Three companies which define why we should invest in India

Image result for mumbai skyline

Mugunthan Siva | India Avenue Invest

Investing in India can be considered mysterious, dangerous, risky and volatile. Investors who prefer clarity and transparency through well managed and governanced companies, generally stick to developed markets like the US, UK, Japan and the ASX 200 for us Australians.

However, perhaps some of the best performed businesses are domiciled in developing economy share markets such as India, China and Brazil. With strong economic growth being driven by fundamentals such as a young and aspiring population, a rich resource base or a comparative advantage, these economies create an ecosystem for thriving companies selling simple goods and services like cars, financial services, consumer goods and information technology solutions. Additionally, the need for infrastructure and economic development creates significant opportunity for businesses involved in areas like road construction, telecom enablers, railway networks and port operators.

These companies are yet to become a Nestle, McDonalds, Coca-Cola, IBM, Facebook, Amazon, WalMart, Pfizer or Apple yet. Their profit base is still at a low point (the Western consumer dwarves the Eastern consumer at this stage), but they are powered by the potential for a significant rise in wealth relative to a developed market ecosystem.

Take for example the case of India. The Government has a stated goal (in its recent budget) of achieving an economic size of US$5trillion by 2024. This will take India to 4th largest economy in the world, behind the US, China and Japan. Importantly, it will mean its GDP per capita will rise from US$2,100 to over $3,500 i.e. a 67% increase in wealth over 5 years. Additionally, the Government of India has stated the need for US$1.5trillion of infrastructure over the next 5 years. More roads, rail, ports, airports and urban infrastructure, which will create substantial opportunity for companies within the ecosystem.

Whilst investors in developed markets are looking for a new technology, the next all curing drug or a medium that gathers significant customers with the intent of future data, in markets like India it can be simple businesses growing tremendously from old-school aspiration and development. We explore three such companies below.

Titan Company is a consumer goods company which generates most of its revenue through the procurement of gold, manufacture and design and retailing of jewelry (93% of revenue). The company, a JV between the Tata Group and State Government, is also involved in manufacture and retailing of fashion watches and eyewear.

As the economy of India is becoming formalised through Government reforms like GST and Demonetisation, there is a huge push towards organised retailing rather than one store operators or those which have traditionally operated in the non-tax paying sector of the economy. This created the opportunity for chains as the aggregation of retailing occurs. Titan now has 4% market share of jewelry and its business is thriving through brand recognition.

Source: Moneycontrol.com
The stock has generated an annualised return of 34% over the last 10 years. That’s a return of $190,328 on a $10,000 investment over just 10 years. That’s from something simple like selling jewelry, driven by fundamentals such as Indian’s love of gold and a transition to organised retailing as wealth increases and the need for authenticity rises.  

Bajaj Finance is a non-banking financial services company. The company deals in consumer finance, SME and commercial lending and wealth management. The company has close to 300 consumer branches and 500 rural locations, with over 33,000 distribution points.

The company has emerged from providing two-wheeler and three-wheeler vehicle loans to durables financing and business and property loans. As credit growth has flourished in India, this company has thrived through strong brand recognition, distribution points and quality management.

Source: Moneycontrol.com

The stock has generated an annualised return of 66% over the last 10 years. That’s a return of $1,628,300 on a $10,000 investment over just 10 years.

This is from a simplistic business benefitting from a shift in a savings culture towards a credit culture for purchases (coming from a low base of only 10% household debt to GDP!).

KEI Industries is a manufacturer and distributor of cable and wires for the electronics industry. Currently the company has an order book of the size of A$1bn and is winning strong orders in the EPC category. The end users for the product in India are the railway, consumer durables, construction, power and automotive sectors, all of which are thriving from the significant development of infrastructure in the country.

The company is relatively small at a market capitalization of A$700m, however its history illustrates its emergence in a growing industry in India which generates double digit EBITDA margins in a market growing at between 15-20% per annum. Over time, KEI Industries will not only be able to thrive in markets like India, but also through exports to other regions through its comparative advantage.

The stock has generated an annualised return of 33% over the last 10 years. That’s a return of $174,371 on a $10,000 investment over just 10 years. This business is an ancillary business to manufacturing and infrastructure and illustrates India’s increasing capability for value-added manufacturing in the electronics industry.

India’s simple businesses, which we know are likely to thrive in an economy where GDP per Capita of US$2,100 rises substantially over the next decade, should generate significant profits. Investing in a portfolio of less discovered companies (i.e. perhaps finding the next Titan Company or Bajaj Finance) in such a market can create substantial gains for investors, if the appropriate primary research is undertaken to decipher the winners from the losers. That is critical!

The India Avenue Equity Fund owns all the companies mentioned in this article. Given their co-locations in Sydney, Australia and Mumbai, India as well as their partnerships with locally based stock and portfolio advisers, it places them in a strong position to identify these companies at an early stage. You can visit their website at www.indiaavenueinvest.com.

The views and opinions contained in this document are those of India Avenue Investment Management Australia Pty. Ltd. (IAIM) (ABN 38 604 095 954) & AFSL 478233. Equity Trustees Limited (Equity Trustees) (ABN 46 004 031 298) AFSL 240975, is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT), is the Responsible Entity of the India Avenue Equity Fund. This document has been prepared to provide you with general information only and does not take into account the investment objectives, financial situation or particular needs of any person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. IAIM does not express any view about the accuracy and completeness of information that is not prepared by IAIM and no liability is accepted for any errors it may contain. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the product disclosure statement before making a decision about whether to invest in this product. No part of this material may be copied, duplicated or redistributed without prior written permission of IAIM or Equity Trustees. The user will be held liable for any unauthorised reproduction or circulation of this document, which may give rise to legal proceedings. Information contained here is based on IAIM’s assumptions and can be changed without prior notice. It is not and may not be relied upon in any manner as legal, tax or investment advice or a recommendation or opinion in relation to an IAIM financial product or service, or any other financial product or service. Please consult your advisors, read the relevant offer document and consider whether the relevant financial product or service is appropriate for you before making any investment decision. Investment in securities involves risks and there is no assurance of returns or preservation of capital. Neither IAIM, Equity Trustees, nor any of its related parties, their directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost capital, lost revenue or lost profits that may arise from or in connection with the use of this information.

The ICAM Duxton Port Infrastructure Trust

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Eyre Peninsula cereal growers are gearing up for a revolution in grain shipment as a new multi-million dollar ‘T-port’ nears completion.

ICAM and Duxton Capital Australia are working with Powerwrap to present an off market opportunity to invest in an innovative port infrastructure via the ICAM Duxton Port Infrastructure Trust. The Port is on schedule to export grain for the upcoming 2019/20 harvest season.

Target IRR: 18%-34% | Target Cash Yield (Post Tax) – 6.5%-11.5% + franking credits. For more information please email your Powerwrap Relationship Manager.

CSL delivers an extraordinary transformation

Blood, Cells, Red, Medical, Medicine, Anatomy, Health
CSL Limited

Marcus Bogdan | Blackmore Capital

We met with senior company management of several of our portfolio holdings during the June quarter in both Australia and the UK. A notable highlight was a meeting with CSL, where we explored the opportunities for its influenza vaccine business, Seqirus.

Delivering an Earnings Turnaround

CSL’s influenza vaccine company (Seqirus) is the world’s second-largest influenza business. Seqirus is a major pandemic partner to governments around the world with a broad portfolio of influenza vaccine products.

CSL’s influenza business has undergone an extraordinary transformation following its US$275 million purchase for Novartis’ flu vaccine business in 2014. CSL combined it with its own vaccine and serum business bioCSL to create Seqirus.

At the time of purchase, Novartis was the global leader in cell-based influenza vaccines, yet it was heavily unprofitable. Despite considerable investor scepticism, CSL’s long heritage of capital acumen and discipline underpinned an impressive turnaround in its profitability. 

Indeed, Seqirus has moved from an EBITDA loss of c.USD$245m in FY16 to an expected EBITDA profit of US$200m in FY20.

The Rise of Cell-based influenza vaccines

For more than 80 years the most common way that influenza vaccines are made is using an egg-based manufacturing process. More recently, advances in influenza vaccines have led to the introduction of cell-based and recombinant flu vaccines, which do not require the use of hen eggs in the production process.

The innovation of influenza vaccine technologies has led to improved vaccine availability and effectiveness. Seqirus has become the global leader in cell-based influenza vaccines. 

Today, Seqirus remains enviably positioned to extend its leadership in cell-based influenza vaccines with over 30% of its vaccines manufactured using cell-based technology. 

Seqirus’ FLUCELVAX Quadrivalent is the first cell-based seasonal influenza vaccine licensed in the U.S. Seqirus remains well ahead of its competitors in cell-based vaccines, with its nearest competitor producing less than 5% of vaccines using this technology. Undoubtedly, the development of more innovative based vaccines has underpinned an attractive pathway of improved returns for Seqirus.

Influenza Poses A Constant Pandemic Threat

Governments and health authorities are aware that influenza poses a constant pandemic threat. There have been 4 influenza pandemics in the last century, with a mortality rate of +50m. World health authorities are acutely aware that the next pandemic is a question of ‘when’ not ‘if’.

Influenza has a higher incidence and higher mortality rate than any other infectious disease. Indeed, the current Australian flu season has been exceptionally severe and northern hemisphere countries are anticipating a difficult flu season in 2019/2020. The challenge with influenza preparedness is that it changes from season to season. For each season there is only a small window of time to identify and manufacture a vaccine for the upcoming flu season. 

Critically, governments globally need to ensure they are prepared and able to respond to a potential pandemic. Seqirus has reservation agreements with the governments of Australia, UK and the US to ensure that these jurisdictions have capacity to respond to the demand for vaccines in each flu season. If a pandemic did occur and borders were “closed”, it is vital for countries to have ready access to influenza vaccines. Seqirus is strategically positioned with manufacturing and Research & Development facilities across the continents of Australia, UK and the US.

Investment Conclusion

The formation of Seqirus by CSL is a rare corporate success story of an acquisition that was integrated effectively and transformed into a highly profitable business. Seqirus has optimised production facilities and has been at the global forefront in developing cell-based vaccines. 

Hence, from an investment perspective the future latency of the Seqirus business remains highly attractive as it is well placed to grow both volume and price into the future. 

Is Negative Sentiment Creating Opportunities?

The Roller Coaster, Shijingshan, Amusement Park
Auscap Asset Management

Recently there has been considerable focus in the press and across the investment community on the state of the Australian economy. Most of this attention has been focused on the negatives. This list frequently includes a discussion of falling house prices, the contraction in the availability of credit for home buyers and residential investors, the likelihood of a coming decline in residential construction given falling residential building approvals, domestic consumption growth that is lower than it has been historically and the decision by the Reserve Bank of Australia (RBA) to cut interest rates. This commentary has continued despite the fact that house prices appear to be stabilising and credit availability is likely to improve following recent changes to the Australian Prudential Regulatory Authority’s guidelines in relation to lending practices.

Very little is being said about what is currently going right for the domestic economy. From our perspective, the positives outweigh the negatives and present a compelling picture for investment. The unemployment rate is low and job vacancies continue to be high, with sufficient job creation to cater for strong population growth. The wealth of the average household is now above one million dollars for the first time. The Australian Federal Government is likely to produce a fiscal surplus in financial year 2020, the first since 2007, allowing for increases in fiscal stimulus through reductions in taxation and increases in expenditure, both of which should increase consumption. Public investment, particularly in infrastructure, continues to boom. The recent election outcomes at the Federal and State levels should provide businesses with certainty on a go forward basis and the re-election of these governments has provided policy continuity. Australia’s terms of trade are very healthy due to strength in commodity prices and volumes, which should continue for some time due to a lack of new global
supply in Australia’s key commodities. Based on recent decisions by Australia’s major mining and energy companies, private investment is set to increase towards the end of 2019 as they commence significant capital expenditure for replacement and expansion projects. And finally, interest rates are the lowest they have ever been, and hence monetary policy is accommodative which is supportive of economic growth. This looks unlikely to change any time soon.

The pervasive bearish sentiment of investors towards domestic-facing businesses does not appear to be supported by an objective analysis of the facts at hand. As Philip Lowe, Governor of the RBA, said recently, “the central scenario for the Australian economy remains reasonable, with growth around trend expected”. Further, “the outlook is being supported by our lower interest rates, by… tax cuts, by higher levels of investment in infrastructure, by a pick-up in the resources sector and the stabilisation of the housing market.”

Understanding market, sector or stock sentiment is important because it typically indicates positioning and therefore asset pricing. When investors are bearish, they hold fewer equities or companies within these “risky” sectors and higher levels of cash, Government bonds and sectors perceived to be “safer”. So broad negativity creates upside risk to equities when economic circumstances turn out to be better than expected. Conversely, bullish sentiment is typically accompanied by higher levels of risk taking through increased exposure to equities or the favoured sectors, lower cash levels and less defensive positioning. Such positioning is also associated with higher prices, where the deployment of capital into equity markets leads to listed companies trading on higher multiples of earnings. Positive sentiment creates its own downside risk
should economic outcomes turn out to be worse than market expectations.

Historically we have found extreme swings in sentiment to present profitable opportunities. At these extremes, extrapolation of recent conditions is commonly assumed. What has been happening is presumed to continue. Very few investors or analysts can imagine significant deviation from their base assumptions. As a result, companies that are benefitting from existing trends or data are bought and trade at elevated levels, whereas companies facing near term headwinds are sold down to bargain prices. Our objective is to reduce our holdings in companies where tailwinds are well known and priced to continue, and buy those businesses that are attractively priced where the market assumption is that headwinds affecting the sector are expected to continue forever, contrasting to our view that these headwinds will prove transitory. Of course, a value investor always has to be mindful of the risk that the headwinds are not seasonal or cyclical, but structural. We aim to avoid investments in businesses where we believe the headwinds are structural.

Long term we remain extremely bullish on the prospects for the Australian economy and hence investment in domestically exposed businesses. The economy is supported by a significant number of factors, which include:

  • Strong population growth driven both by a reasonable rate of natural increase and positive net migration;
  • Large natural in-ground commodity resources with the benefits flowing to what is a relatively small population;
  • Proximity to a large number of fast-growing emerging economies in Asia;
  • Relatively low government debt;
  • An entrepreneurial culture known for its innovation;
  • A stable democracy with shared access to education, health and welfare;
  • Separation of powers, a strong rule of law and judicial independence;
  • Private property ownership; and
  • Strong regulatory institutions, including an independent central bank.

This list is far from exhaustive. We believe the factors that have always allowed Australia to prosper and outperform many peers will continue to support growth in the domestic economy and provide good long term investment opportunities. These opportunities are typically greatest at the points in time when the majority are bearish. We continue to look to invest in high quality businesses when they trade at attractive prices.

© Auscap Asset Management Limited

Winning at the IPO Game

Dean Fergie | Cyan Investment Management Pty Ltd

Dean Fergie from Cyan Investment Management shares five lessons from examining 50 new company listings from the last 18 months. In the past 18 months, there have been over 125 IPO’s* land on the ASX boards; their average return to date is around +10%. Despite the modest overall return, more than 2/3 of these new listings are underwater; the mathematical average being held up by the 10 companies now trading between 100% and 500% above their listing prices. Take a bow Althea (AGH) and Unity Wireless (UWL), both up more than 400%.

At Cyan, over this period, we have considered approximately 50 of these listings (we don’t invest in resources or biotechnology which make up many of the new market entrants) and have put money into just 11. Despite both our cynical nature and selective investment approach, our hit rate is still less than 50% (only 5 of 11 are above water); however, our average return is over 50%.

So what IPO specific lessons have we learned?

It’s a Truly Inefficient Market
In our minds, the huge attraction of IPO investing is the unique opportunity to invest in true market inefficiency. At the time of an IPO, the market has:

  1. limited company information;
  2. no pricing history; scarce research;
  3. no active buyers and sellers operating in an open marketplace; and,
  4. most importantly, set pricing (or at the very least a small range).

This gives those investors prepared to back their own research and analysis a rare opportunity to deploy capital in a closed pricing environment.

There’s an Asymmetrical Payoff
This is true of all ‘long-only’ investing but it is particularly acute with IPO’s because of the market inefficiency. Most simplistically the “Asymmetrical Payoff” relates to the mathematically advantageous outcome that the most an investor can lose from a single investment is ‘just’ 100%; and the most one can profit is, theoretically, unlimited. As stated above, this is why the average IPO return is well above zero even though a majority of IPOs result in losses.
Of course, where this beautiful numerical outcome can fail is when stubborn or arrogant investors feel the need to double down if their IPO investment begins falling. It’s the horrible case of thinking, “The market has got this wrong”. Never argue with the market! Conversely, investors should be willing to let a profitable investment run. The stockmarket is a great place to make a quick buck but, really, serious wealth is generated over long periods of time. Notwithstanding the material capital gains tax advantage of holding an investment for longer than 12 months, it’s rare that companies that have captivated the market’s attention will enjoy a strong rise followed immediately by a steep fall.

Beware the Capital Raising Paradox
This, unfortunately, is the drawback of set pricing and is an outcome of the microeconomic supply/demand curve (that being, for a set price and set demand, supply may fluctuate wildly). In simplest terms, investors are likely to get a lot of what they really don’t want; and get not much of what they do. It’s certainly no coincidence that the two IPO’s we’ve backed and have been ‘looked after’ in allocations have not performed nearly as well and those in which we’ve been seriously scaled back.

Cut Losses and let Winners run
This should be a mandate across all investment securities but it is particularly apt with respect to early trading in IPOs. Investment banks do aim to price their IPO’s for early success. If a security begins trading below its issue price, it’s a good sign to get out. And don’t wait. Be one of the first out the door, as there’s often a long line of investors wanting to exit when a disappointing float doesn’t magically rise above its IPO price after a few days trading under water. More often than not, “the first loss is the best loss”.
Conversely, if you’ve been smart (or lucky) enough to be on a winner, stick with it. If the company has been mispriced, it takes time for the market to adjust. Success breeds success.

Develop Relationships
The best way to get access to the hottest IPO’s is to deal with a number of different brokers, pay fair brokerage rates and be upfront about your investment objectives. All new IPOs need a spread of 300 shareholders at $2,000 so there’s every chance of receiving the minimum allocation, but if you do want a better allocation, give a genuine indication of your level of interest and desire to be a long-term shareholder.
As always, keep a lookout in the press, the ASX and other media for indications of new IPO opportunities. For those willing to back their own judgement, it can be a lucrative place to invest.
*source: ipowatch.com.au

This document is for general information purposes only and does not take into account the specific investment objectives, financial situation or particular needs of any specific recipient. As such, before acting on any information contained in this document, recipients should consider the appropriateness of the information to their needs. This may involve seeking advice from a qualified financial adviser. Cyan Investment Management Pty Ltd (AFSL 453209) is the issuer of the Cyan C3G Fund. A current IM is available from Cyan Investment Management Pty Ltd, located at 17/31 Queen Street, Melbourne VIC 3000. A person should consider the IM before deciding whether to acquire or continue to hold an interest in the Cyan C3G Fund. Any opinions or recommendation contained in this document are subject to change without notice and Cyan Investment Management Pty Ltd is under no obligation to update or keep any information contained in this document current. Cyan Investment Management Pty Ltd holds AFSL 453209.

Recent additions to the Powerwrap Approved Products List – Month of July 2019

Recently, Powerwrap has added the following funds to our Approved Products List (APL). Some are subject to close. If you are an adviser who would like access to any of these funds please raise a ticket through Hive or the Service Desk. 

APIR CODE Fund Manager – Managed Fund Description
COR0001AU Cor Capital Fund Absolute Return
RGL5177AUThe Regal Global Equity Income Fund  Global Equity
SWI1413AU WCM Quality Global Growth Fund (Managed Fund)  Global Equity
IM BasedThe Navis Jockey Fund Private Equity
IM BasedOctopus Innovation Fund  Venture capital
PER7572AU  MCP Credit Trust Credit
IM BasedPEP – Secure Assets Fund A Private Equity
IM BasedICAM Duxton Port Infrastructure Trust Infrastructure
IM BasedWingate Ordinary Note II  Credit
BFL3446AUWheelhouse Global Equity Income fund  Global Equity
WCP8486AUPerennial Value Management – Perennial Private to Public Opportunities Fund Listed Absolute Return
IM BasedShenkman Capital – Global High Yield Fund Global Bonds
IM BasedKapstream Absolute return fund – Income Plus – Janus Henderson Absolute Return
PIM1966AU  CFM IS Trents Trust Class A Units Multi-Asset
IM BasedCVS Lane – 312 South Street, Marsden Park  Property
FID0026AU Fidelity Future Leaders Aus small cap Equities
ETL4432AUL1 Capital UK residential property High Yield Residential Prop
HOW8743AUKapstream Absolute Return Income Plus IAbsolute Return
SLT3458AULong-Short Credit Fund Institutional Investor Class  Long Short
ECC2707AU Ellerston – JAADE Retail Fund Private Equity
IM BasedMutual Private Opportunities Fund (Rent 4 Keeps) Private Equity
SBC0811AU UBS Cash fund Cash

Powerwrap’s Model Portfolios – Recent Additions

Model Portfolio ManagerBanyantree Investment Group
Model Portfolio NameBanyantree Australian Core Model Portfolio
Model descriptionS&P/ASX 300, with the ability to invest up to 30% in global stocks and 30% in ex ASX300 stocks. Between 20 and 35 holdings. 
No more than 10% in any stock. Up to 100% in cash.
Investment ObjectiveTo beat the ASX 200 index
Benchmark IndexASX 200
Who is this option suitable for?Retail and institutional clients
Model Portfolio Fee (ex. GST)25 bps (excluding transaction costs)
Performance FeeNil
Asset Allocation Ranges (including target allocations)Cash: 0 – 100% Companies within ASX300: 0 – 100% 
Global Stocks: up to 30%
Authorised InvestmentsDirect shares
Minimum Cash Holding2%
Minimum Model Investment$20,000
Indicative Number of AssetsBetween 20 and 35 holdings.
Minimum suggested timeframe5 years
Risk levelMedium
Model Portfolio ManagerBanyantree Investment Group
Model Portfolio NameBanyantree Australian Small Companies Model Portfolio
Model descriptionTo invest in all companies outside the ASX100, with the ability to invest up to 30% in global stocks. Between 20 and 35 holdings. No more than 10% in any stock. Up to 100% in cash.
Investment ObjectiveTo beat the ASX Small Companies index
Benchmark IndexASX Small Companies
Model Portfolio Fee (ex. GST)25 bps (excluding transaction costs)
Performance FeeNil
Asset Allocation RangesCash: 0 – 100% Companies outside ASX100: 0 – 100% 
Global Stocks: up to 30%
Authorised InvestmentsDirect shares  
Minimum Cash Holding2%
Minimum Model Investment$20,000
Indicative Number of AssetsBetween 20 and 35 holdings.
Model Portfolio ManagerBanyantree Investment Group
Model Portfolio NameBanyantree Australian Multi-Asset Strategy
(Moderate Growth 70% / 30%)
Investment ObjectiveTo beat the LT RBA Cash Rate + 3.5%
Benchmark IndexLT RBA Cash Rate + 3.5%
Model Portfolio Fee (ex. GST)25bps (excluding transaction costs)
Performance FeeNil
Asset Allocation RangesCash: 0 – 100% 70% in Growth assets 30% in Defensive assets
Authorised InvestmentsDirect shares, hybrids, ETFs and managed funds
Minimum Cash Holding2%
Minimum Model Investment$20,000
Indicative Number of AssetsUp to 20 investments
Model Portfolio ManagerBlackmore Capital
Model Portfolio NameBlended Australian Equities Portfolio
Model descriptionThe Blackmore Capital Blended Australian Equities Model Portfolio is focused on the Australian equity asset class. Diversity is achieved through investment across a variety of equity strategies, industries and geographies, all aiming to emphasise alpha driven returns and risk reduction. Blackmore Capital’s investment approach aims to generate long-term risk adjusted returns, by investing in companies that focus on generating high-quality earnings and operate in industries that exhibit favourable long-term growth prospects.
Investment ObjectiveThe portfolio seeks to generate long term capital appreciation by investing in Australian listed equities. The portfolio aims to do so with lower volatility and greater downside protection relative to the S&P/ASX 200 Accumulation Index benchmark.
Benchmark IndexS&P/ASX 200 Accumulation Index
Who is this option suitable for?The Blackmore Capital Blended Australian Equities Model Portfolio is suitable for an investor who is seeking long term capital growth via an exposure to the Australian share market. This portfolio is designed for investors who seek a lower level of volatility and greater downside protection relative to the S&P/ASX 200 Accumulation Index, prefer a relatively lower turnover portfolio and hold a moderate appetite for risk.
Model Portfolio Fee (ex. GST)0.60%
Performance FeeNil
Asset Allocation Ranges (including target allocations)Australian Equities – 75% to 100% Cash – 0 to 25%
Authorised InvestmentsAustralian Shares Cash
Minimum Cash Holding2%
Minimum Model Investment$20,000
Indicative Number of Assets20 – 40
Minimum suggested timeframe5 years+
Risk levelMedium-High
Model Portfolio ManagerBlackmore Capital
Model Portfolio NameAustralian Equities Income Portfolio
Model descriptionThe Blackmore Capital Australian Equities Income Model Portfolio is focused on the Australian equity asset class. Diversity is achieved through investment across a variety of equity strategies, industries and geographies, all aiming to emphasise alpha driven returns and risk reduction. The primary focus of the portfolio is to identify companies that provide an attractive and stable dividend income stream over the long term. Blackmore Capital’s investment approach aims to generate long-term risk adjusted returns, by investing in companies that focus on generating high-quality earnings and operate in industries that exhibit favourable long-term growth prospects
Investment ObjectiveThe portfolio seeks to deliver long term growth in both capital and income by investing in Australian listed equities. The portfolio aims to do so with lower volatility and greater downside protection relative to the S&P/ASX 200 Accumulation index benchmark.
Benchmark IndexS&P/ASX 200 Accumulation Index
Who is this option suitable for?The Blackmore Capital Australian Equities Income Model Portfolio is suitable for an investor who is seeking an income stream via an exposure to the Australian share market.   This portfolio is designed for investors who are seeking a lower level of volatility and greater downside protection relative to the S&P/ASX 200 Accumulation Index
Model Portfolio Fee (ex. GST)0.60%
Performance FeeNil
Asset Allocation Ranges (including target allocations)Australian Equities – 75% to 100% Cash – 0 to 25%
Authorised InvestmentsAustralian Shares Cash
Minimum Cash Holding2%
Minimum Model Investment$20,000
Indicative Number of Assets20 – 40
Minimum suggested timeframe5 years+
Risk levelMedium

Monthly Model Portfolio update

Blackmore Capital – Monthly update

Central bank risk aversion was on full display in July with both Australia and the US cutting interest rates by 25 basis points. Mounting concerns over the weakness in the global economy and escalating trade tensions between the US and China provided the tinder for the US Federal Reserve to reduce its interest rate for the first time since the global financial crisis.

Global equity markets remarkable rally since December 2018 has been predominately fuelled by Central Bank intervention and fiscal stimulus as investors have chosen to ignore company earnings headwinds. Yet, with a growing number of Australian companies pre-announcing earnings downgrades, the ASX 200 price-earnings valuation of circa 16.2 times looks increasingly vulnerable. As such, we have raised portfolio cash levels to around 20%.

Blended Australian Equity Portfolio  |  Australian Equities Income Portfolio

The Blended Australian Equity Portfolio finished the month of July up 2.07% compared to the ASX Accumulation Index up 2.94%. Positive attribution for the Blended Australian Equity Portfolio was driven by Caltex (CTX), Resmed (RMD), and Cleanaway Waste Management (CWY). Whereas, Adelaide Brighton (ABC), Nearmap (NEA) and Healius (HLS) weighed negatively on attribution.

The Australian Income Portfolio finished the month of June up 1.88% compared to the ASX Accumulation Index up 2.94%. Positive attribution for the Australian Income Portfolio was driven by Caltex (CTX), ASX Limited (ASX), and Woolworths (WOW). Whereas, Adelaide Brighton (ABC), Healius (HLS) and Woodside (WPL) weighed negatively on attribution.

Blended Australian Equities Portfolio
The Blended Australian Equities Portfolio commenced investing in Feb 2014. Since its inception, the portfolio has achieved a compound annual return of 12.4% compared to the ASX 200 Accumulation Index of 9.0%. 

Australian Equities Income Portfolio
The Australian Equities Income Portfolio commenced investing in May 2014. Since its inception, the portfolio has achieved a compound annual return of 10.9% compared to the ASX 200 Accumulation Index of 8.9%.

Recent changes to the Blended Australian Equities Portfolio & Australian Equities Income Portfolio  

Reduced Woodside Petroleum (WPL)
We reduced the position in Woodside because its major growth projects, Browse and Scarborough, are facing several uncertainties from a regulatory, market and joint venture partner point of view. The partners in Woodside’s proposed projects are facing pressure from the WA Government to commit to development in order to retain the resource leases. While this may suit Woodside’s agenda to develop the projects, the LNG market into 2025 is presented with several rival projects (currently ~100mtpa) with competitors that are prepared to develop with significant uncontracted capacity. This environment may necessitate the higher risk of developing the projects with significant uncontracted capacity. We have reduced the Woodside exposure in the portfolios until there is greater clarity around these issues.     

Reduced Qube Holdings (QUB)
QUBE Holdings has an impressive suite of operating divisions in Automotive, Bulk and General Stevedoring along with Logistics and strategic developments in the Moorebank Logistics Park. This combination of essential logistics earnings with long term Industrial Logistics property development is more attractive amid a low interest rate environment and the stock price traded to record high earlier in July. While we remain long term investors in this suite of assets, the share price has moved well ahead of earnings in the near term and has traded up with the support of the bond market rally.

Sold QBE Insurance (QBE) & Reduced Insurance Australia Group (IAG)
Over the course of the last 12 months IAG and QBE have benefitted from a period of greater industry discipline and a more favourable pricing environment. Both companies have recorded strong share price appreciation in 2019 and their earnings multiples now look relatively full. Moreover, the bond yield collapse in 2019 and the likely long- term impact of an extended period of record low interest rates will negatively weigh on insurance sector returns. As such, we have sold our position in QBE Insurance and reduced our weighting in IAG Limited

Trade wars and reporting season

White Water Boat

There are two things Australian investors need to keep their eyes on:

  • Australian company reporting season
  • The US-China trade war

Australia

The ASX200 Index closed the month of July up 2.93% making it one of the best months this year. The Australian market has extended its positive consecutive streak to seven months to be trading at its highest level ever. Its all time high sat at just over 6,800 points reached on November 1, 2007. The market closed at 6,812 points. At the time of writing, the market was trading at however trading at around 6,500 points. Almost every sector in the Australian market was up except for the Financials. Consumer staples, Healthcare and Consumer discretionary stocks outperformed.

Global Markets

Wall Street closed in the positive as well with the Dow Jones Industrial Index finishing +0.99% and the S&P 500 was +1.31% for the month. Global shares rose again over July with the potential for another US rate cut and hopes that a US-China trade deal will be reached, helped support market sentiment over the month. The election of Boris Johnson in the UK saw the increased prospect of a hard Brexit, dulling expectations in the manufacturing sector. July finished with the Federal Reserve cutting rates as expected by 25bps. It was the first cut since 2008 and was done due to concerns about the impact of the US-China trade war having a direct negative impact on growth. Bond yields are trending lower. The Dow Jones fell by 333 points in July 31 after the US Federal Reserve Chair Jerome Powell stifled any future interest cut expectations saying the recent cut was just a mid-cycle adjustment to policy rather than the beginning of a long series of rate cuts.

Key themes for investors going forward:   

  • Australian reporting season gets underway
  • Not to listen to all the noise and media noise
  • Cash rates are ticking lower
  • US-China trade war
  • Markets are at all-time highs

On the local front – The RBA cut the cash rate 25bps to 1.25% at its early June policy meeting and followed up with another 25bps cut to 1.00% at its early July meeting. Governor Phillip Lowe has indicated that the RBA is prepared to cut the cash rate further if needed. In other news, Housing auction clearance rates are well on the mend with housing prices following suit. The next Australian GDP report for Q2 due in early September.

Source: JP Morgan – Exhibit 1: Asset class and style returns in local currency

August outlook:

There are two things Australian investors need to keep their eyes on:

  • Australian company reporting season
  • The US-China trade war

Australian June half earnings reporting season kicks into full gear this week with Ansell, JB Hi-Fi, Challenger, Magellan, Cochlear, CSL, Computershare, Tabcorp, ASX, QBE, Sydney Airport, Telstra, Woodside Petroleum, Treasury Wine Estates, and Newcrest Mining, all due to release results this week. Earnings estimates (EPS) are for the ASX200 to grow 1.65% propped up by the resources sector. Earnings growth in Energy sector is expected to be up 23.8% and Materials 15.7%. On the flip side Retail earnings are tipped to fall 13%. A mild winter, housing downturn and a fall in the Aussie dollar are factors being blamed on the weaker earnings. Here is a short summary of companies that have already reported – data from AFR:

Wednesday August 7

  • CBA – Lower than expected. Profit pulled down by compensation costs
  • Suncorp Group (SUN) – Profit falls.
  • Transurban Group (TCL) – Raises $500m

Thursday, August 8

  • AGL Energy (AGL) – Despite a beat in expectations, outlook weak.
  • AMP – Sells life to Resolution and raises $650m
  • Insurance Australia Group (IAG) – Sells Thai business
  • Mirvac Group (MGR) – Profit falls 6% to $1b

Friday August 9

  • News Corp (NWSA US)
  • REA Group Ltd (REA)

So far there have been 22 companies that have reported.

Beats – 5, In line – 10, Misses – 7.

To download a full reporting season calendar by Morgans – click here.

On the other news front – The escalating US-China trade war remains a near term concern. The Australian market is down almost 4% from its July peak after China allowed its currency to slide against the US dollar to break the 7 Renminbi to dollar barrier. This hasn’t occurred since 2008. The real worry now is that Trump continues the tit for tat game and retaliates by increasing tariffs further. Any such trade tension will drag down the global economy that’s already hurting from this war. It’s worth noting that August and September are usually the weakest months in the year for share market returns. We think this could be the case considering a potential trade escalation together with a subdued Australian earning season.