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Friday, 31 January 2014

ATI Equity Portfolio January 2014

Information as at 31 January 2014

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

(1.1) (0.1) (1.5)   (0.4) 1.4  1.5

*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 January 2014

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

BHP Billiton







Commonwealth Bank







ANZ Bank







National Aust Bank











Consumer Staples



Westpac Bank





















Rio Tinto




Information Technology



Insurance Aust Group




Consumer Discretionary



Selected Portfolio Statistics as at 31 January 2014 

Inception Date 23-Dec-05   MER (est.) 0.90% p.a.
Number of Stocks 30   Tracking error (forward estimate) ~ 2% p.a.
ATI Funds Under Management ~$400m      

Relative Portfolio Performance

The ATI Equity Portfolio fell 4.1% in January compared with a fall of 3.0% in the benchmark index. Against this benchmark, ATI is producing excess returns on a 5 year and since inception (Dec’05) basis.   

The Best and Worst Performing Sectors

The best performing sectors for the month were Utilities (+0.9%), Health Care (+0.3%) and Telco’s (-1.9%); while the worst were Consumer Discretionary (-4.5%), Energy (-3.7%), and Consumer Staples (-3.1%).

From a sector perspective, the relative performance of the ATI portfolio was most positively impacted from being overweight Utilities stocks (2.4% v benchmark of 1.6%) and underweight Energy stocks (4.2% v benchmark of 5.9%), whilst it was most negatively impacted by being underweight Materials stocks (17.2% v benchmark of 18.1%).

Attribution of Stocks

The portfolio performance during January was assisted by overweight positions in AGL Energy (AGK), CSL (CSL) and Telstra (TLS); and by not holding Santos (STO), Treasury Wine Estates (TWE) and Super Retail Group (SUL). The three stocks in the portfolio that contributed most to its relative performance during January were:  

AGL Energy (AGK) (+1.1%) outperformed during January in a month where Utilities were the best performing sector across the market, and other defensive sectors (such as REIT’S and Healthcare) also outperformed. There was no specific company news, but in relation to the sale of the MacGen asset, we note that with the withdrawal of the Chinese consortium, AGK is now the likely front-runner for the asset, over ERM Power. The fact that MacGen covers its current short position in the market means AGK could use the surplus to rebuild its commercial and industrial (C&I) business, which has shrunk in recent years. We continue to hold AGK on the basis of i) valuation support; ii) a higher than market yield and; iii) its defensive portfolio risk management attributes.

CSL (CSL) (+1.9%) outperformed out-performed the broader market during the month after it reiterated FY14 guidance for 10% NPAT growth in FY14, at the JP Morgan healthcare conference. Achieving this outcome is based on expectations of continued strong double digit growth in specialty products, further efficiencies in plasma collection, strong growth in Albumin sales into China (coupled with a price premium vs developed markets) plus ongoing volume expansion into emerging markets such as Eastern Europe and into new indications such as CIDP. Competition from Baxter is also unlikely to be as great or as soon as initially expected with capacity constraints remaining an ongoing issue now that Sanquin’s fractionation capacity (which Baxter utilises) is under review by the FDA. We maintain our overweight position in CSL on the basis of i) our expectation for continued market share gains ii) ongoing capital management with 78% of an A$950m buyback still remaining; iii) its low cost producer status in a rational oligopoly industry structure and iv) leverage to a falling AUD/USD and CHF/USD.

Telstra (TLS) (-2.1%) outperformed during the month due to its defensive nature and speculation of potential capital management given the recent cash raised from asset sales. In December Telstra agreed to sell CSL HK for US$2.43bn and in January sold 70% of Sensis for $454m. This has lead to speculation of an increase in capital management (i.e increase in fully franked dividend) or using the proceeds for acquisitions in Asia, although TLS has already announced that it will not disclose any potential capital management until the deals are complete (March ‘14). In January, Telstra also acquired O2 Networks for $60m expanding their NAS (Network Application Services) division with existing customers including Australia Post, Macquarie Group & Tabcorp. We retain an overweight portfolio holding in TLS as it remains relatively attractively ranked in the ATI universe with an attractive underlying running yield and offers the comfort of significant earnings certainty compared to many other stocks covered in the universe.

Positions that detracted most from the portfolio’s performance during the month were from being overweight Twenty-First Century Fox Inc (FOX), Sandfire Resources (SFR), and ANZ Banking Group (ANZ); and from not holding Newcrest Mining (NCM), Westfield Holdings (WDC), and Amcor (AMC). Stocks in the portfolio that detracted most from relative performance during the month included:  

Twenty First Century FOX Inc (FOX) (-8.2%) was down sharply during the month following an announcement that it had initiated the process to de-list from the ASX, subject to approval of its Class B voting stock holders. FOX will hold a special shareholder meeting on March 24, with the delisting date to be May 8, if successful. This is a disappointing outcome as FOX has been a significant contributor to positive alpha for us over the last few years. We have been forced to reduce our position in FOX due to mandate restrictions precluding us from holding overseas investments. We expect to continue reducing our position in the upcoming months.

Sandfire Resources (SFR) (-10.1%) underperformed during January despite the reasonably robust copper price, which traded in the US$3.20-3.30/lb range during the month. As previously guided by the company, copper production during the December 2013 quarter of 15.5kt fell below the required rate to achieve full year guidance of 65-75kt due to a scheduled fall in head grade. However, with underground production hitting the required 1.5mtpa rate from five active stopes, improved copper recoveries of ~90%, and an expected increase in head grade, we remain confident in the company's ability to deliver its stated targets over the next six months. Gold recoveries continue to struggle, at just ~39% for the quarter, however we once again note that less than 10% of forecast revenue generation for SFR comes from its gold by-product stream, with copper generating over 90%. This exposure to gold is substantially less than Australian peers Oz Minerals (~20% from precious metals) and PanAust (~40% from precious metals). SFR remains attractively ranked in the ATI equity ranking system, and remains an overweight portfolio holding.

ANZ Banking Group (ANZ) (-6.5%) underperformed the broader market in January despite there being no significant company specific news releases. The most likely cause of the negative performance is the fact that ANZ is far more heavily exposed to the Asian emerging economies than the other major banks and the recent concerns regarding the economic health of many of the emerging markets globally has heightened investor concerns regarding the potential risks over the course of 2014. Despite the intra-month volatility, we are still prepared to maintain our overweight portfolio holding as we feel that the majority of ANZ’s clients are in the more developed economies of the Asian regions and indeed the current flight to safety to the USD means that ANZ is likely to be a recipient of some unusually large and profitable currency transaction business that results from investors heading for the emerging markets “exit door”.

Portfolio Construction

The main portfolio weighting changes during January included: new portfolio additions in Challenger (CGF) and M2 Group (MTU); portfolio top-ups for our holdings in ANZ, Commonwealth Bank of Australia (CBA), CSL, Dexus Property Group (DXS), Orica (ORI) and Telstra (TLS); the complete disposal of our position in Recall (REC); slight portfolio reductions for our holdings in AMP (AMP), Fortescue Metals group (FMG), FOX and Rio Tinto (RIO). Cash at the end of January was 4.2% (December 3.8%).

The ATI portfolio, with regard to its market capitalisation exposures, remains differentiated to the benchmark index with ~92% of the portfolio (excluding cash) in the top 50 stocks (benchmark ~83%), ~6% in the next 100 (benchmark ~13%), and ~2% in the last 150 stocks (benchmark ~4%). The 10 largest holdings constitute ~69% of the portfolio (benchmark ~55%), the dividend yield is 4.4% (benchmark 4.3%) and the portfolio’s historic PE is 15.3x (benchmark of 16.4x).

Whilst the portfolio’s market cap bias is currently tilted to the larger stocks compared to the benchmark index, its underlying sector positioning is not too dissimilar to that of the benchmark. After the performance of some resource stocks over the last half of 2013, ATI took advantage of that strength and reduced the portfolios materials sector exposure to slightly underweight and has also moved to a slightly overweight position in the financials sector. We remain comfortable holding a number of resource stocks with iron ore exposure, particularly RIO & FMG, and copper exposure, SFR, whose expected return is sufficiently attractive to justify some additional portfolio risk. We continue to also remain overweight in stocks we view as having industry structure advantages and/or the expected benefit of USD currency exposure from offshore earnings such as Brambles (BXB), Computershare (CPU), CSL (CSL), Resmed (RMD) and Wesfarmers (WES) in combination with other opportunities that we feel have fundamental valuation support, such as ASX (ASX), CGF, MTU and Suncorp Group (SUN).

Portfolio Risk 

The current forecast tracking error of ~2.5% is similar to last month (~2.5%). We are continuing to be presented with a number of stock opportunities in the financial, industrial and property trust sectors as a result of their recent market underperformance. At this stage we still feel that any further additional risk in the mining contractor stocks is unlikely to be justified in an environment with ongoing profit warnings and earnings downgrades, minimal earnings clarity and continued reductions in the expected mining capex spend of the larger mining companies over the next few years.

At present, the main sources of portfolio risk are from overweight positions in SFR, Lend Lease (LLC), Telstra (TLS), RIO, RMD, Insurance Australia Group (IAG), Woolworths (WOW) and Ardent Leisure (AAD).

General Market Commentary

Australian equities retreated in January as jitters began creeping back into global markets on the worse than expected Chinese manufacturing data, weaker emerging market currencies and a softer than expected US corporate earnings season. After the stellar performance we saw from equities in calendar 2013, the benchmark ASX300 Accumulation Index ended the month down 3.0%, making it the fourth lowest returning start to the year in over a decade. The more defensive stocks out-performed during the month, with utilities being the best performing sector, whilst a weaker Aussie dollar helped the materials stocks to weather the soft commodity prices and emerging market economic health concerns to outperform the broader market.

 In domestic company specific news: pre-results season earnings confessions continued with a major downgrade by Treasury Wine Estates (TWE) and upward margin guidance from Insurance Australian Group (IAG), though this was clouded by a cautious outlook on the level of premium growth for FY14; post Christmas retail trading data appeared mixed, with profit warnings from Super Retail Group (SUL) and the Reject Shop (TRS) somewhat countered by a relatively solid update from JB Hi-Fi (JBH); David Jones (DJS) confirmed press reports that it had declined a merger approach from Myer (MYR) in late 2013; the bidding contest for Commonwealth Office Property Fund (CPA) ended with GPT Group (GPT) withdrawing and DXS prevailing; Telstra (TLS) announced the majority sale of its directories business, Sensis, for $454m, to private equity group Platinum Equity; and FOX announced its intention to de-list from the Australian stock exchange, citing the facts that it no longer has Australian businesses in the portfolio and a US only listing would improve overall liquidity in the stock.

Whilst there was no RBA meeting in January, meaning the official cash rate remained unchanged at 2.5%, the inflation number for December was above market expectations and this does not bode well for the prospects of further rate cuts. Despite there being no official rate change the impact of falling commodity prices saw the Aussie dollar still fall almost 2% against the USD in January, being its lowest level against the US dollar since mid-2010, with the AUD/USD ending the month lower at US87.68c (-0.02c). We still expect the broader trend in recent months of US dollar strength will continue in the year ahead given the backdrop of slower domestic growth, lower overall mining investment, potentially higher unemployment levels and local interest rates not expected to be moving higher in the nearer term. An unexpected official rate rise by the RBA in the next few months is one variable factor that would reduce our confidence in the expected ongoing weakness in the Aussie dollar over 2014.

Although the domestic economic data released in December had generally been a little more upbeat, the data released during January was more mixed and included: consumer confidence down 1.7% m/m to 103.3 (+2.7% y/y); the December unemployment rate coming in at 5.8% (consensus 5.8%), but with a 20bp contraction in the participation rate (64.6%) being softer than expected; the NAB Business survey which showed an improvement in business conditions in December to the highest levels since March 2011, suggesting recovery in the non-mining economy is gaining some momentum; the inflation rate for the December quarter surprised on the upside +2.7% y/y (consensus +2.4%) with the higher than expected number driven mainly by poor weather and a tobacco tax change; building approvals in November rose 22.2% y/y (consensus +21.1% y/y), driven by a 27.6% rise in multi-family approvals with single-family approvals rising to the highest level since 2010 after being up 6% m/m; housing finance commitments rose 1.0% m/m in November (consensus 1.0%); private sector credit increased 0.5% m/m (consensus 0.4% m/m), up sharply from the 0.3% level in November; November retail sales rose 0.7% m/m (consensus 0.4%), with the trend having picked up noticeably since mid-year as the cafes and restaurants category was strongest (+2.2% m/m) for a second consecutive month while weakness continued in the department stores category (-2.0% m/m).

With concerns in January about the economic health of some emerging market economies, weaker US housing data and a stronger USD taking centre stage, base metals prices were generally weaker with the LME index down 3.7% for the month. The natural gas price in the US rose sharply on cold weather and was one of the best performing commodities during the month. Spot Brent crude oil fell 3.3% over the month amid expectations of supply ramping up in Libya as the blockades in the southern Libyan oil fields, which have crippled output since July, were removed and production started shortly afterwards. A stronger US dollar also contributed to the falling oil price. The benchmark spot iron ore contract, Tianjin 62% fines, fell 5.9% as exports of iron ore from Port Headland to China totalled 24.16mt in December, up 19% y/y and the second biggest monthly export volume ever. As a result of this, iron ore port inventories rose to their highest levels since October 2012. Gold finally snapped its losing streak with the spot gold price rising 3.2% as investors reacted to negative sentiment in equity markets and the strains around emerging markets.


With a spate of profit warnings hitting the market in January and consensus earnings growth estimates for FY14 gradually being ratcheted down over that last six months, the focus for equity investors has once again shifted to potential earnings risk ahead of the upcoming February reporting season. As we have discussed previously, the expanding market multiple was largely responsible for driving equity markets higher over calendar 2013 and the current index levels are only expected to be maintained if the reporting season is at least in line or better than the prevailing market consensus expectations. A weaker than expected reporting season opens the window for a “double whammy” effect whereby both the market PE multiple and consensus earnings forecasts would come under pressure and this would clearly not be a positive for equities.

Given our equity market in 2013 rallied so strongly, the upcoming reporting season will certainly be a test of the markets confidence in the ability of companies to deliver on the expectation that earnings are set to improve. We remain of the view that earnings certainty should be front and centre in our thinking about portfolio holdings. With equity markets having moved higher last year as the market multiple continued to rise, negative earnings surprises are sure to be punished in the upcoming reporting season and this is why we feel more comfortable being positioned with a bias to the large cap stocks that we feel will deliver on current expectations. An example of this is the major banks still being our preferred means of exposure to the higher yielding opportunities due to our confidence in their ability to meet or exceed their current market consensus earnings estimates. We also remain positioned with a number of stocks having USD earnings exposure that are likely to benefit from a weaker AUD and we expect a stronger US economic outlook will continue to put pressure on the gold price and we still have no direct exposure to gold.

The portfolio’s historically low active risk level (tracking error) has resulted from a combination of being more overweight the larger cap stocks and being less actively positioned at the specific sector level exposures. Given our expectation that equity markets will also be somewhat macro driven in the lead up to reporting season, we feel this positioning suits the current environment as the performance impact of market volatility is usually best mitigated by being overweight in larger cap stocks. Other specific active sector positioning includes being underweight the industrials (including holding no mining services stocks), consumer staples and energy stocks. We remain overweight the materials, financial, healthcare and telecommunications sectors.





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