Each month we give our readers a little insight into a Powerwrap team member by asking them ten questions about their role, life and personality. This issue we speak to Tannille Miller from the Powerwrap Marketing team.
Name: Tannille Miller
Company role: Marketing Coordinator
What does your role at Powerwrap entail? I focus on increasing our brand awareness through platforms like our website, social media and digital advertising.
What nickname do you prefer to be called? Tannille is fine, no nicknames work for Tannille.
What you enjoy most about being Marketing Coordinator? I like the creativity involved with coming up with new ideas to appeal to our audience.
What do you like most about Powerwrap? The people are lovely, and it’s exciting to be part of such a unique company.
What were you like in high school? A good student, when I wasn’t getting distracted by my friends.
What’s your favorite 80-90s jam? Wannabe – Spice Girls
Authors – Erik Weisman, Ph.D. Chief Economist Fixed Income Portfolio Manager | Robert M. Almeida Portfolio Manager and Global Investment Strategist | MFS Investment Management
Globalization created a multi-decade tailwind for margins.
But there are growing signs that globalization has reached its limits.
As a result, margins may be at risk.
Changing business environments have a way of exposing corporate vulnerabilities, amplifying the importance of selectivity.
An accelerated brand of globalization, labeled by some as hyper-globalization, has been underway for the better part of a generation. Spurred in part by NAFTA, the inception of the euro and China’s acceptance into the World Trade Organization, multinational companies have ridden the globalization wave along with its secular tailwind to margins. But with growing concern that globalization may have reached its limits, are margins at risk?
In the post–global financial crisis era, chief financial officers have become extremely adept at employing all manner of financial engineering in order to increase margins, earnings and stock prices. They’ve adopted capital-light strategies, increased leverage, engaged in debt financed mergers and acquisitions and bought back stock. Companies have also become proficient in driving down costs by managing global value chains, sourcing intermediate goods and services from around the world and assembling them in low-cost countries.
At the same time, they’ve engaged in international regulatory and tax arbitrage. But as we’ve globalized more and more, the marginal benefits of additional globalization have decreased. The value added resulting from NAFTA, the formation of the eurozone and offshoring appears to be at an end.
As good as it gets?
While globalization has ebbed and flowed for thousands of years, the post–Bretton Woods order that gave rise to today’s global value chain has been underpinned by the central role of the US dollar as the world’s reserve currency, institutions such as the World Trade Organization and the International Monetary Fund and the United States acting as the world’s enforcer.
Against that backdrop, the global value chain has been predicated on a relentless decline in tariffs. But there are growing signs that globalization may have reached it limits, with rising income inequality and a concurrent increase in populism among the symptoms. The US–China trade war calls into question the viability of the global value chain in a world where tariff rates may be reversing their decades-long fall. If the US were to apply 25% tariffs on all imported goods from China, overall tariff levels would rise toward heights not seen since the 1960s.
However, global value chains weren’t designed for 1960s-style tariffs. At those heights, value chains would likely fray. At the same time, non-tariff barriers are seemingly on the rise everywhere. The global value chain was built for a world of low tariffs in which free trade is seen as a public good. But recent events call that view into question, putting the multi–trillion dollar global value chain at risk.
No levers left to pull
In an environment where CFOs have already pulled all the available levers, is there any margin for error from an asset price perspective? We’d argue there isn’t much. If globalization is reversing and global value chains are undermined or forced to make expensive adjustments, gross margins are likely to be negatively impacted. Companies that generated above-average margins, profits and equity performance not because they produced superior products but because they effectively managed global supply chains may find themselves in unsustainable positions, no longer surrounded by an economic moat. And in an environment where management has few cards left to play and margins are at risk due to supply chain disruptions, companies with truly differentiated business models, unique intellectual property and strong brand equity are likely to be better positioned to deal with the shifting global conditions. Companies that are unable to quickly move production to avoid the impacts of tariffs and those without pricing power could be at risk.
This potential dislocation makes security selection increasingly important as market dispersion reasserts itself after a decade of monolithic index-driven price action. In essence, late in the business cycle investors have become much choosier, avoiding highly leveraged companies with falling gross margins as well as lower-quality cyclicals. As is often the case, changing business environments have a way of exposing corporate vulnerabilities, amplifying the importance of selectivity.
The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affi liates and may be registered in certain countries. Distributed by: U.S. – MFS Investment Management; Latin America – MFS International Ltd.; Canada – MFS Investment Management Canada Limited. No securities commission or similar regulatory authority in Canada has reviewed this communication. Please note that in Europe and Asia Pacifi c, this document is intended for distribution to investment professionals and institutional clients only. U.K. – MFS International (U.K.) Limited (“MIL UK”), a private limited company registered in England and Wales with the company number 03062718, and authorized and regulated in the conduct of investment business by the U.K. Financial Conduct Authority. MIL UK, One Carter Lane, London, EC4V 5ER UK provides products and investment services to institutional investors. This material shall not be circulated or distributed to any person other than to professional investors (as permitted by local regulations) and should not be relied upon or distributed to persons where such reliance or distribution would be contrary to local regulation; Singapore – MFS International Singapore Pte. Ltd. (CRN 201228809M); Australia/New Zealand – MFS International Australia Pty Ltd (“ MFS Australia”) holds an Australian fi nancial services licence number 485343. MFS Australia is regulated by the Australian Securities and Investments Commission.; Hong Kong – MFS International (Hong Kong) Limited (“MIL HK”), a private limited company licensed and regulated by the Hong Kong Securities and Futures Commission (the “SFC”). MIL HK is approved to engage in dealing in securities and asset management regulated activities and may provide certain investment services to “professional investors” as defi ned in the Securities and Futures Ordinance (“SFO”). Japan – MFS Investment Management K.K., is registered as a Financial Instruments Business Operator, Kanto Local Finance Bureau (FIBO) No.312, a member of the Investment Trust Association, Japan and the Japan Investment Advisers Association. As fees to be borne by investors vary depending upon circumstances such as products, services, investment period and market conditions, the total amount nor the calculation methods cannot be disclosed in advance. All investments involve risks, including market fl uctuation and investors may lose the principal amount invested. Investors should obtain and read the prospectus and/or document set forth in Article 37-3 of Financial Instruments and Exchange Act carefully before making the investments.
George Deligiannis | Head of Distribution at Newmark Capital
We are delighted to announce Newmark Hardware Trust has been added to the platform to form part of our direct property income producing investment options.
The Hardware Trust offers investors the opportunity to invest in four A-grade, high-profile properties. Well located in strong fast-growing local economies with access to excellent transport options. The buildings are well leased to national blue-chip businesses including Bunnings, Officeworks, JB Hi Fi underpinning the stable and secure rental income returns.
Introducing the Newmark Hardware Trust
Open-ended unlisted property trust investing in real property
Established track record delivering 15% total return per annum since trust inception to February 20192
Over 85% of the Trust’s income is underpinned by Bunnings
Fixed annual rent reviews of 3.00 – 4.00%
Geographically diversified multi asset trust
Delivering strong, consistent long-term income distributions
Tax advantaged income component
No entry and exit fees
Capital growth potential
Disciplined defensive investment strategy designed to reduce both market and specific risk
The Product Disclosure Statement dated 12 February 2019 describes the fees, costs and risks.
This Trust is suited to
Investors seeking consistent income
Investors seeking tax effective income
SMSFs – Ideal for investors managing their own retirement
Investors wanting access to a diversified portfolio of unlisted Australian property
Newmark has a 5 year track record of successfully managing the portfolio
Strong history of tenant retention
15.0% per annum total return since inception2
Ongoing asset management activity to ensure future competitiveness
1. Warragul is under development with an indicative value of $50.9M on completion mid 2020.
2. Performance is based on original fully paid Units at $1.00. Past performance is not indicative of future performance. Fund inception 2014.
About Newmark Capital
Newmark Capital Limited is an experienced
property funds management business that manages approximately $975 million of
real estate assets under management on behalf of wholesale and retail
investors. Newmark Capital is an active property investment manager with a
concentrated focus on income and has been investing on behalf of its clients in
commercial real estate since 2011.
For further information call George Deligiannis, Head of Distribution at Newmark Capital on 03 9820 3344.
Newmark Capital Limited ACN 126 529 690
AFSL No. 319372 (“Newmark Capital”) is the responsible entity of the Newmark
Hardware Trust ARSN 161 274 111 (“Trust”) Newmark Capital has not considered
the investment objectives, financial circumstances or particular needs of any
particular recipient. You should consider your own financial situation,
objectives and needs and obtain professional advice. Past performance is not
indicative of future performance. You should read the Product Disclosure
Statement dated 15 February 2019 (as updated or replaced) before making an
investment decision relating to the Trust. Forward-looking statements involve
risks, uncertainties and assumptions which are beyond the control of Newmark
Capital and are not guarantees of future performance.
Michael Price is Portfolio Manager of the Ausbil Active Dividend Fund at Ausbil Investment Management.
Regular equity income can help beat longevity risk and inflation, but finding quality income in equities is not as simple as it seems. Ausbil’s Michael Price talks us through successful active dividend investing.
Investors in the later stages of their accumulation phase, approaching retirement, and in retirement can benefit from the use of equities as part of their overall income plan. With a rolling 10 year dividend yield of 4.18%, equities can provide a vastly more attractive income than alternatives. Investors face two major risks that impact how much they have to fund retirement, and how long this will last: longevity risk, and the risk of inflation/rising costs over time. In simple terms, longevity risk is the risk of outliving your money. Inflation risk is the risk that rising costs (such as healthcare) reduces the purchasing power of your money each year. An equities approach to income can help outpace those rising costs, and provide long-term capital appreciation to help replenish funds.
does active dividend income investing work?
An active dividend investment approach can
add value to a portfolio, and generate outperformance, through focusing on quality
companies with strong dividends and dividend growth, companies with sustainable
earnings growth, maximising the benefits available through the tax and
imputation system, and tactical allocation to capture a greater share of dividend
Markets are efficient, but not perfect. The
first and most fundamental reason that an active approach to income investing works
is the fact that the market is relatively inefficient, particularly in the
short term. However, some inefficiencies can be traps.
risk of chasing yield for yield’s sake
The assumption that many income investors make regarding dividend yields is that the relationship of current dividend yield to future earnings growth is linear, that is, the higher the dividend yield, the higher the future earnings growth from which dividends are paid. This assumption does not actually hold in the market.
On average, the top dividend yield companies actually see low, or even negative, earnings growth going forward compared to companies in the 4th to 7th decile of companies, as illustrated in Figure 1. This has been true for the last 20 years. An active approach does more than simply chase the highest yield, as would a passive approach to yield. An active dividend income strategy can increase income from companies whose dividends are healthy, but maybe not the highest, because they are also investing earnings into a growing business, hence into better earnings growth in the year ahead. Another quirk of dividend investing is that the highest yielding stocks are more volatile, as illustrated in Figure 2.
Top decile dividend yielding companies tend to show higher volatility in returns, on average. An active approach to dividend income investing can seek to reduce portfolio return volatility by not chasing yield for yield’s sake, but investing judiciously on the fundamental value of future sustainable earnings growth. Finally, top dividend paying securities may not be good value-for-risk, as illustrated in Figure 3.
Chasing the highest dividend yield companies can provide poor value for risk taken when compared to the market. Lower decile stocks by dividend yield demonstrate a better performance for risk than for the top decile of dividend yield companies. High dividend payout ratios may also be indicative of a lack of equity reinvestment opportunities for a company, back into growing their own business. A company with a sustainable dividend profile usually seeks to reinvest some earnings into their business, into positive return projects that can generate earnings growth in the future. A classic example of a high dividend paying company compared to a company which has reinvested some earnings into productive opportunities for reinvestment is the difference between Telstra and CSL.
Purely to illustrate two different
journeys, take a look at the following example. Telstra was long considered a
key dividend paying stock, but the burden of being the largest telco, legacy
systems and infrastructure cost, rapid change and limits to growth have seen
Telstra lose its status as a key dividend stock. By contrast, CSL has steadily
transformed itself from also being government owned, as the Commonwealth Serum
Laboratories, into a global leader in biotechnology, largely by balancing the payment
of dividends with significant reinvestment into areas that can generate future
growth in earnings, as illustrated in figure 4. Of course, these relationships
may change over time, but it can take a long time for a company to change its
Astute active dividend income approaches can seek dividend yield while avoiding companies with no opportunity to reinvest to improve earnings and returns. With active dividend income approaches, investors like SMSFs, retirees, and investors approaching retirement can diversify away from traditional sources of income, like fixed income and term deposits, for a longer-term approach, diversified across high-quality Australian companies. They can do this in equities without sacrificing the potential for long-term growth.
About Ausbil Investment Management Ausbil is a leading Australian based investment manager. Established in April 1997, Ausbil’s core business is the management of Australian equities for major superannuation funds, institutional investors, master trust and retail clients. Ausbil is owned by its employees and New York Life Investment Management a wholly-owned subsidiary of New York Life Insurance Company. As at 31 July 2019, Ausbil manage over $12.2 billion in funds under management.
otherwise specified, any information contained in this publication is current
as at the date of this report and is prepared by Ausbil Investment Management
Limited (ABN 26 076 316 473 AFSL 229722) (Ausbil). Ausbil is the issuer of the
Ausbil Active Dividend Income Fund (ARSN 621 670 120) (Fund). This report
contains general information only and the information provided is factual only and
does not constitute financial product advice. It does not take account of your
individual objectives, financial situation or needs. Before acting on it, you
should seek independent financial and tax advice about its appropriateness to
your objectives, financial situation and needs. Securities and sectors
mentioned in this monthly report are presented to illustrate companies and
sectors in which the Fund has invested and should not be considered a
recommendation to purchase, sell or hold any particular security. Holdings are
subject to change daily. The value of an investment and the income from it can
fall as well as rise and you may not get back the amount originally invested.
Past performance is not a reliable indicator of future performance. Unless otherwise
stated, performance figures are calculated net of fees and assume distributions
are reinvested. Due to rounding the figures in the holdings, breakdowns may not
add up to 100%. No guarantee or warranty is made as to the accuracy, adequacy
or reliability of any statements, estimates, opinions or other information
contained herein (any of which may change without notice) and should not be
relied upon as a representation express or implied as to any future or current
matter. You should consider the Product Disclosure Statement which is available
at http://www.ausbil.com.au before acquiring or investing in the fund.
We are currently experiencing an extended equity market cycle. While there has been much debate as to when the upward trend of equities will end, this is something that is difficult to forecast. Instead of trying to forecast something that is beyond our control, we can alternatively focus on building robust portfolios that have the greatest probability of achieving client’s longer-term objectives. Diversification within an investment portfolio can help achieve a more consistent long-term absolute return profile with lower drawdowns than equity indices. Allocating to investments uncorrelated to equity markets, meaning investments that have the ability to deliver returns irrespective of equity market direction, is one of the best ways to achieve diversification.
Alternative investments are a diverse and evolving universe of strategies that do not share the same risk and return characteristics as traditional bond and equity investments, making them ideal candidates for diversification. There is a large number of potential investments, each differing significantly in terms of market maturity, liquidity, exposure to equity market risk, as well as many other factors. There is a world of opportunities, but each potential alternative investment requires individual assessment to ensure it meets broader portfolio objectives. How do we get started? A clear criteria by which to evaluate your investments is a good place to start.
to consider when selecting alternative investments as part of a diversified
It has a low correlation to
traditional asset classes, such as equities and bonds, due to the underlying
drivers of return being unique and independently sourced
The liquidity profile of the
investment matches the client’s liability needs
The investment improves the
overall risk/return profile of the portfolio
A number of different strategies can be employed in order to achieve the above criteria, a common one being investing in different markets such as currency markets. Currency markets can move independently of equity and bond markets because they are often driven by different factors. Currencies can be influenced by different monetary or fiscal policies in different countries, the shape of relative yield curves and the dependence of certain currencies upon the price of commodities and economic momentum.
currency markets can bring a new source of uncorrelated risk and return to
investors’ portfolios, however it is important to look for an investment
manager with extensive experience navigating these markets. One that has a clear
and disciplined investment rationale, a proven ability to generate alpha over
the long term while effectively managing the additional associated risks of
investing in these markets.
Professional Series brings the P/E Global FX Alpha Fund to Australian Investors
In 2017 Macquarie Professional Series (MPS) launched the P/E Global FX Alpha Fund, which accesses the investment capabilities of P/E Global LLC based in Boston. MPS started in 2004 with the aim of providing Australian investors access to differentiated investment solutions that can make a real difference to their portfolios.
P/E Global LLC (P/E) is a specialist currency manager that aims to provide investors with uncorrelated, absolute returns to traditional asset classes via a disciplined and dynamic quantitative model. It was founded in 1995 with the underlying investment philosophy that ‘Factors drive currency markets and that the importance of these factors can be identified using a systematic statistical process’. Underlying this is a belief that the relative influence of factors changes over time, and this influence can be identified and exploited to generate returns.
Since 2003, P/E has achieved a return of 10.4% per annum in AUD (after all fees), outperforming the Australian equity market by 0.9% per annum over the same period. The chart shows the cumulative performance of P/E against that of the ASX300. The light blue shaded areas highlight the significant drawdowns of the ASX 300. In each case P/E generated strong positive returns.
As a measure of its power to diversify traditional portfolios, P/E has achieved, a correlation to equity and fixed income markets, of close to zero since 2003. Importantly P/E has a correlation of -0.3 in down equity markets; demonstrating its potential to protect investors’ capital when they need it the most. The P/E Global FX Alpha Fund offers daily liquidity and is available on the PowerWrap platform. It sources its alpha from the movements of fifteen currency markets based on seven underlying factor drivers.
P/E is a true alternative investment.
For more information on the P/E Global FX Alpha Fund please visit:
This is general information only and
does not take account of investment objectives, financial situation or needs of
any person. It should not be relied upon in determining whether to invest in
the Funds. In deciding whether to acquire or continue to hold an investment in
a Fund, you should consider the Fund’s product disclosure statement, available
at the links above or by contacting us on 1800 814 523. Past performance
information is not a reliable indicator of future performance.
Other than Macquarie Bank Limited
(MBL), none of the entities noted are authorised deposit-taking institutions
for the purposes of the Banking Act 1959 (Commonwealth of Australia). The
obligations of these entities do not represent deposits or other liabilities of
MBL. MBL does not guarantee or otherwise provide assurance in respect of the
obligations of these entities, unless noted otherwise.
Reece Birtles | Chief Investment Officer, Martin Currie Australia
“ Asset allocators need to be positioned in Value stocks ahead of the inflection point to capitalise on future narrowing spreads”
The past two years has seen poor performance for value style indices and typical value managers globally, and stronger performance for Momentum, Growth and Quality factors. There have been recent comments in the market that Value is broken or that this could be the death of Value. Or, given how expensive the market has become, is now actually the time to overweight the style? Below I discuss what value spreads really tell us about what lies ahead for the Value style, and value managers like Martin Currie Australia.
VALUE NORMALLY OUTPERFORMS GROWTH Globally, the value style (based on the MSCI World Value Index) has underperformed the broader market (MSCI World Index) in the last few years. But on a rolling 10-year basis, the level and persistence of this underperformance looks quite extraordinary in contrast to the long-term. Similarly, if you think about this in the inverse, the persistent outperformance of the Growth style (based on MSCI World Growth Index) is also peculiar, as it is historically known to underperform Value over the long-term. This is backed up by research studies by Fama and French, Kahneman and Tversky.
VALUE OUTPERFORMS OVER TIME BECAUSE HIGH EPS EXPECTATIONS GO UNMET A key reason why Value typically outperforms Growth in the long run is Value’s superior EPS growth relative to Growth stocks. Investors have a bias towards trend extrapolation and over optimism of future EPS, but the reality is that paying more for an unmet expectation doesn’t add value, and Value’s fundamentals prevail in the end. The continued trend of superior EPS, despite poor value style performance in the last few years, gives us confidence that the value style works when the market focusses on underlying fundamentals.
VALUE SPREAD = THE FORWARD OPPORTUNITY The relative valuation of the style indices, i.e. a value spread, can give us another way to look at the behaviour of Value and Growth stocks over time and how recent behaviour is out of kilter. I’ve measured a value spread for the MSCI World using a naive average of the log of the spread between the two indices, for P/E, P/E NTM, dividend yield and P/B valuation measures.
SPREADS NORMALLY MOVE WITH VALUE STYLE PERFORMANCE Historically, data suggests that widening value spreads usually go hand in hand with poor Value style performance. Wide value spreads have then historically preceded strong future alpha for Value-biased managers.
BUT SPREADS MOVEMENT NOT FOLLOWING HISTORY Unusually, despite Value underperforming Growth throughout 2013-2017, the value spreads did not immediately widen due to falling relative EPS growth for Value, making the Value superiority appear to be “broken”. The persistently narrow spread situation through to 2017 made it hard to “pound the table” for asset allocators to be overweight Value and be ready for the rebound that should occur when spreads begin to narrow again. The situation dramatically changed in 2018, with spreads exploding out to greater than GFC and Tech bubble levels across all metrics. The relative EPS issue to Growth is now no longer an issue, so we do not believe it is justified to call the death of Value.
AUSTRALIAN SPREADS HAVE MOVED IN STEP WITH GLOBAL FACTORS Our 20+ years of in-house discounted cashflow valuations of Australian companies provides us with great insight in understanding the Australian market. Therefore, for analysing the Australian market, we have used Martin Currie valuations data instead of MSCI index data. We use our proprietary valuation of the 80th percentile stock (representing cheap stocks) versus the 20th percentile (representing expensive stocks). Consistent with my long-held thesis that factor performance of the Australian market is strongly dominated by global macro and factor performance, I have found that the Australia value spread is also highly correlated with the World value spread, with notable and understandable exceptions around the Asian crisis, Tech bubble and naughties China boom. This relationship between MSCI World value spread and that for Australia has only strengthened over time, especially since the GFC. This is explainable by the low growth/Quantitative Easing world, and financial market weaponisation (or development) of, for example, commodity futures trading (CTAs) that allows trading of common factors on a global basis.
DRIVERS FOR CHANGE IN THE SPREAD I have looked at what has been really driving changes in value spreads, and my analysis shows that the level and change in economic growth (e.g. based on our in-house business cycle indicator or PMI), bond yields (e.g. the US 10yr) and the yield curve, have all generally moved in concert with value spreads. This tells us that value style performance should turn around when economic growth stabilises, bond yields are no longer falling, and central banks cut rates to stimulate the economy. In other words, when the world doesn’t remain in a constant state of deterioration.
DATA SUGGESTS THE TIME FOR VALUE IS NEAR Based on the historical relationship between value spreads and macro data, current value spreads imply that there are no further Fed rate cuts, PMI is set to trend below 50, and further falls in bond yields are on the way. But the world doesn’t retain a state of panic/euphoria for an extended period. The bottom of a cycle is notoriously hard to time. The value spread based on the holdings in our Legg Mason Martin Currie Select Opportunities Fund1 versus the S&P/ASX 200 Index, appears to already be pricing recessionary outcomes and no response by policy makers. As such asset allocators need to be positioned in value stocks ahead of the inflection point to capitalise on future narrowing spreads.
‘VALUE AS A DEFENSIVE’ WHEN VALUE SPREADS TIGHTEN Wide value spreads in the Tech bubble were associated with an expensive market, whereas in the GFC, wide spreads were associated with a cheap market. Post the Tech bust, when spreads again started to narrow, value stocks were attractive as they were considered defensive/low beta and provided strong alpha, but post GFC, value stocks became less attractive as their correlation to beta rose. Today’s situation of high value spreads and an expensive market looks more like the Tech bubble than the GFC. Therefore, in the coming cycle, it is more likely today’s cheap stocks prove more defensive than expensive Growth stocks which have been low beta in recent years. The Legg Mason Martin Currie Select Opportunities Fund is positioned away from the overvalued ‘High Growth/High PE/ High Momentum’ part of the market to maximise long-term income and returns.
IN SUMMARY Now is the time to position for Value, not to chase expensive stocks. We believe that our Legg Mason Martin Currie Select Opportunities Fund is able to capture alpha for clients based on three sources:
The long-term Value premium available because of the market’s behavioural bias towards over optimism;
Our tactical allocation approach to style and risk based on our deep understanding of value spreads and the Value
Superior stock selection over time from our experienced research team’s fundamental and quantitative insights into company Valuation, Quality and Direction.
Past performance is not a guide to future returns. Source: Martin Currie Australia, FactSet, as at 30 June 2019. Legg Mason Asset Management Australia Ltd (ABN 76 004 835 849 AFSL 240827) is part of the Global Legg Mason Inc. group. Any reference to ‘Legg Mason Australia’ or ‘Martin Currie Australia’ is a reference to Legg Mason Asset Management Australia Limited. ‘Martin Currie Australia’ is a division within Legg Mason Asset Management Australia Limited. Legg Mason Australia is the responsible entity of the Legg Mason Martin Currie Select Opportunities Fund (ARSN 122 100 207)(Fund). Martin Currie Australia is the fund manager of the Fund. Before making an investment decision you should read the Product Disclosure Statement (PDS) for the Fund carefully and you need to consider, with or without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. The PDS is available and can be obtained by contacting Legg Mason Australia on 1800 679 541 or at http://www.leggmason.com.au. This product has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Neither Legg Mason Australia, nor any of its related parties guarantees any performance or the return of capital invested. Past performance is not necessarily indicative of future performance. Investments are subject to risks, including, but not limited to, possible delays in payments and loss of income or capital invested. These opinions are subject to change without notice and do not constitute investment advice or recommendation. The information contained in this paper has been compiled with considerable care to ensure its accuracy. But no representation or warranty, express or implied, is made to its accuracy or completeness. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested. Martin Currie has procured any research or analysis contained in this presentation for its own use. It is provided to you only incidentally, and any opinions expressed are subject to change without notice. The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds. Please note the information within this report has been produced internally using unaudited data and has not been independently verified. Whilst every effort has been made to ensure its accuracy, no guarantee can be given. Some of the information provided in this document has been compiled using data from a representative account. This account has been chosen on the basis it is an existing account managed by Martin Currie, within the strategy referred to in this document. Representative accounts for each strategy have been chosen on the basis that they are the longest running account for the strategy. This data has been provided as an illustration only, the figures should not be relied upon as an indication of future performance. The data provided for this account may be different to other accounts following the same strategy. The information should not be considered as comprehensive and additional information and disclosure should be sought ahead of any planned investment. The distribution of specific products is restricted in certain jurisdictions, investors should be aware of these restrictions before requesting further specific information.
Introducing the Ardea Real Outcome Fund and ActiveX Ardea Real Outcome Bond Fund (Managed Fund) (ASX: XARO)
With the RBA recently cutting the official cash rate twice to a record low levels of 1.00% p.a., for many investors the need to consider other income sources to maintain current levels of income has increased. As such, the Ardea Real Outcome Fund (ARO) or its related ASX-quoted active ETF launched in December 2018, the ActiveX Ardea Real Outcome Bond Fund (Managed Fund) (ASX:XARO), may be smart alternatives for those investors to consider as term deposit (TD) rates decline in line with falling cash rates. But first, it’s important to be clear that ARO and XARO are not cash or TD substitutes. This is because neither ARO nor XARO benefit from the government guarantee for bank deposits. Instead ARO and XARO are actively traded fixed income strategies which are intended to deliver a return higher than cash and TDs but may experience negative monthly returns and are subject to a range of other risks. For these reasons, ARO and XARO are not suitable to replace ‘at call’ cash products or where the investor is uncomfortable with the change in risk profile. That said, with current advertised one- and two-year TD rates from the big four Australian banks dipping below 2.00% p.a.1, ARO or XARO may be suitable investment alternatives for investors looking to invest surplus cash over a longer investment horizon and can tolerate a higher risk level than TDs. ARO seeks to strike the right balance by offering the potential for higher medium-term returns than TDs2, but less risk than many other income seeking investments3. A minimum 2-year time horizon for an investment in ARO or XARO is recommended.
ARO’s volatility has been consistently lower than risk levels experienced by many common Australian income asset classes. Commonly used income alternatives like dividend paying stocks, bank hybrids, mortgage backed securities and credit investments may provide higher returns than TDs but can also experience significant volatility in adverse environments, with hybrids and credit investments also being subject to greater liquidity risk.
For investors willing to accept a higher level of risk than cash or TDs, including the risk of modest short-term volatility and of capital loss, ARO can be a smart alternative for surplus cash invested in low return bank deposits.
The following characteristics of ARO and XARO are relevant to consider as an alternative for medium term surplus cash: ✓ historically low volatility returns vs. other income-generating asset classes (see chart above). ✓ daily liquidity as ARO processes redemptions daily and XARO investments can be sold on market at any time (0.025% bid/offer spread for unit trust or on-market spreads for active ETF vs. the typical break costs for TDs if redeeming prior to maturity). ✓ smooth quarterly distributions with minimal administration (vs. continually rolling TDs). ✓ returns independent of the direction of interest rates from Ardea’s ‘relative value’ investment approach (TD returns typically decline as interest rates fall). ✓ low correlation to equity and bond market fluctuations offers portfolio diversification benefits. ✓ low credit risk (portfolio is primarily invested in ‘AAA’ and ‘AA’ rated government bonds and excludes credit investments). ✓ low interest rate risk (portfolio is managed with close to zero interest rate duration) ✓ no FX or emerging markets risk. ✓ ‘risk-off’ strategies that are designed to profit in adverse environments and therefore offer the potential for additional returns when equity and broader fixed markets are more volatile.
Why choose ARO/XARO over conventional fixed income funds? Conventional fixed income funds typically have only two choices for generating higher income:
Buy longer dated bonds and so take more interest rate duration risk, (i.e. so there is the potential for capital losses if bond yields rise)
Buy credit investments (e.g. corporate bonds, loans, etc.) and take more credit risk, with the potential for capital losses in adverse market environments In our opinion, both these choices currently carry more risk for less return and may no longer be as defensive as previously assumed. The following articles provide further insight:
In our opinion, both these choices currently carry more risk for less return and may no longer be as defensive as previously assumed. The following articles provide further insight:
By contrast, each of ARO and XARO offers another alternative that has low interest rate duration risk, no credit investments and returns that are independent of declining interest rates and bond yields. It does this by combining Ardea’s unique ‘relative value’ (RV) investment approach, with ‘risk-off’ strategies that are designed to profit in adverse market environments, to target low volatility fixed income returns, irrespective of broader bond and equity market fluctuations. While ARO’s investment approach is unique, its portfolio is made up of the same high-quality government bonds and cash investments that conventional defensive fixed income strategies typically use. What’s different is the way Ardea extract returns from these securities and the wide range of risk management strategies used. The resulting return profile exhibits low correlation to equities, government bonds and credit markets, while aiming to deliver returns that are higher than cash rates with low levels of volatility. The following articles provide further insight: In our opinion, both these choices currently carry more risk for less return and may no longer be as defensive as previously assumed. The following articles provide further insight:
Combining uncorrelated RV return sources with risk-off strategies allows ARO and XARO to offer the potential for higher returns in more volatile environments, when conventional investments may incur losses. This type of return profile can be a useful risk diversifier when added to a broader investment portfolio.
These characteristics were evidenced in ARO’s performance throughout the market volatility experienced in 2018, as shown in the charts below. ARO’s returns remained positive and smooth through the bond and equity market volatility experienced in 2018 and early 2019.
Unless otherwise specified, any information contained in this publication is current as at the date of this publication and is provided by Fidante Partners Limited ABN 94 002 835 592, AFSL 234668 (Fidante Partners), the responsible entity and issuer of interests in the Ardea Real Outcome Fund and ActiveX Ardea Real Outcome Bond Fund (Managed Fund) (together, the Funds). Ardea Investment Management ABN 50 132 902 722 AFSL 329 8289 (“Ardea”) is the investment manager of the Funds. The information has been prepared on the basis that the reader is a ‘wholesale client’ within the meaning of the Corporations Act 2001. It is intended to be general information only and not financial product advice and has been prepared without taking into account your objectives, financial situation or needs. You should consider the product disclosure statement (PDS) and any additional information booklet (AIB) for the Funds before deciding whether to acquire or continue to hold an interest in the Funds. The PDS can be obtained from your financial adviser, our Investor Services team on 13 51 53, or on our website http://www.fidante.com.au. Please also refer to the Financial Services Guide on the Fidante Partners website. Past performance is not a reliable indicator of future performance. Neither your investment nor any particular rate of return is guaranteed.
It is not intended to be relied upon as a forecast or research and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy, nor is it investment advice. Fidante Partners makes no representation or warranty as to the accuracy of the data, forward‐looking statements or other information in this material and shall have no liability for any decisions or actions based on this material. Fidante does not undertake, and is under no obligation, to update or keep current the information or opinions contained in this material. The information and opinions contained in this material are derived from proprietary and non-proprietary sources considered by Fidante Partners to be reliable but may not necessarily be all-inclusive and are not guaranteed to be accurate.