Monthly Report

Monthly Report

November 2016

November 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 (%) (-0.10) (-7.17) (-1.58) 9.51 7.12 8.21 4.19
Mid Cap Masters Index (%) 0.38 (-4.33) 1.19 14.74 10.64 9.56 2.44
Active Performance (%) -0.48 -2.84 -2.76 -5.23 -3.52 -1.35 1.76

Market Performance

The S&P/ASX 200 Accumulation Index was up +2.99% in November, and outperformed the MSCI World Accumulation Index (+1.44%), having endured volatility early in the month when global financial markets digested the surprise Republican win in the US presidential election. Markets initially sold off on news of a Trump victory as the focus shifted to risk of abrupt protectionist moves from the US President-elect regarding international trade policy. An initial conciliatory speech from Trump quickly resulted in rising investor optimism that potential tax cuts and an expansionary fiscal policy would further strengthen the US economy and support inflation. US equity markets posted strong gains with the Dow Jones Industrial up +5.41% and the S&P500 index +3.42%.

The prospect of a pivot to expansionary US fiscal policy quickly heightened growth and inflationary expectations for the US economy and resulted in a sharp sell of in US treasuries which correspondingly spilled over into global bond markets. The yield on 10 year US treasuries rose over 50 basis points to 2.39%. The yield on 10 year Australian Commonwealth bonds expanded a lessor 38 basis points with the widening interest rate differential causing a 3% fall in the AUD/USD to $0.74. The USD climbed against most currencies and by the end of November the US trade weighted index was at its highest level since 2002.

Indeed, there are already signs that the US economy is picking up pace without a substantial fiscal stimulus from Trump or his proposed large tax cuts. Average hourly earnings rose solidly in October, +2.8%, the fastest year on year (YoY) growth rate since June 2009. The unemployment rate is low and stable and has now been at 4.9% or 5.0% for 11 of the past 12 months. Retail sales data for October was solid with the last two months the strongest in two years.

In China, the Caixin manufacturing PMIs rose to 51.2, the highest level in more than two years. Industrial production growth remained stable at 6.1% YoY, fixed asset investment growth was moderately higher, helped by stronger real estate investment and government supported infrastructure spending. Commodity markets surged in November as optimism drove copper (+18.9%), lead (+2.83%), zinc (+12.0%) higher. Gold fell (-8.1%), oil rose (+4.7%) on promised OPEC production cuts and bulk commodities were mixed with iron ore (+12.0%) and coking coal (+19.8%) stronger but thermal coal weaker (-19.5%).

Turning to the domestic economy, economic data continues to be patchy with business conditions reported to be above average levels but jobs growth slowing with a skew to part time over full time jobs. Consumer sentiment has remained relatively stable in recent months with optimists outnumbering pessimists.

In mid cap news, the A2 Milk Company (A2M) announced that revenue and earnings we up strongly for the first four months of fiscal 2017. APN Outdoor Group (APO) upgraded its guidance for revenue to grow 8.5% to 9.0% and earnings up $84m to $86m (previously $79-84m). Bluescope Steel’s (BSL) share price rallied after the company upgraded earnings guidance, whereas Isentia (ISD) and Vocus Communications (VOC) shares suffered heavy falls on the back of earnings guidance that disappointed expectations. Metcash (MTS) reported its interim results which included a weaker than expected food & grocery result, offset by a stronger than expected outlook for hardware
earnings.

Attribution Analysis for the month ended November 2016

Top 5 Bottom 5
CYBG PLC Boral
Bendigo & Adelaide Bank Cochlear
APN Outdoor Group Southern Cross Media
ResMed Inc Orora
Mayne Pharma TPG Telecom

Fund Performance

The Concise Mid Cap strategy returned -0.10% in November, below the benchmark return of 0.38%. Key stock price moves in November included strong performance from CYBG Plc (CYB), Bendigo & Adelaide Bank (BEN) and APN Outdoor (APO). Key detractors were Boral (BLD), Cochlear (COH) and Southern Cross Media (SXL).

Aristocrat Leisure’s (ALL) FY16 result delivered in all areas of the business, reaffirming managements adopted strategy. Significant earnings growth was reported in Australia (+49%), North America (+33%) and Digital (+135%). ALL has made significant gains in market share, increased average fee per day and delivered meaningful margin expansion. Changes in the earnings mix have improved the quality of its earnings profile with recurring revenue now representing a substantial proportion of group revenue. We continue to hold ALL and consider recent earnings momentum will continue.

Boral (BLD) announced it intends to acquire 100% of Headwaters Inc. in an all-cash deal worth A$3.5bn (USD2.6bn) for the US listed building products and fly ash company. The announced transaction came with a discounted capital raising, which resulted in BLD shares trading lower. For some time now, BLD has signalled that growth opportunities are larger and longer in the US housing market. We remain focused on the long term opportunities and believe targeted synergies and further expansion of the US housing cycle are not adequately captured in the current share price and at current prices remains a core holding of the fund.

Outlook

In early December Australia’s September quarterly GDP was released which showed that the economy contracted by 0.5%, which was worse than expectations, while the year on year growth rate was 1.8%, well below economist expectations of 2.2%. The 3Q contraction is the first since December 2008. Following on from this was the Reserve Bank of Australia (RBA) leaving the cash rate unchanged at 1.5%.

Looking forward, with global GDP still sluggish, and inflation well below central bank targets and with the Australian economy contracting, the RBA is in a bind with the direction of the cash rate in 2017. While lower rates theoretically should stimulate growth through credit expansion and business investment, a lower cash rate at a time when bonds yields are expanding will only crimp bank margins and negate any credit growth. On top of this the labour markets remain underutilised which is suppressing wage growth, while house prices continue to rise at record pace and
remain out of reach for most first homes buyers. To further complicate matters for the RBA, the Australian dollar has declined against the US dollar but remains historically high on trade weighted basis and is at a two year high versus the Chinese yuan. The Monetary lever looks challenged in 2017. We are of the view that Fiscal Policy, particularly at a Federal level, in 2017 needs to be pulled to get the Australian economy out of its sluggish place. The Fund is well placed to take advantage of this scenario in 2017.

Post the end of November, Duet Group (DUE) announced that Cheung Kong Infrastructure had approached the company to acquire 100% of the group for $3.00 cash. Directors are currently evaluating the offer. DUE has been a core holding of the portfolio since we first acquired it a $2.05 in September 2012. In that time, the portfolio has received $0.78 in dividends. If the current bid price of $3.00 is recommended by Directors, and including dividends that the stock has delivered over the holding period, the compounded return will be in the order of 25% per annum. While cognisant of the fact that short term momentum and themes drive volatility. Our belief is that companies who continue to generate growing cash flows, reinvest these back into their asset base while at the same time distributing dividends are in our opinion likely to deliver superior returns over the medium to long term.

*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.