Quarterly Investment Update Antares Australian Equities Fund – December 2019
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Quarterly Investment Update Antares Australian Equities Fund – December 2019 For adviser use only Highlights for the quarter Performance: The Fund returned 0.3% (net of fees) for the December quarter, underperforming its benchmark by 0.4%. Contributors to performance: Positive contributors – Caltex, BlueScope Steel, Amcor and Iluka Resources; Negative contributors – Bank of Queensland, Nine Entertainment and CSL (underweight) Stock activity: Buys/additions – GPT, Northern Star Resources, South 32, Worley; Sells/reductions – ANZ, Coles, BlueScope Steel, CBA, Link Administration, NAB, Stockland, Westpac. Fund snapshot Inception date 3 July 1995 Benchmark S&P/ASX 200 Total Return Index To outperform the benchmark (after fees) over Investment objective rolling 5-year periods Investment returns as at 31 December 20191 Since Period 3 months 1 year 3 years pa 5 years pa 10 years pa inception pa Net return2 % 0.3 20.0 7.8 7.9 7.3 9.4 Gross return3 % 0.5 20.7 8.6 8.8 8.2 10.4 Benchmark return % 0.7 23.4 10.3 9.0 7.9 9.5 Net excess return % -0.4 -3.4 -2.5 -1.1 -0.6 -0.1 Gross excess return % -0.2 -2.7 -1.7 -0.2 0.3 0.9 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 Positive Caltex Australia (CTX) - We have discussed Caltex in the ESG section of the report. In short both management action to extract value, and subsequent news of a potential takeover bid from Canadian convenience store retailer Alimentation Couche Tarde created a strong share price rally. BlueScope Steel (BSL) – BSL was a big beneficiary of both the cooling down of trade tensions with China, but also of other US trade action to protect US steel production. Amcor (AMC) – We were somewhat surprised by the Amcor sell off in the September quarter. The rebound in the December quarter seemed more about a recovery from the previous sell-off, which occurred on little news. 1 Chart 1: Fund attribution – December quarter Source: Antares, December 2019 Negative CSL Limited (CSL) - The Fund’s underweight position in CSL detracted from performance over the quarter as CSL rallied strongly in line with a strong rally in US pharmaceuticals. We note the rally in the S & P 500 pharmaceutical index leaves it trading on a forward PE of 15.8 times and the US Healthcare index trades on 22 times, according to Bloomberg data, whereas on the same methodology CSL trades on a forward PE of 41 times. Bank of Queensland (BOQ) - BOQ reported a poor result and announced a capital raising. Of equal importance to the share price performance was the announcement of a strategy update early in 2020, which the market interpreted would bring more bad news. We note BOQ is now trading around book value, which theoretically should result in limited downside. Nine Entertainment (NEC) - After reporting a reasonable full year result, NEC subsequently updated the market of weakness in the advertising market, which saw the share price sold off. Stock activity NB: commentary may not be provided on smaller trades or some positions where we have an imminent intention of buying or selling. Stock activity – December 2019 General Property Trust (GPT) - We further added to the position for the reasons discussed last quarter. Buys/additions Northern Star Resources (NST) - Northern Star is our preferred gold stock. Its share price had weakened over the quarter, not only because the gold price had fallen, but because concerns remained around the quantum of production from its Pogo asset. Late in the quarter, NST announced, what we believe will be Antares Australian Equities Fund Quarterly Investment Update – December 2019 2 another transformational acquisition, being 50% of the KCGM (ie the Kalgoorlie Super Pit) interest, including operator ship, from Newmont Goldcorp. The announcement also included an operational update showing the Pogo mine is now producing to expectations. We not only added to our position in the placement to fund the KCGM acquisition, but also bought on market. South32 (S32) - We again added to our position in what is one of our preferred mining companies, as per the commentary in the last quarterly report. Worley (WOR) - We added to the position for the reasons mentioned in the last quarterly report. ANZ Banking Group (ANZ) - We reduced our holding in ANZ. We had become concerned that cost cutting was becoming more difficult, as ANZ went hard on costs well before the three other major banks, meaning that the low hanging fruit has already been picked. It was also clear they were experiencing operational difficulties in Australia. What we hadn’t expected, was the drop in dividend franking from 100% to 70%, with the expectation this level of franking will continue. The other major banks frank to 100% which means that ANZ stands at a grossed up yield disadvantage. On top of this, the actual FY19 result was compositionally weak with poor revenue growth in the consumer segment, and a re-risking of the Commercial book. For the next six months the bright spot appears to be that ANZ have been able to reaccelerate growth in the mortgage market. Coles Group (COL) - We reduced our Coles holding after the stock’s strong sharemarket performance left little upside on our valuation. Although low volatility earnings has been the market sweet spot for some investors, we expect COL’s earnings growth to be 4% pa or below for the next three years. The stock is priced on a 2020 PE multiple of 23 times, a Price to Book ratio of six times and a yield of 3.8%. Although the payout ratio is not extreme, it is unlikely to be increased in the short term due to the very large capital investments required to remain competitive with peers. There is also a risk of further competition coming into the market from Kaufland, and possibly Lidl. We also note thus far Amazon’s entrance into Australia has been somewhat benign, but this may not always be the case. A positive for Coles is the abatement of Sales/reductions price deflation in grocery, and possibly even nascent signs of small inflation re- emerging, which if sustained would increase profitability. However, on balance at such high valuation multiples the risk return trade - off is turning down in our view. BlueScope Steel (BSL) – We trimmed the position after a very strong price run left little margin for any negatives. Commonwealth Bank (CBA) - CBA does not report its full year result at the same time as the other big three banks, so when ANZ and WBC reported weakly, followed by capital requirements from WBC and NAB, CBA benefitted by default. Further, when Austrac made the horrific Westpac accusations, CBA benefited from having already been called out by Austrac. In a sense, the market is pricing CBA as having already suffered its regulatory issues, and therefore it trades at a massive PE premium to the three other major banks. Also in its favour was its 1Q trading results which looked much better than ANZ and WBC, particularly with regard to revenue growth, so that became a sector differentiator. However, as in so many ASX sectors currently, the sector leaders are enjoying huge premiums over peers, which in this case has led to what we believe is an overvalued share price. Link Administration Holdings (LNK)-We trimmed after the size of the position had expanded after a strong share price rebound. National Australia Bank – We sold down to index weighting. Although the FY19 result was ok, uncertainty remains around the possibility of the new MD Antares Australian Equities Fund Quarterly Investment Update – December 2019 3 rebasing earnings and regulatory fine risk around Austrac and ASIC, which may pressure NAB’s’ capital position and dividend. Westpac Banking Corporation (WBC) -We reduced our position considerably early in the quarter, after the strong share price run had taken away much of the potential valuation upside. This was before the bank reported on 4 November, Unfortunately for our remaining position, Westpac produced a poor result, conducted a capital raising, cut its dividend, and shortly thereafter was served with the horror of the Austrac claims, resulting in the MD resigning, one board member not seeking re-election and the Chairman announcing his intention to step down. While we believe the huge price fall now looks to be a bit overdone to the downside, given all that has occurred we don’t expect the market will re- rate the stock in the short term. Strategy and Outlook Economic Overview International The quarter has elicited strong debate about the state of the global economy. On the bullish side, proponents point to possibly expanding credit conditions in China, a very strong consumer in the US with robust wages growth and high levels of employment (The US consumer is arguably the best area to be exposed from a corporate perspective at present.), signs that leading indicators and global PMIs have bottomed and are now rebounding. Chart 1: OECD Leading indicators (6 month moving average rate of change %) Source: Macquarie Australian Equity Strategy; 18 November 2019 Chart 2: Manufacturing PMIs – Global, USA and Euro Area Source: Macquarie Australian Equity Strategy; 18 November 2019 Antares Australian Equities Fund Quarterly Investment Update – December 2019 4 the UK election outcome has removed substantial uncertainty and tail risk, the supposed agreement of phase one trade talks between the US and China, economic data from Europe showed steady improvement over the quarter, corporate bond spreads remain low, which is a healthy sign for credit markets, and the price of copper is starting to bounce, which is often regarded by the market as a bellwether for growth, wages growth is reasonable, consistent with “ok” levels of demand and growth, Chart 3: Global wages growth Source: Deutsche bank FX Special Report; 3 December2019 The US Federal Reserve (Fed) will inject a massive $500b in liquidity to help the repo (collateralised short term loan) market over December.