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Sunday, 31 July 2011

ATI Equity Portfolio Jul 2011


Information as at 31 July 2011

Fund 1 Mth (%) 3 Mth (%) 1 Yr (%) 2 Yr (%pa) 3 Yr (%pa) 5 yr (%pa) Inception (%pa)

ATI Portfolio Return

(4.3)

    (8.2)

(0.1)

6.7

4.2

4.6

5.3

S&P/ASX 300 (Accum)

(3.8)

(7.6)

3.0

6.5

0.6

1.9

 3.0

Outperformance (Alpha

(0.5) (0.6) (3.1) 0.2 3.6 2.7  2.3

*Past performance is not a guarantee of future results and may not be indicative of them. The gross returns are calculated using the Portfolios net asset value of a model mandate within the Share Invest SMA product. Performance assumes reinvestment of all income. Inception date is 23 December 2005.

Portfolio Objective

The ATI Australian Equity Portfolio seeks to achieve total returns (includes income and capital appreciation and before the deduction of fees and taxes) that exceed those on the S&P/ASX 300 Accumulation Index by 3% per annum over rolling three-year periods.

Portfolio Details as at 31 July 2011

  Fund S&P/ASX300     Fund S&P/ASX300
Largest Holdings Weight (%) Weight (%)   Sector Allocation Weight (%) Weight (%)

BHP Billiton

15.0

12.3

 

Financials

41.5

35.9

ANZ Bank

8.0

        5.1  

Materials

26.6

28.4

National Aust Bank

7.4

4.9

 

Consumer Discretionary

7.1

3.8

Commonwealth Bank

7.3

7.1

 

Consumer Staples

7.0

8.4

Westpac Bank

6.2

5.7

 

Telecommunications

5.8

3.7

RIO Tinto

5.8

3.2

 

Industrials

3.6

7.1

Telstra

5.8

3.4

 

Energy

2.0

7.4

Woolworths

4.0

3.0

 

Healthcare

1.4

3.3

QBE Insurance

2.9

1.7

 

Utilities

1.3

1.4

News Corporation

2.6

0.6

 

Information Tech

0.0

0.7

Selected Portfolio Statistics as at 31 July 2011 

Inception Date 23-Dec-05   MER (est.) 0.90% p.a.
Number of Stocks 33   Tracking error (forward estimate) ~ 3.0% p.a.
ATI Funds Under Management ~$550m      


Relative Portfolio Performance

The ATI Equity Portfolio fell 4.3% in July compared with a fall of 3.8% by the S&P/ASX300 Accumulation Index. Against this benchmark, ATI is producing excess return on a 2 year, 3 year, 4 year, 5 year and since inception (Dec-05) basis.

The Best and Worst Performing Sectors

The Telecommunication Services sector (+3.5%) was the only positive contributor during the month, whilst the other relatively good performers were Industrials (-0.7%) and Utilities (-1.7%). The worst performers were Consumer Discretionary (-7.5%), Property (-6.6%) and Financials (-6.2%).

Attribution of Stocks

The portfolio performance during July was assisted by overweight positions in Telstra (TLS), Kingsgate Consolidated (KCN), and PanAust (PNA); and by not holding Wesfarmers (WES) and Westfield Group (WDC). Stocks in the portfolio that contributed to its relative performance during the month included:

Telstra (TLS) (+3.5%) rose in July after the ACCC finalised fixed access prices for the three years to June 2014. The ULL (unconditional local loop) and WLR (wholesale line rental) prices, which are based on an access network value of $15.5bn, increased marginally on the interim 2011 prices. The ULL at $16.21 (per line per month) across three geographic bands is 3% lower than the draft price of $16.75, but slightly better than the interim price of $16.00. The WLR price of $22.84 is 3% better than the interim rate of $22.10, but 12% below the 2010 rate. As one of the few stocks which has reconfirmed FY11 earnings guidance, TLS remains a core portfolio holding due to its relative attractiveness and defensive nature.

Kingsgate Consolidated (KCN) (+11.0%) rose in July as the gold price reached record high levels (in nominal terms) above US$1,600/oz. Gold stocks outperformed the broader market due to their perception as somewhat of a safe-haven from the turmoil being created from European and US sovereign debt issues. Despite reporting relatively soft production levels during the June quarter (36.9koz) taking FY2011 production to 113koz, KCN’s annual gold production is expected to increase to 240-260koz in FY2012. The stock remains relatively attractive in the ATI universe and a portfolio holding.  

PanAust (PNA) (+8.8%)  also benefitted from the rising gold price during the month, as approximately 30% of the company’s revenue will be contributed by precious metals once the second operation, Ban Houayxai, ramps up to full production in 2012. The company’s performance was also assisted by the strengthening copper price during July (+4.8%), as industrial action intensified at the world’s largest copper mine, Escondida in Chile, threatening further supply disruption in a market which is already in deficit. PNA remains relatively attractive in the ATI universe and a portfolio holding.

Positions that detracted most from the portfolio’s performance during the month were from being overweight APN News & Media (APN), News Corp (NWS) and Seven West Media (SWM); and from not holding Newcrest Mining (NCM) and Macarthur Coal (MCC) which both outperformed. Stocks in the portfolio that detracted from performance during the month included:

APN News & Media (APN) (-16.0%) & Seven West Media (SWM) (-11.6%) both underperformed during the month following the ongoing deterioration of the Australian advertising market, particularly for the newspaper sector. The ad market decline is being driven by significant weakness in the retail industry which accounts for ~20% of advertising expenditure, along with general economic softness and very tough comparables with last year which benefitted from substantial advertising surrounding the mining tax and the Federal election. Following the latest advertising data disappointment we lowered our earnings forecasts for all media stocks. As a result, we now believe the balance sheets of both APN and SWM are too highly geared to continue to be considered investment grade in the current climate. As such, both stocks are in the process of exiting the ATI portfolio.

News Corp (NWS) (-10.2%) declined in July despite announcing a US$5bn share buyback following the recent phone hacking scandal in the UK and postponement of the BSkyB deal. The main damage from the phone hacking scandal appears to be reputational rather than financial at this stage. The BSkyB deal will now be delayed by at least eight months as the UK Competition Commission undertakes its review. We expect the NWS 4Q11 result on 11 August to show significant growth which should help focus the market back towards the stock’s fundamental earnings and attractive valuation. We are forecasting a 38% increase in 4Q EBIT driven by ongoing strong structural growth in Cable, a continuation of the turnaround in US TV, and end of the difficult Film comparisons (post Avatar). NWS remains a portfolio holding and is still relatively attractive within the media sector of our universe.

Portfolio Construction

The ATI portfolio continues to reflect a large stock bias with regard to its market capitalisation exposures against the S&P/ASX300 index with 87% of the holdings in the top 50 stocks (81% of the S&P/ASX300 index), 11% in the next 100 (15% of the S&P/ASX300 index), and 3% in the last 150 stocks (5% of the S&P/ASX300 index). The number of stocks (33) in the portfolio remains unchanged from last month with the completion of the Equinox (EQN) takeover. The ATI stock rankings have changed slightly over the last month as the market sell-off continues and has seen some new names becoming relatively attractive. The portfolio is likely to be overweight the larger cap stocks in these volatile markets and the number of holdings in coming months will only increase if some stocks become relatively attractive in the ATI stock universe as a result of reporting season updates and market weakness. Any new positions would be expected to compliment the overweight positions already held in the larger capitalisation stocks which history has shown us is a relatively good place to be in these uncertain markets.

Portfolio Risk 

The current forecast tracking error of ~2.7% (range of 2-8%) for the ATI portfolio has the potential to change in coming months as the risk/return benefit of taking on some relatively oversold stocks is assessed over the reporting season.

As at 31 July the main sources of portfolio risk are from a variety of overweight smaller capitalisation stock holdings including Pacific Brands (PBG), PanAust (PNA) and Mount Gibson (MGX). Larger capitalisation stocks that provide a contribution to portfolio risk include having no holding in Newcrest Mining (NCM) and Wesfarmers (WES), and having overweight positions in BHP Billiton (BHP), Rio Tinto (RIO), OneSteel (OST), Lend Lease (LLC) and Telstra (TLS).

General Market Commentary 

 

July was the fourth consecutive down month for the local equity market, its longest losing streak since February 2009. Equity markets were hostage to the ongoing problems in Europe and US with investors remaining wary about the potential implications of the European debt crisis and the debt ceiling impasse in the US. Local factors were also negative as patchy economic data raised concerns about the coming years’ earnings prospects, while a higher than expected inflation number cooled hopes of a possible interest rate reversal by the RBA. While the risks around the Euro issues diminished by month end, the US debt ceiling situation still remained unresolved and markets drifted lower. The Australian market (ASX300 Accumulation Index) was not immune to these issues and finished the month sharply down (-3.8%).

There were some major sentiment shifts around domestic interest rate expectations during July. Market pricing shifted from a potential rate hike to a rate cut, before a higher than expected monthly inflation number meant the potential for a near-term rate hike re-emerged and the AUD/USD went above $1.10. In other local news during July: the Government released some details around its proposed carbon pricing scheme with a price of $23/t of CO2 starting 1 July 2012; News Corp (NWS) was caught in a phone hacking scandal at the News of the World in the UK; BHP announced the $14.3bn acquisition of Petrohawk Energy which is a significant shale gas business in the US; and David Jones (DJS) revised down guidance for 2H11 and 1H12 citing a “dramatic and rapid deterioration in trading conditions in 4Q11”. Not surprisingly, overall market trading activity was subdued in light of the offshore events and ahead of the August reporting season.

Domestic economic data releases in July continued to highlight the extent of our dual speed economy with emerging softness in the non-mining segments of the economy. House prices and credit data continued to soften, while building approvals fell further. As mentioned, the Government released details around pricing and compensation of its proposed carbon tax, while employment data rebounded from recent softness. Despite near-full employment and continued employment growth, the average Australian household has now increased its savings ratio to 9.1% into the face of rising cost-of-living inflation. During July, the RBA had reason to comment on the impact of the cautious consumer and it is now expected that policy deliberations going forward will be influenced by this unexpected conservatism as discretionary spending continues to slow. With this in mind, the RBA left interest rates on hold at 4.75% and removed the tightening bias rhetoric in its minutes during the month. Given the volatility in interest rate expectations, the AUD/USD traded in a wide range declining to a low of $1.055 before rallying to finish the month at $1.098 (+2.5¢), just off its intra-month record high of $1.107.

Spot Brent crude (+5.1%) recovered early in July from the sell-off that had been sparked in June by the International Energy Authority’s (IEA) decision to release reserves; the IEA commented during the month that it had no plans for further releases. Spot gold (+6.8%) was a beneficiary of market caution and sovereign debt concerns in Europe and the US. It reached record highs during the month against both the USD ($1,619) and the Euro (EUR1,138). Base metals (LME index +4.3%) emerged from their May-June breather with renewed strength in most of the commodities; copper (+4.2%) was supported by supply disruptions due to strikes and weather-related problems at mines in Chile and Indonesia, but zinc did better still (+5.3%). Spot iron ore prices bounced after two down months (Tianjin 62% fines +5.2%), although inventories at Chinese ports remained elevated (July weekly average 24% above the same month of 2010). Data for China’s steel production confirmed a gentle acceleration over the first half from a rolling 12-month rate of 626m tonnes in December to 656mt in June 2011.

Outlook

ATI continues to hold a diversified portfolio of stocks that provides leverage to the key growth themes driving the domestic economy (mining investment and volumes, plus consumption) with a minority of stocks being exposed to the US economy that appears to be losing the potential for positive earnings surprises to emerge over calendar 2011. The resources sector remains leveraged to China’s ongoing growth plans as it becomes more likely that there will be downward revisions to global growth forecasts in coming months, while the short term sentiment towards the major banks has the potential to continue to improve as the chance for some disappointing earnings reports from some industrial stocks seems possible over the next month during the reporting season. ATI continues to remain overweight the major Australian banks as we feel they are among the best positioned globally to counter fears of systemic risk given the low credit growth environment provides them with more flexibility to decide when they should re-tap the wholesale markets over the next six months or so. The recent sell-off for equity markets reflects the fact that a synchronised global earnings recovery is now some way off with both Europe and the US attempting to deal with mounting debt problems. The ongoing earnings downgrade cycle is still in motion and until we see some improvement in FY12 earnings prospects, investors are likely to remain wary of equities.

ATI’s relative value process is still identifying some attractive opportunities, particularly in stocks where operating leverage may emerge during our three year forecast period. Those stocks whose share prices have rallied excessively in anticipation of the expected simultaneous global economic recovery remain the standout risks over the course of the coming year as signs of earnings growth are now required to drive the next upward phase in equity markets.
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