News & Media

Over the last week investors have been digesting multi-billion dollar profit results for the major trading banks, wading through voluminous investor discussion packs, whilst listening to bank CEOs and CFOs give details on their profit results. For 2015 ANZ, CEO Mike Smith’s final results pack took the cake for the largest presentation with over 150 charts on 268 pages!

In this piece we are going to look at the common themes emerging from the results, differentiate between the banks and hand out our reporting season awards to the companies that grease the wheels of Australian capitalism. Further what to do with the banks is probably the biggest issue facing Australian equity investors. The banks have all raised capital in 2015, are repricing their loan book upwards and look cheap post a correction, but bad debt charges can only rise from current historic lows.

Read more here.

In Ancient Rome victorious generals returning to the capital were given a triumph where they paraded through the city with their army, musicians and strange animals from conquered territories, together with carts laden with treasure and captured armaments. If everything goes well in the early hours of Sunday morning the Wallabies should be enjoying a triumph down George Street in Sydney, though sadly unlike in Roman times we are unlikely to see Richie McCaw and Chris Robshaw being dragged along in chains at the foot of the Wallabies chariots.

In this World Cup themed piece, we are going to turn the clock back four years to 23^rd October 2011 (the date of the previous World Cup Final) and look at the top five outperforming stocks and the bottom five performing stocks along with the investment theses that were being applied at the time.

Read more here.

Notwithstanding the weakness in the global markets over the past eight months, investors globally have had a good run over the last six years with the US’s Dow Jones up 160% since 2009 and the ASX200 up 67%. However it is very rare to ever be enjoying market conditions where you can have a great degree of confidence as to the future direction of the share market, as it is the uncertainty of returns that gives rise to the return premium that equities have enjoyed over bonds and cash over the long term. Indeed over the past week we have seen headlines in the financial press with the title “Two Significant Flags signal the Bull Run is getting close to the Peak” and “Kerr Neilson sees value in Epic Sell-Off”. As the equity markets have only seen a modest increase this week, surely these statements can’t both be true.

In the spirit of investing in uncertain times, in this piece we are going to look at seven reasons that have caused both individual and institutional investors (including the author of this piece) to lose money in the market when making investment decisions

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Last week my five year old daughter perused the room service menu at a luxury resort in Port Douglas, went past the seafood and steaks on offer and ordered baked beans on toast. This order not only pleased the individual that was paying the bill and the simple tastes of a small child, but it was also within the budget afforded by the paltry 2.3% that she is currently getting from her ANZ Term Deposit.

At current risk free rates even wealthy retirees who have amassed $1 million in a superannuation account face a very meagre retirement (unless they have the same bland tastes in foods as small children), if they are looking to live off income rather than eat into capital. As the market is speculating that the RBA may cut cash rates even further on Melbourne Cup Day, if this occurs the hunt for yield amongst Australian retirees will only intensify.  We would expect investors to rotate investments out of cash and into other yield assets such as shares and listed property trusts. In this week’s piece we are going analyse what to look for when assessing the sustainability of a distribution.

Read more here.

On Monday a broker in the UK put out a research note on Swiss-based Glencore suggesting that equity in the company could be worthless thanks to its US$50 billion debt burden. Shares in the company which runs over 150 mining, oil production and agricultural assets and employs about 180,000 people fell by 29%, caused BHP and Rio Tinto to fall 6.7% and 4.6% respectively on Tuesday and contributed to wiping A$50 billion off the market capitalisation of the ASX.

Like all fund managers we follow the resources sector closely, as it is the biggest sector in the ASX after the banks and spend a large amount of time testing our assumptions. Indeed over the last year, we have travelled to both the hot and dusty mines of the Pilbara and to the Dickensian dark satanic steel mills of North and Western China. In the press there has been much written about the end of the mining boom, and whilst we see that the boom days are over where marginal mines were making supernormal profits, we don’t see that the wholesale dumping of mining stocks is the right move for investors especially at current prices.

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The media, sections of the market and the companies themselves pay close attention to how analysts at the large investment banks rate individual companies, despite their frequent changes of opinion. Depending on the influence of the analyst in question, “Buy” calls are greeted with joy and gains, “Sell” causes concern and falls. “Neutral” calls tend to result in ambivalence and questions from the bank’s hedge fund sales desk as to why research are publishing a 40 page note advising clients to do nothing.

Earlier this week one of the investors in Aurora’s Dividend Income Trust asked me how closely we follow the stock calls offered by analysts at investment banks. In this piece we are going to run through the strengths and weaknesses of stockbrokers and how we as investors can best utilise their work to improve portfolio returns.

Read more here.

by Jonathan Shapiro  22 September 2015

When a company finds itself swimming in cash, you would think that’s a good thing for shareholders.

But far too often when a management team finds itself with more cash than it knows what to do with, a rush of blood to the head means they end up frittering it away, costing shareholders billions.

That’s the view of Hugh Dive, of Aurora Funds Management, who’s less than impressed with Woodside’s pursuit of Oil Search.

Woodside is reaping the rewards of its completed $15 billion Pluto LNG project, which has been gushing with cash for three years, allowing it to cut its debt and boost its dividend payments.

But Dive is concerned that by looking to expend those reserves by acquiring Oil Search, it ends up wasting what is a precious resource in itself – cash.  Among the issues with the $11.6 billion deal is that it will dilute Woodside shareholders and give Oil Search shareholders access to franking credits, while the synergies of the deal are in question.

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Last week Woodside Petroleum (WPL) submitted an offer to acquire Oil Search (OSH). This hostile bid had a range of conditions (such as approval by the PNG Government) and is to acquire all of the shares in Oil Search for a consideration of 1 WPL share for every 4 OSH shares. This announcement proved to be positive for OSH shareholders who saw an immediate +17% jump in the company’s share price and enjoyed speculation in the press that higher bids would be coming down the pipeline. Woodside Petroleum’s shareholders were less happy as the stock was immediately sold off -5%, as the market questioned the company’s financial discipline and whether this represents a transfer of value from the acquirer to the acquiree.

In this note we are going to look at the questions that Woodside’s board face with the billions of shareholders’ funds burning a hole in their back pocket. Historically we have observed that far too many companies have frittered away their excess cash or diluted existing shareholders by issuing new shares on questionable acquisitions designed to buy growth or move into new markets.

Read more here.

One of the biggest decisions facing listed property fund managers is in determining the weight in the portfolio for both Scentre (SCG) and Westfield Corporation (WFD). These are the two largest trusts on the ASX and currently comprise around 38% of the ASX 200 A-REIT index, so a significant underweight or overweight will be a big driver of a manager’s performance.

Last year, Westfield Group (WDC) and Westfield Retail Trust (WRT) announced a proposal whereby their combined assets will be restructured along geographical lines.  Westfield’s Australian/NZ businesses were consolidated as Scentre Group (SCG) and their US and UK assets, including the Westfield World Trade Center in New York, Century City in Los Angeles and Westfield London were retained as Westfield Corporation (WFD). The investment thesis behind this quite costly move is that the market will rate the two separate companies more highly, and that offshore acquirers will now be more interested in Westfield’s global assets without the baggage of part ownership shares in Australian shopping malls. We note that Westfield Corp now trades at a PE ratio similar to US-based REITs such as the US$57 billion Simon Property.

In this piece we are going to look at the various permutations of Westfield over the years and follow the “pea” or the Westfield entities that have given investors the greatest returns over the last 35 years. Recently we have fielded a few questions about our positioning in the two former Westfield vehicles in the Aurora Property Buy Write Trust.

Read more here.

A key part of our investment process is meeting with the management teams of companies at least once every six months where we hold a significant long or short position in the Aurora Dividend Income Trust and the Property Buy – Write Income Trust. Generally we seek to meet with management teams just after they have released their semi-annual profit results and at other times during the year when we have specific issues or concerns that we feel need to be addressed. The content and tone of these meetings varies widely depending on the nature of the company and how far the results that the management team has delivered deviates from our expectations.

As it is reporting season we have been very busy over the month meeting with management teams from both large (BHP and CSL) to small (Investa Office Fund) companies.  In this piece we are looking to shed some light on the role that these meetings play in the investment process.

Read more here.