Avoiding Torpedo Stocks

May 2nd, 2016

Last week McGrath (ASX: MEA), an integrated residential real estate services company (which we don’t own) saw a 31% decline in the company’s share price after the company downgraded estimates for future earnings. This was very painful for investors in this recently listed company, but for us was not particularly surprising.

In this piece we are going to look at the mechanisms we use to filter out companies that are more likely to have a higher chance of issues in the future to improve performance and reduce heartache. This exercise is based on the position that removing a few “losers” from the long only portfolio is more consistently beneficial to a portfolio’s performance than focusing on picking the next Aconex (up 207% in the last year). As we can also short stocks this process is also a component of what we use to identify “torpedo” stocks. Also like most investors I am somewhat irrationally loss averse[1] in that I strongly prefer avoiding losses to acquiring gains, even when the probability weighted outcome is the same. One of the mechanisms we use to filter out noise and narrow down our investment universe is our quality filter model (QFM).

Read more here.

Investment Philosophies Part II

April 15th, 2016

Almost every month the financial press will publish an article lauding the top performing fund manager over the previous 12 month period; generally accompanied by a picture of the manager looking quite pleased with themselves in an expensive suit, together with an after match report detailing which stocks they had in their portfolio that allowed them to outperform their peers. The assumption underlying these articles is that all equity funds are managed using the same investment philosophy and that a manager’s outperformance is solely due to their skill.

In the piece Investing Styles Part 1 we looked at the four basic investment styles (index, growth, value and quality). In this week’s note on investment styles we are going to look at the market conditions under which each style tends to outperform, as no single investment style outperforms in every market condition.

Read more here.

REIT Resurrection/Roll-over – What You Need toKnow

April 14th, 2016

Last week we looked at Cracks within REITs, which showed some of the worst performing REITs on the ASX being the companies dependent on development profits or trading profits. This is of little surprise to some, especially after the Australian Bureau of Statistics announced last month that the Sydney property market fell in the December quarter of last year – that was the first fall in the Sydney property market since 2012.

BY CHRISTOPHER HALL – APRIL 2016

Read more here.

Investing Styles

April 4th, 2016

Investors looking for a professionally managed Australian equity portfolio face a dizzying array of options. The February Morningstar survey looked at 123 different institutional fund managers delivering Australian equity portfolios and this number expands further when you include model portfolios and stock lists offered by stock-brokers, asset consultants and investment newsletters. The individual stocks in this enormous range of portfolios are selected and then blended into Australian equity portfolios based on a range of investment philosophies or investment styles.

In this week’s piece we are going to look at the different investment styles used to manage equity portfolios and the investing foundations upon which these styles are built.

Read more here.

AZZG update

April 4th, 2016

Aurora Funds Management Limited (“Aurora”) as Responsible Entity of the Aurora Global Income Trust (“the Fund”) and the Aurora Absolute Return Fund (“the Fund”), refers to its voluntary suspension from trading and recent announcements in relation to its investment in Antares Energy Limited Convertible Notes (“the Notes”).

The Noteholders meeting was held on 31 March 2016, however, the vote did not proceed and the Noteholders meeting has been postponed until 29 April 2016.

Aurora advises that its voluntary suspension is expected to remain in place for an additional period of up to one month or until further information becomes available to us.

We will continue to monitor the situation and provide any additional information on any material changes in due course through ASX announcements.

AFR Coverage

March 31st, 2016

Bad debts spook bank investors by Jonathan Shapiro.

Read more here.

Short Sellers

March 24th, 2016

Eye of newt, and toe of frog, Wool of bat, and tongue of dog, Adder’s fork, and blind-worm’s sting, Lizard’s leg, and owlet’s wing, For a charm of powerful trouble, Like a hell-broth boil and bubble. Double, double toil and trouble; Fire burn, and caldron bubble.  Shakespeare’s Macbeth

The financial press frequently paints the picture of hidden cabals of short sellers conspiring together to drive down a stock, causing unrealised losses to retail investors and pain to executives whose company’s stock have been sold short. Whilst short-sellers are frequently derided as vultures, criminals, pessimists or un-Australian (or un-American), in reality shorting stocks is a hard, stressful and often lonely way to make money in the market. Short selling allows an investor to profit from taking a contrarian view.  In this week’s piece we are going to look at short-selling shares a hot topic given the offshore shorting in February of the Australian banks.

Read more here.

Takeovers: What would “The Gambler” do?

March 14th, 2016

Analysing the lyrics to country music songs can strangely provide insight into managing money and in particular in dealing with the game theory that investors must analyse when faced with a takeover offer. Recently we have been receiving quite a few requests from clients about the takeovers of Asciano and Investa Office Trust asking about what to do in various takeover situations.  In this Kenny Rogers themed piece we are going to look at the different kinds of takeovers and the strategies investors should employ when a stock they own receives a takeover bid; namely “hold ‘em”, “fold ‘em” and know when to walk away and know when to run”.

Read more here.

Idiot Proof Companies?

March 7th, 2016

I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will.” W. Buffett

Investors are constantly forced to assess the sustainability of company business models when looking at adding new stocks to their portfolios or critically evaluating the companies that they currently own. Indeed an institutional investor may be exposed to the management teams from several hundred companies in any given year. Amongst those companies they will find large variations in both management and business model quality. During bull markets with supportive business conditions it can be quite difficult to separate management quality from the positive tailwinds the business is currently enjoying.

In this week’s piece we are going to look at the characteristics of ‘idiot proof’ companies and the reciprocal which are companies that typically need both supportive market conditions and a strong management team to prosper.  Obviously the conditions of strong management teams and a sympathetic business environment are rarely permanent.

Read more here.

AFARF – Letter to Unit Holders

February 29th, 2016

Suspension of applications and redemptions

From 25th February 2016, applications, redemptions and dividend reinvestments for the Aurora Fortitude Absolute Return Fund (Fund) are temporarily suspended. This means you will not be able to apply for or redeem your units in the Fund until further notice.

Background

The Aurora Fortitude Absolute Return Fund holds Antares Energy Limited Convertible Notes (ASX Code: AZZG) (Antares Notes), which have been suspended from trading and are, consequently, currently illiquid. The note is due to be repaid on 31st March 2016, but information has become available to us which leads us to believe there is a possibility that repayment will not occur on this date, and therefore we are unable to accurately determine a value for the Antares Notes. This uncertainty means we do not believe it is the best interest of unit holders to continue to accept applications and redemptions. The Antares Notes currently comprise 8.03% of the net asset value of the Fund, but this percentage may change as the value of the Antares Notes, and the value of the Fund’s other assets change.

Acting in the best interests of Investors

Aurora has determined that, in these circumstances, it is in the best interest of investors in the Fund as a whole to temporarily suspend applications and redemptions to ensure all investors are treated equally so there is fair treatment between investors who choose to remain invested in the Fund and investors who choose to exit the Fund in the short to medium term.

What this means for you

The Fund has ceased accepting any applications for units or processing redemption requests effective from 25th February 2016. Any application funds received will be returned to you. The temporary suspension does not affect the distributions paid by the Fund. As more information becomes available to us, we will be in better to position to advise when liquidity is likely to be restored.

If you currently have a Distribution Reinvestment Plan in place, your future distributions will only be paid via direct credit into your nominated account and cannot be reinvested in the Fund until further notice. You will need to provide your bank account details by contacting our security registrar, One Registry Services on +61 2 8188 1510.

Further information

If you have any queries or concerns, please contact us.

Telephone: 02 9080 2377 or 1300 553 431 (within Australia) or 0800 447 637 (within New Zealand)
Email: enquiries@aurorafunds.com.au
Post: PO Box R1695, Royal Exchange NSW 1225

Aurora Funds Management Limited | ABN 69 092 626 885 | AFSL No. 222110
29 February 2016

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