|Net Performance (After Fees)||1 Month||3 Month||6 Months||1 Year||3 Years||5 Years||*Since inception (Annualised)|
|Concise Mid Cap Fund Return (%)||6.39||1.03||(-0.98)||7.02||9.78||3.47|
|Mid Cap Masters Index (%)||7.26||0.33||(-1.90)||8.13||9.60||0.97|
|Active Performance (%)||-0.87||0.70||0.92||-1.11||0.18||2.50|
October saw strong monthly returns posted in all major global equity markets. In the US, the S&P500, Dow Jones and Nasdaq indices rose 8.3%, 8.5% and 9.4% respectively. In Japan, the Nikkei rose 9.8% and China’s Shanghai composite rose 10.8%, whereas in Europe, the German DAX rose 12.3% and the French CAC40 finished 9.9% higher.
The S&P/ASX 200 Accumulation Index was up 4.4% in October, lagging global markets. The relative underperformance by Australia’s equity market was in large part due to the large cap ASX50 companies which dominate the S&P/ASX 200 index and are over represented by low growth profiles in the consumer staple, banks and resources sectors. Mid Caps, on the other hand, have a better spread of industry groups and sectors and the mid cap index generated a return of 7.3% in October and has now outperformed the S&P/ASX 200 Accumulation index by 7% in the last three months.
Commodity prices were mixed in October. The gold price rose (+2.4%) as did the oil price (+2.3%). Aluminium prices fell (-7.3%), while other base metals were marginally higher. Bulk commodities were weaker with iron ore, thermal coal and coking coal down 11.5%, 3.9% and 1.6% respectively.
Economic data released on the US economy continues to indicate moderate growth. Real GDP growth slowed to +1.5% in Q3 and core inflation is currently +1.9% year on year, below the Fed’s 2% inflation target. The unemployment rate held steady at 5.1% and sits within the current Federal Open Market Committee member’s estimates of the longer run normal rate of unemployment range of 4.7% to 5.8%. It was with this backdrop that the recent Fed statement of monetary policy indicated that the next meeting (December) is still very much on the table for consideration of a cash rate hike decision. A US central bank rate hike would place monetary policy in Europe on a divergent path.
Prices in the Eurozone fell for the first time since March and the European Central Bank (ECB) acknowledges developments surrounding slower growth in emerging market economies are posing renewed risks to the Euro area outlook. Options the ECB has said it could pursue include lowering the deposit rate further or extending its quantitative easing program. The central bank in the world’s most important emerging market, China, again cut benchmark one year lending and deposit rates, the sixth official interest rate cut since November 2014. During October, China reported third quarter GDP of 6.9% and the International Monetary Fund announced it expects China’s economy to grow between 6.5% and 7.5% this year.
Meanwhile, in Australia the unemployment rate remained stable at 6.2% and the economy continues to expand at a moderate pace, underpinned by positive trends in the consumer and housing sectors which are supported by accommodative interest rates but held back by a capex downturn and weaker commodity prices.
Mid Cap news for the month included Bank of Queensland announced FY15 cash profit of $357m, up 19% on the previous corresponding period and largely due to the purchase of the Investec Bank Professional Finance and Asset Finance & Leasing business. Dick Smith (DSH) share price fell sharply after it downgraded profit guidance from $45-48m to $37-43m for FY16. M&A continued to be a dominant mid cap theme with Beach Energy (BPT) and DrillSearch Energy (DLS) announcing they had entered into a merger agreement under which BPT would acquire DLS through an all scrip offer. Qube Holdings (QUB) also announced it had acquired an interest in Asciano (AIO), with the support of co-investors, representing 19.99% of AIO shares. Blackmores (BKL) announced a strong first quarter sales result at its annual general meeting and announced a partnership with Bega Cheese (BGA) in which they intend to manufacture a range of nutritional foods including infant formula.
Attribution Analysis for the month ended October 2015
|Top 5||Bottom 5|
|Challenger||JB Hi Fi|
|Bluescope Steel||SAI Global|
|Whitehaven Coal||Adelaide Brighton|
|Treasury Wine Estates||TPG Telecom|
The Concise Mid Cap Strategy returned 6.39% in October, below the index return of 7.26%. Strong performers included Challenger (CGF), Bluescope Steel (BSL) and Whitehaven Coal (WHC) with JB Hi-Fi (JBH), SAI Global (SAI) and Adelaide Brighton (ABC) the main detractors.
Treasury Wines (TWE) announced it was acquiring the majority of Diageo PLC’s wine assets in the US and UK for US$600m. The acquisition is highly accretive on a standalone basis but also provides TWE with a number of ways to drive added value through investment behind the brands, taking costs out and selling high quality wine into global markets. Integration of the business is expected to provide an earnings uplift in the low teens with US$25m of cost synergies at a full run rate before FY20 and immediate access to high quality fruit providing the opportunity to get margin accretion by selling quality wine into Asia. Overall, the turnaround opportunities for TWE remain clear and our confidence has increased that TWE can reach its margin objective of high teens by FY20.
Bluescope Steel (BSL) upgraded 1H16 earnings guidance and announced it was keeping the Port Kembla steel works open, pursuing a $200m cost improvement program and also announced it was acquiring the remaining 50% interest in its US asset, the North Star US electric arc furnace. Executing on cost improvements has been impressive with benefits being realised earlier than expected. This ongoing cost improvement program not only increases the profitability of BSL domestic products but it also reduces the losses on surplus exports. Notwithstanding the current challenging pricing environment, these positive developments support our view that restructuring options available to BSL provide earnings upside.
As outlined earlier the Mid Cap index has outperformed the ASX 200 by approximately 7% over the last three months. This trend is set to continue. The valuation of the ASX 200 is near enough at long term averages with the market Price to Earnings multiple (PE Multiple) slightly over 14x. In recent years, equity market performance has been driven by global quantitative easing by central banks driving down the cost of funds and subsequently inflating asset prices. As opportunities for central banks to continue lowering the cost of funds become limited, investors are switching focus looking for earnings growth.
After benign earnings growth in FY15, consensus estimates for the ASX 200 earnings growth in FY16 is 2%. Ex Resources and Financials, consensus estimates of earnings growth is 8%. Resources and Financials comprise around 62% of the ASX 200 by market cap, with a particular emphasis in the 20 largest companies. Accordingly, market estimates of earnings growth in FY16 is heavily biased towards Mid Cap Industrial companies. With valuations around fair value Mid Cap companies are set to deliver strong outperformance.
*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.