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Quarterly Investment Update Antares High Growth Shares Fund – June 2020

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Quarterly Investment Update Antares High Growth Shares Fund – June 2020 Quarterly Investment Update Antares High Growth Shares Fund – June 2020 For adviser use only Highlights for the quarter Performance: The Fund returned 17.8% (net of fees) for the June quarter, outperforming its benchmark by 1.3%. Contributors to performance: Positive contributors – Afterpay, James Hardie, Boral; Negative contributors – Metcash, CSL, Telstra Stock activity: Buys/additions – Woolworths, Seek, Oil Search, Oz Minerals, Virgin Money; Sells/reductions – Wesfarmers, AGL, Medibank Private, Treasury Wine Estates Fund snapshot Inception date 7 December 1999 Benchmark S&P/ASX 200 Total Return Index To outperform the benchmark (after fees) over rolling Investment objective 5-year periods Investment returns as at 30 June 20201 Period 3 months 1 year 3 years pa 5 years pa 10 years pa Since inception pa Net return2 % 17.8 -11.7 3.4 5.6 7.7 9.8 Gross return3 % 18.1 -10.7 4.4 6.7 8.8 11.3 Benchmark return % 16.5 -7.7 5.2 6.0 7.8 7.6 Net excess return % 1.3 -4.0 -1.8 -0.4 -0.1 2.2 Gross excess return % 1.6 -3.0 -0.8 0.7 1.0 3.7 1 Past performance is not a reliable indicator of future performance. Returns are not guaranteed and actual returns may vary from any target returns described in this document. 2 Investment returns are based on exit prices, and are net of management fees and assume reinvestment of all distributions. Contributors to performance For the June quarter the fund delivered a return of 17.8% outperforming the benchmark return of.16.5%. Positive Adding value to performance were our overweight holdings in Afterpay (APT), James Hardie (JHX), Boral (BLD). • Afterpay (APT) shares have been the strongest performer in the ASX 100 on the back of positive trading updates, the surge in popularity of online retail shopping and news of a substantial shareholding by Chinese tech giant, Tencent. • James Hardie’s (JHX) FY20 results were well received by the market as was the company’s report on trading for the first six weeks of FY21 which revealed a far smaller decline in net volumes than had been expected. • The announcement of a new managing director with a track record in business transformation and the emergence of Seven Group with a 10% stake piqued investor hopes of change at Boral (BLD), whether asset sales or a break-up. 1 Chart 1: Fund attribution – June quarter Source: Antares, June 2020 Negative The largest detractors to performance were our overweight positions in Metcash (MTS), CSL and Telstra (TLS). • After a strong run in the March quarter as investors sought stocks in the consumer staples sector, MTS surprised the market with a seemingly opportunistic capital raising which together with the shift in focus to the discretionary retail sector saw its shares underperform. • CSL shares underperformed the strong rise in the broader market as investors worried about the impact the covid crisis might have on CSL’s ability to collect plasma in the key US market. CSL also announced a change to the CFO position during the quarter, a move that invariably unnerves investors. • Having also been keenly sought by investors during the March sell-down, TLS shares were less favoured, particularly as the merger between TPG and Vodafone was approved and attention turned to the implications for pricing and competition. Stock activity Given its long / short nature, the Fund can invest $1.25 for every dollar invested (net) in the fund. It also has no stock number limits. This means we can invest in a large number of securities. We have utilised this flexibility to make a number of thematic investments aimed at capitalising on mega trends that we have identified. These are long-term transformative forces that can change the social and economic landscape. Mega trends then are broken down to investible themes that provide tailwinds to earnings and hence drive outperformance. Examples of megatrends might include, demographic shifts, technological transformation, urbanisation and climate change. From these a number of themes may flow, including ageing, millennials, artificial intelligence and automation, energy transition, ecommerce and digitisation. Fortunately, the Australian market is broad enough to enable investment in these themes. Some of the Fund’s investments over recent quarters are part of the technological transformation megatrend and include Afterpay, Wisetech and PolyNovo. Afterpay has already had a meaningful impact on fund performance over the quarter. Afterpay provides payment services, an alternative to credit cards, the company offers an instalment payment service that is free for customers who pay on time. The company serves customers in Australia, New Zealand, the United States, and the United Kingdom. Wisetech Global designs and develops cloud-based logistics software solutions. The Company offers forwarding, custom clearance, liner and agency, warehousing, and land transport solutions and operates worldwide. PolyNovo is a biotechnology company that has a portfolio of patented biodegradable polymers that have potential for application across numerous medical fields leading to superior patient outcomes. A summary of stock activity over the quarter is presented in Table 1. (Commentary may not be provided on some positions where we have an imminent intention of buying or selling.) Antares High Growth Shares Fund Quarterly Investment Update – June 2020 2 Table 1: Stock Activity Portfolio Trades Buy / Close Sell / Initiate AWC, OZL, SEK, QAN, QUB, Long TWE, MPL, AGL, WES OSH, WOW, PVN, VUK COL, EVN, FMG, RMD, TPG, Short CAR, CCL, FLT, URW, SGP WPL Shorts and Pairs During the quarter we covered a number of our short positions. These include Flight Centre (FLT) following its share price collapse and subsequent capital raising. We also bought back our position in Carsales (CAR) over the quarter- unfortunately this short was not successful. The stock continued to rise on the back of better than expected guidance, the halo effect around all digital business models and the prospects of commuters shunning public transport in favour of their own private vehicle. Coca Cola Amatil (CCL), Unibail Rodamco Westfield (URW) and Stockland (SGP) were all bought back having contributed modestly to performance over the quarter. Short positions added during the quarter include Evolution Mining (EVN). Below we present some basic metrics comparing EVN and Northern Star (NST), our preferred gold stock. NST offers a much lower valuation for what we believe to be a superior mix of assets hence our decision to maintain our exposure to NST, despite its strong outperformance, while reducing our gold exposure by shorting EVN. Table 2: Evolution Mining vs Northern Star Resources Characteristic EVN NST Bloomberg Forecast (BF) 8.5 6.6 EV/EBITDA (x) BF PE ratio (x) 19.8 13.8 ROE 12.3% 14.6% 3-year production growth 27% 41% Source: Bloomberg; July 2020 Following our participation in the OSH capital raising discussed below we initiated a short position in Woodside Petroleum (WPL) creating a pair. The WPL portfolio is not immune from the destruction caused by the low oil price. WPL is also in the difficult position of requiring significant capital to fund it growth projects at a time when cashflows are low. Compounding the problem is its high, and we believe unsustainable, payout ratio that has attracted a new class of shareholders to the share register over recent years. The final pair trade we began to initiate during the quarter was to short FMG offset by a long position in Oz Minerals (OZL) and Alumina (AWC). Our view is that the iron ore price has held up amazingly well given global events. The Chinese stimulus measures have seen Chinese steel production grow at almost 4% for the year while Brazils inability to deliver tonnes to the market has exacerbated the tightness causing the price to remain high. As we enter the back half of CY20 we expect some of the tightness to ease. The Alumina (exposure via AWC) and Copper (OZL) prices have lagged the iron ore (FMG) price, however there are early signs that may be about to change. The alumina price has fallen to such a level that much of the industry is loss making at the levels seen during the quarter. The pain felt has seen some producers shut production that has already led to a bounce in the alumina price over the quarter. On the copper side, many of the worlds big copper producing regions are experiencing a covid crisis that is beginning to impact local workforces and hence production, all this at a time when China is stimulating demand. Combined, these drivers have seen the copper price rally almost 34% over the quarter. Antares High Growth Shares Fund Quarterly Investment Update – June 2020 3 Chart 2: Indicative commodity price movements 60 50 40 30 (%) 20 10 0 -10 1/04/2020 1/05/2020 1/06/2020 1/07/2020 Copper Iron Ore Alumina Source: Bloomberg; July 2020 Switch Wesfarmers (WES) and Woolworths (WOW) During the quarter we began to switch some of our Wesfarmers (WES) exposure into Woolworths (WOW). From a valuation perspective, WES is now trading at a 30% premium to the market, well above its long-term average. Conversely WOW is trading in line with its long-term average, having underperformed during the market bounce in recent months. We have an opposing view to that of the market. WES has benefitted strongly from the mobility restrictions particularly from its large exposure to Bunnings and to a lesser extent Officeworks, but we view this benefit more as a one-off sugar hit to sales. It is unlikely that consumers will return to renovate a room or purchase another monitor or office chair anytime soon. WOW however should enjoy a longer duration to its uplift in sales.
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