March 2016 Selector Ex 50 High Conviction Equity Fund Quarterly Newsletter #45
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5 4 6 201 Equity Fund High Conviction March Ex 50 Ex Quarterly Newsletter No. elector S In this quarterly edition we review performance and attribution. In our headline stories, we cover Cochlear and Blackmores new infant formula. We take a look at electric cars, oil and credit rating agencies. We also comment on trends in central banking and “just-in-time” investing. Photo: “The Classic Panama” – neatly boxed. Selector Funds Management Limited ACN 102756347 AFSL 225316 Level 3, 10 Bridge Street Sydney NSW 2000 Australia Tel 612 8090 3612 www.selectorfund.com.au Selector March 2016 Selector Ex 50 High Conviction Equity Fund Quarterly Newsletter #45 About Selector We are a boutique fund manager with a combined experience of over 150 years. We believe in long-term wealth creation and building lasting relationships with our investors. Our focus is stock selection. Our funds are high conviction, concentrated and index unaware. As a result, we have low turnover and produce tax effective returns. We seek businesses with leadership qualities, run by competent management teams, underpinned by strong balance sheets and with a focus on capital management. 1 Selector March 2016 Selector Ex 50 High Conviction Equity Fund Quarterly Newsletter #45 Dear Investor, What started as a trickle, has turned into a torrent. We are referring to the new world of negative rates. Central bankers globally are embracing this new approach in a desperate attempt to kick start economic growth. In a historical sense this is new ground. Central bankers have often dealt with the opposite, controlling growth to drive down inflationary pressures. Today, it’s all about fostering growth to avoid deflation. For a central bank, cutting rates to spur on an economy that is struggling is standard practice. Yet when this extends to imposing negative interest rates on funds deposited, the economic consequences are uncharted. With currency wars and counter moves by other central banks underway, an adjustment process is at hand. It is therefore no surprise that stock markets are experiencing significant swings as macro factors including China, oil markets and weak global economic activity impacts investor confidence. On the flip side, opportunities will present themselves as markets re-price many businesses in fear of the near term outlook. The recent reporting season allowed us to consider the investment case for each of our holdings as well as investigating new opportunities. A key theme that emerged centred on companies that are delivering and those that are not. The best management teams are driving top line growth despite the prevailing economic backdrop, while continuing to invest in new products, all without compromising their respective balance sheets. These companies include the likes of Cochlear, Domino's Pizza Enterprises, Treasury Wines, Sydney Airports, The Star Entertainment Group, Reece, Blackmores and SEEK. In contrast, a raft of businesses appear ill prepared for this challenging environment. Some have resorted to cutting costs and pulling back on investing in an attempt to shore up earnings and reduce debt, especially in the resources sector. The message from management of operators such as Worley Parsons has clearly shifted to one of capital preservation and survival. No doubt some of these damaged businesses provide share price upside should circumstances change, however, our approach will continue to assess each on their individual merits, with a particular emphasis on management culture and financial strength. In this edition we profile our thoughts on the emergence of the electric car, the role of credit rating agencies, the rather novel concept of what we term just-in-time investing and re-visit global implant leader Cochlear. We also compare baby formula’s produced by Blackmores amongst others, chart the history of oil and take a look at the evolution of central bank communication. For the 2016 March quarter the Fund delivered a gross negative return of 0.30% for the quarter while posting a gross positive gain of 17.42% for the current financial year to date. In contrast the All Ordinaries Accumulation Index has delivered negative returns of 2.35% and 1.92% over the same periods. We trust you find the report informative. Regards, Selector Investment Team 2 Selector March 2016 Selector Ex 50 High Conviction Equity Fund Quarterly Newsletter #45 Table of Contents About Selector ....................................................................................................................... 1 Performance March 2016 ....................................................................................................... 4 Just-in-time investing ............................................................................................................. 9 Credit rating agencies – the blind leading the blind ............................................................... 10 Cochlear (ASX: COH) ............................................................................................................. 13 Blackmores Newborn Infant Formula .................................................................................... 16 Electric Vehicles ................................................................................................................... 19 The Prize – Book Review ....................................................................................................... 22 A Trend in Central Banking ................................................................................................... 30 Company visit diary March 2016 Quarter .............................................................................. 38 Performance Statistics.......................................................................................................... 40 Quote: Peter Lynch, former Fidelity Investments Portfolio Manager “Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.” 3 Selector March 2016 Selector Ex 50 High Conviction Equity Fund Quarterly Newsletter #45 Performance March 2016 For the quarter ending March 2016, the Fund delivered a gross negative return of 0.30% compared with the 2.35% fall in the All Ordinaries Accumulation Index. Performance statistics are detailed on page 40. Performance table since inception Returns Gross Fund All Ordinaries All Ordinaries Return % Accumulation Index % Index % 3 Months -0.30 -2.35 -3.61 6 Months 11.59 4.11 1.84 1 Year 9.21 -8.05 -12.11 3 Years annualised 18.51 5.63 1.14 5 Years annualised 15.09 5.43 0.89 10 Years annualised 8.45 4.50 0.13 Since Inception annualised 11.84 6.81 2.40 Fund’s Top 10 holdings Top 10 March 2016* Top 10 December 2015* ALTIUM ALTIUM ARISTOCRAT LEISURE ARISTOCRAT LEISURE CARSALES.COM BLACKMORES FLIGHT CENTRE TRAVEL GROUP CARSALES.COM GBST HOLDINGS FLIGHT CENTRE TRAVEL GROUP NIB HOLDINGS NIB HOLDINGS REECE OZFOREX GROUP SEEK SEEK TECHNOLOGY ONE SIRTEX MEDICAL THE STAR ENTERTAINMENT GROUP TECHNOLOGY ONE Top 10: 42.24% Top 10: 44.55% * Listed in alphabetical order Selector employs a high conviction, index unaware, stock selection investment strategy, which typically targets 25-40 stocks for the Fund. As shown above, the Fund’s top 10 positions usually represent a high percentage of its equity exposure. Current and past portfolio composition has historically been very unlike that of your average “run-of-the-mill index hugging” fund manager. Our goal remains focused on truly differentiated broad-cap businesses rather than the closet index hugging portfolios offered by most large fund managers. 4 Selector March 2016 Selector Ex 50 High Conviction Equity Fund Quarterly Newsletter #45 Performance attribution for the March 2016 quarter Top 5 stock contributors Contribution Top 5 stock detractors Contribution ALTIUM 1.06% OZFOREX -1.74% IRESS 0.57% SIRTEX MEDICAL -1.26% NIB HOLDINGS 0.47% BLACKMORES -0.83% THE STAR ENTERTAINMENT GROUP 0.42% INFOMEDIA LIMITED -0.42% FLIGHT CENTRE TRAVEL GROUP 0.41% ARB CORPORATION -0.25% Portfolio Commentary Below we provide brief commentary on some of the larger portfolio moves during the quarter. Top contributors 1. ALTIUM (ASX: ALU) Printed circuit board design software group Altium remains on track to substantially grow sales and earnings, as management continues its pursuit of global market share leadership. We reviewed the Altium investment case in our December 2014 quarterly newsletter and the recent half year 2016 result confirmed that the group's business strategy and financial aspirations remain on track. Most pleasing has been the strong growth achieved in the U.S. region which delivered revenue up 25% to US $18.4 million, while the EMEA region appears back on track following a 18% rise in revenues to €14.0 million. CEO Aram Mirkazemi noted the achievements and aspirations commenting, "Altium's financial performance over the first half positions the company well to achieve its full year objectives of double digit revenue and sales growth and to reach an EBITDA margin that enters into the 30's. The first half result also confirm that the company is on track to achieve its goal of $100 million revenue by 2017 (from organic growth alone) and is on course to realise market leadership in the PCB software design by 2020." We are planning to visit the group's U.S. operations during April. 2. IRESS (ASX: IRE) Financial data services group IRESS delivered a solid 2015 full year result, with group sales