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Wednesday, 31 August 2011

ATI Equity Portfolio Aug 2011

Information as at 31 August 2011

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

ATI Portfolio Return








S&P/ASX 300 (Accum)








Outperformance (Alpha

(0.5) (0.4) (1.9)   3.5 2.6  2.2

*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 August 2011

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

BHP Billiton







ANZ Bank






Westpac Bank




Consumer Staples



Commonwealth Bank







Ntional Aust Bank




Consumer Discretionary



RIO Tinto





















News Corporation







Fortescue Metals




Information Tech



Selected Portfolio Statistics as at 31 August 2011 

Inception Date 23-Dec-05   MER (est.) 0.90% p.a.
Number of Stocks 30   Tracking error (forward estimate) ~ 3.0% p.a.
ATI Funds Under Management ~$500m      

Relative Portfolio Performance

The ATI Equity Portfolio fell 2.5% in August compared with a fall of 2.0% by the S&P/ASX300 Accumulation Index. Against this benchmark, ATI is producing excess return on a 3 year, 4 year, 5 year and since inception (Dec-05) basis.

The Best and Worst Performing Sectors

The best performing sectors in August were Utilities (+4.2%), Property trusts (+1.7%) and Telecommunications (+1.2%). The worst performers were Energy (-6.4%), Materials (-4.9%) and Industrials (-4.2%).

Attribution of Stocks

The portfolio performance during August was assisted by overweight positions in Telstra (TLS), Newscorp (NWS) and Suncorp Group (SUN) and by not holding Alumina (AWC) and Orica (ORI). Stocks in the portfolio that contributed to its relative performance during the month included:

Telstra (TLS) (+1.3%) rose in August after they reported a 16.8% fall in FY11 net profit to $3.23bn, but this was above consensus expectations of $3.08bn. On a divisional basis, the fixed business was in line with market expectations while Mobile was strong in 2H11, with Telstra expanding market share. Subscribers in 4Q11 were 376k for Telstra compared to Optus (+28k) and Vodafone (-376k). The company commented that “guidance is prudent” despite tough retail conditions and committed to a broader review of capital management after shareholders vote on the proposed participation in the rollout of the NBN (18 October 2011). The stock remains relatively attractive in the ATI universe and a portfolio holding due to strong core earnings fundamentals.

Newscorp (NWS) (+7.1%) shares were stronger in August after it released a solid 4Q11 result, which saw: (1) FY11 EBIT growth of 12% (in line with guidance of “low double digit growth”) driven by continued momentum at the Cable division (+22%) and a dual structural/cyclical rebound in TV (+210%); (2) FY12 guidance for EBIT growth of “low to mid teens”; (3) a US$5bn buyback program to be completed over the next 12 months; and (4) a capital structure that highlights a significant excess cash position. Also during the month, BSkyB (NWS 39%) announced a £750m on-market share buyback with NWS agreeing to participate pro-rata. In Film, Fox's Rise of the Planet of the Apes lived up to the hype, successfully overcoming the mixed reaction to the 2001 Planet of the Apes remake, to rank as the fifth highest grossing August opening ever. NWS remains a core portfolio holding due to its relative attractiveness within the ATI universe and diverse earnings composition.

Suncorp Group (SUN) (+10.5%)  closed up in the month after releasing its FY11 result which came in over 5% ahead of consensus NPAT at $641m. The surprise was driven by the bank performance. The core bank reported NPAT of $259m vs consensus expectations of $235m (driven by a 14bp half-on-half increase in the net interest margin) and the non-core bank NPAT was $175m, broadly in line with expectations. SUN expressed confidence in the current level of capital buffers, but said it will hold off on returning capital until market/regulatory uncertainty settles down. CEO Patrick Snowball's contract was due to expire in August 2013, but he has now moved to a rolling contract with an intention to stay until "at least 2015". SUN remains relatively attractive in the ATI universe and a core portfolio holding due to a better earnings profile outlook over FY12.

Positions that detracted most from the portfolio’s performance during the month were from being overweight Qantas Airways (QAN) and QBE Insurance (QBE) and underweight Wesfarmers [WES]; and from not holding Westfield Holdings [WDC] and Newcrest Mining (NCM) which both outperformed. Stocks in the portfolio that detracted from performance during the month included:

Qantas Airways (QAN) (-14.9%) share price declined in August due to market reaction to news flow regarding 1) the release of Qantas' International Transformation Plan; 2) the removal of Tiger Airways' CASA suspension; 3) the announcement of further industrial action and 4) its full year profit announcement. The Transformation Plan will focus on returning Qantas International to profitability in the short term and allowing the Qantas mainline business to sustainably exceed its cost of capital over the long term. QAN FY11 result came in ahead of market expectations although no final dividend was declared, management provided no specific FY12 Guidance due to the high degree of volatility/uncertainty in global economic conditions. Despite the relative underperformance, QAN remains a portfolio holding and we feel there is upside earnings risk and PE expansion upon resolution of the industrial relations issues.

Wesfarmers (WES) (+7.8%) shares outperformed the market after a solid FY11 result and the relatively defensive characteristics of its business being seen as attractive in volatile markets. ATI’s relative underperformance was due to an underweight position in the stock. The FY11 result was driven by a continuation of the Coles turnaround (via margin improvement) and improved Bunning sales, this was partially offset by Target and Kmart which were impacted by a weak retail environment and the Resources and Insurance divisions which were rain impacted (these are expected to normalise in FY12). ATI will continue to monitor its position in WES over the upcoming months with a view to potentially increasing the portfolio holding as a global macro risk mitigation exercise.

QBE Insurance (QBE) (-10.1%) underperformed dramatically in the month on the back of its 1H11 result. Premium revenue was about 4% below market expectations (due to timing issues and reinsurance reinstatement costs) and the overall insurance margin was very weak, being 11.2% vs market consensus of ~13%, mainly due to a surprisingly high level of large claims in June. The negative margin surprise was compounded by a big reduction in management's full-year margin guidance which is now 11-14%, down from 15-18% prior to the result. In response to this fact, QBE stated that “reinsurance pricing has increased significantly in catastrophe-affected areas and reinsurance renewals for the rest of the year are likely to be more price sensitive due to claims in 2011 to date”. Despite the disappointing 1H11 result, QBE remains a portfolio holding and is still relatively attractive within the insurance sector of our universe.


Portfolio Construction

The ATI portfolio continues to maintain its large stock bias with regard to its market capitalisation exposures against the S&P/ASX300 index with 90% of the holdings in the top 50 stocks (81% of the S&P/ASX300 index), 8% in the next 100 (15% of the S&P/ASX300 index), and 2% in the last 150 stocks (5% of the S&P/ASX300 index). The number of stocks (30) in the portfolio has reduced from last month with the removal of APN News & Media (APN), Bank of Queensland (BOQ), Macquarie Group (MQG) and Seven West Media (SWM) whilst Wesfarmers (WES) was a portfolio addition. The ATI stock rankings have moved around more than usual over the last month as the market volatility continues and this means that some new names have become relatively attractive. The portfolio is expected to remain overweight the larger cap stocks in these volatile markets and the number of holdings in coming months will only increase if those stocks that have become relatively attractive in the ATI stock universe, as a result of reporting season updates and/or market weakness, are expected to improve the risk/return profile of the portfolio. 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 and market conditions.

Portfolio Risk 

The current forecast tracking error of ~2.9% (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, post the reporting season, with reference to the global macro developments.

As at 31 August, the main sources of portfolio risk are from a variety of overweight smaller capitalisation stock holdings including Pacific Brands (PBG) and PanAust (PNA). Larger capitalisation stocks that provide a contribution to portfolio risk include having no holding in Newcrest Mining (NCM) and having overweight positions in Fortescue Metals (FMG), Rio Tinto (RIO), ANZ Bank (ANZ), Telstra (TLS), BHP Billiton (BHP), Qantas Airways (QAN) and National Australia Bank (NAB).

General Market Commentary 

August was one of the most volatile months for equity markets in recent times as markets begin pricing an increasing lack of confidence in overseas governments being able to orchestrate economic recoveries given their current fiscal positions. The continued debate around the US debt ceiling, subsequent downgrading of US sovereign debt by Standard &Poor’s, a lack of consensus on how to deal with European sovereign debt and weaker leading indicators only highlighted the macro headwinds markets are facing. Equity markets bore the brunt of the increasing risk aversion, with investors dumping shares and fleeing to the relative safety of bonds and gold. The Australian equity market was under severe pressure early in the month before staging a significant intra-day rally of over 7% and then continuing to trend higher over the rest of the month. After this recovery, the Australian market (ASX300 Accumulation Index) finished the month down (-1.9%) representing its fifth consecutive monthly decline and at its lowest month-end value since July 2009.

Apart from the global macro issues driving significant volatility, investors were also attempting to digest the high volume of earnings reports associated with the main August reporting period. Themes emerging from the results season included a weak consumer environment, cost pressures and delays in resources projects. In general, companies gave mixed views on the outlook and stressed the high degree of uncertainty, while reported profits missed consensus expectations slightly more often than they beat them. Buyback announcements were another theme of results season as they generally lead to stocks rallying after being announced. While outlook comments generally remained subdued, capital management initiatives (buy-backs) increased and dividends were, on average, ahead of market forecasts with the higher payout ratios reflecting the strength in corporate balance sheets. As investors sought to de-risk their portfolios, the defensive utility, property trusts and telco sectors outperformed the market while the more cyclical energy, resource and Industrial sector stocks generally lagged it.

Domestic economic data releases in August continued to highlight emerging softness in the non-mining segments of the economy. House prices, credit data and retail sales remained soft while building approvals and employment levels fell further. The RBA left rates on hold at 4.75% and broadly removed its tightening bias as the bond markets priced in 100bp of rate cuts by Dec 2011. Consistent with the significant volatility across asset classes, the AUDUSD traded in a wide range hitting a high of $1.106 (record post-float high $1.1081 last month), fell back to a low of $0.993, before rallying to finish the month at $1.068 (-3.2¢).

Spot Brent crude (-0.0%) sold off sharply early in August, along with equity markets, but clawed back its losses by the end of the month despite improved prospects for a return of Libyan output as anti-Gaddafi forces made significant gains. WTI was more subdued (-7.2%), reflecting a continued glut in the Cushing hub. Gold (+13.5%) had its best month since 1999 as a weak global growth outlook and the prospect of continued monetary stimulus fuelled buying. However it was a volatile rise which included a two-day fall of 9.2%, the second biggest (after one in October 2008) since 1983. Base metals (LME index -6.6%) retreated on worries over global growth momentum and evidence that China’s monetary policy is remaining restrictive; conversely spot iron ore prices remained resilient (Tianjin 62% fines +2.5%), although inventories at Chinese ports continued to grow from elevated levels (August weekly average 25% above the same month of 2010).



ATI has responded to the recent market conditions with a series of active portfolio management decisions that have been implemented during this period of significant market instability. These decisions had the cumulative effect of concentrating and de-risking the portfolio into those large capitalisation stocks which provided the greatest expected return for the lowest level of expected risk. The recent sell-off in equity markets reflects the fact that a synchronised global earnings recovery is now some way off as both Europe and the US are attempting to deal with mounting debt problems. As a result of revised global growth expectations, the ongoing domestic earnings downgrade cycle for equities is likely to continue and until we see some improvement in the global macro backdrop, investors are likely to remain wary of equities.

ATI’s relative value process is still identifying some attractive opportunities in conjunction with some more defensive holdings that we feel are appropriate for these market conditions. 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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