a 1.29m unit annual rate in February with single family starts at a new post GFC cycle high. The homebuilders’ survey in March rose to a 12 year high. New home sales jumped to the second highest level since the recession. Fourth quarter 2016 GDP was revised upward from 1.9% to 2.1% and consumption in Q4 of 2016 was revised up to 3.5% from 3.0%, a very healthy rate that will continue to underpin US economic growth if it continues growing at a 3% annualised pace. The Conference Board’s consumer confidence index increased to 125.6, levels of confidence only previously exceeded in limited periods, most recently 1997 to 2000. Consumers’ view of current US labour market conditions rose to the most positive level in 16 years and the unemployment rate fell a tenth to 4.7%. The Fed hiked rates at its March meeting to 1.0%, and continues to expect three hikes this calendar year. The policy stance continues to be accommodative despite recent cash rate rises. Recent inflation data shows the headline PCE inflation (Fed’s preferred measure of inflation) moved slightly above the Fed 2% target for the first time since 2012, implying the real cost of interest is a circa -1%.
A dominate theme through the month of March was mid cap corporate activity and M&A news. Downer EDI (DOW) launched a takeover for Spotless (SPO), partly funded via a $1.011bn equity raising. Myer Holdings (MYR) share price rallied on the back of new Premier Investments (PMV) had taken a 10.8% stake in the company and Ardent Leisure’s (AAD) shares posted solid gains on news property investor Ariadne has a significant interest.
Attribution Analysis for the month ended March 2017
|Top 5||Bottom 5|
|Ardent Leisure||Fletcher Building|
|Star Entertainment||JB Hi Fi|
|Aristocrat Leisure||Super Retail Group|
|Ardent Leisure||ResMed Inc|
The Concise Mid Cap strategy was up +2.94% for the month, resulting is quarterly return of +2.66%, below the benchmark return of +4.00%. Major contributors to performance for the month included Ardent Leisure (AAD), Star Entertainment (SGR) and Aristocrat Leisure (ALL). For the quarter Aristocrat Leisure (ALL), WorleyPasons (WOR) and Challenger (CGF) were outperformers. Biggest detractors for the month included Fletcher Building (FBU), JB Hi-Fi (JBH) and Fortescue Metals (FMG). While over the quarter laggards were Fletcher Building (FBU), Ardent Leisure (AAD) and JB Hi-Fi (JBH).
Bluescope Steel (BSL) announced an upgrade to its 1H17 EBIT guidance to ‘around $600m’ up from ‘at least $510m’ citing stronger steel prices and spreads, stronger iron ore prices for its iron sands and productivity improvements, including further costs reductions. The increased returns to shareholders reflect the strong execution of a highly successfully strategy implemented by a high quality management team.
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. While 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 which recently secured a ~13% interest in WOR at a premium.
As we have discussed in recent reports we have been expecting merger and acquisition activity to increase as organic growth drivers become more challenged and company management switch their focus to inorganic acquisition activity. With capital remaining cheap by historical standards, March saw a large pick up in M&A activity with Downer EDI (DOW) launching a takeover bid for Spotless (SPO) , Cromwell Property Group (CMW) advancing its takeover offer for Investa Office Fund (IOF), Premier Investments (PMV) acquired a 10.8% stake in Myer Holdings (MYR), property investor Ariadne Australia (ARA) acquired a strategic take in Ardent Leisure (AAD) while Dar Group increased its effective holding in Worley Parsons (WOR) from 13% to around 19%.
Our recent discussions with companies has highlighted a broadly held view that the cost of capital is not going to get any cheaper in the current cycle. With offshore funding rates increasing, capital investment decisions are now higher priority and becoming an increasing part of a company’s growth outlook.
As with the most recent observed M&A cycles, we expect the activity to be most pronounced in the mid cap sector of the Australian equity market. Mid cap companies are typically highly cash generative with large opportunity to utilise balance sheet capacity for capital projects and acquisitions. While for any acquirer, mid cap companies are large enough within the industry which they operate to have meaningful market share widening their attraction to a large range of potential acquirers.
*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.