Australian Ethical’s chief investment officer David Macri warns that investors should baulk at having high exposures to just one industry with all the underlying stocks exposed to the same drivers or economic factors.
Highlights of his report on the Larger Companies Trust are below.
Investment commentary
- Any rational investor will baulk at the thought of having such a high exposure to just one industry with all the underlying stocks exposed to the same drivers or economic factors. We remain comfortable with our portfolio’s diversification and characteristics as a whole
- REA Group (+19.1%) was the largest contributor to performance over the month on the back of introducing a new agent subscription offering in FY14 and put through material price increases.
- QBE (+8.7%) and CSL (+7.3%) both benefited from the recent strength of the US dollar which has focussed investors’ attention on companies with foreign dominated earnings. QBE also benefited its briefing on its Global Operational Transformation Program which confirmed $250m of cost-outs with the potential to increase further.
- Suncorp (+7.6%) performed strongly and at month end pre-released its FY13 NPAT. While headline profit was below consensus the dividend (30cps ordinary & 20 cps special) exceeded market expectations.
Larger Companies Trust
Monthly Performance Report – July 2013
The Larger Companies Trust underperformed its melded benchmark index over the month due mainly to the domestic equities portfolios, which returned approx. +3.8% versus its benchmark (S&P/ASX 200 Industrials) return of +4.0%.
Our underweight position in the Banks relative to the benchmark accounted for approx. 63bps of underperformance. As a group the Banks returned +6.1% reflecting a return to the yield theme. Of the Big 4 banks, we only hold a position in Westpac which happens to be a significant underweight holding (3.2% v 9.5%) relative to the index. It is also worth noting that Banks make up 37% of the index while our holding is just 7.8%. This large difference in the Banking sector also helps to explain much of the underperformance over the 12 months given the sector returned 36.8% over the period vs the S&P/ASX 200 Industrials return of +30.6%.
During times of significant outperformance by the Banks we will inevitably underperform the market, however any rational investor will baulk at the thought of having such a high exposure to just one industry with all the underlying stocks exposed to the same drivers or economic factors. We remain comfortable with our portfolio’s diversification and characteristics as a whole.
Sigma Pharmaceuticals (-15.9%) was the single largest detractor from performance after it provided a trading update downgrading earnings to below market expectations. The company pointed to a higher cost base arising from greater investment in developing their mutli-channel sales strategy (i.e. developing their online presence). In the update, Sigma also noted they are unlikely to recoup the full amount owing from a key customer that recently fell into receivership, thus increasing their provision for bad and doubtful debts.
On the positive: REA Group (+19.1%) was the largest contributor to performance over the month on the back of introducing a new agent subscription offering in FY14 and put through material price increases. QBE (+8.7%) and CSL (+7.3%) both benefited from the recent strength of the US dollar which has focussed investors’ attention on companies with foreign dominated earnings. QBE also benefited from its briefing on its Global Operational Transformation Program which confirmed $250m of cost-outs with the potential to increase further. Suncorp (+7.6%) performed strongly and at month end pre-released its FY13 NPAT. While headline profit was below consensus the dividend (30cps ordinary & 20 cps special) exceeded market expectations.
The international equities portfolio (themed around Global Smart Energy) rose approx. 9.4% performing in line with its benchmark, the MSCI Global Climate Index (AUD) Index which rose 9.5%. The falling AUD again boosted returns for Australian investors given it fell a further 2% over the month, following on from a dramatic 12.2% fall during the June quarter.
contact
David Macri
Australian Ethical
CIO
02 6201 1993
0404 080 862
dmacri@australianethical.com.au