Volatility: Where are they now?

July 7th, 2015

With the close of the 2014-2015 financial year, markets have become focused on the global ramifications of the Greek debt crisis/potential exit of the Euro and more locally the ramifications of a Chinese slow down. While normally it is trite to be permanently pessimistic, the current situation is significant in that the possibility of asset price contagion is relatively high: UBS forecasts a 40% chance of ‘GREXIT’ and if this were to arise then a further 40% chance of ‘severe contagion’.*

Read more here.

Beware of the Bankers Bearing Gifts

June 19th, 2015

Over past two years investors have faced a barrage of glowing research from the investment banks trumpeting the blue sky potential of new companies seeking to be floated on the ASX. What is also clear is that the overall quality of these new initial public offerings (IPOs) are declining and that investors right now should be more critical of the bright forecasts contained in the prospectuses. Earlier this week we received the IPO offer documents for a company exposed to the buoyant domestic housing sector, valued based on the assumption that the current demand for new homes and apartments remains unchanged.  Indeed one of their competitors that listed just over six months ago and has already fallen 20%.

Read more here.

What’s going on in Property

June 12th, 2015

Over the last twelve months, listed property has been one of the top performing sectors on the ASX 200. Whilst Australian other sectors in the equity market have faced concerns about a rising and then falling AUD, falling commodity prices, Eurozone issues and bank capital raisings in the wake of Basel III; listed property has seemingly sailed under the radar and the index has posted a total return of +23% over the past 12 months bettering the overall equity market by 17%! In this note we will look at what is going on in listed property together with our positioning in the Aurora Property Buy-Write Income Trust (AUP) in the various property sectors.

Read more here.

Splitting Up!

May 22nd, 2015

This week marked the ASX debut of South32, the third major group of BHP assets (total value $14 billion) to be spun-off to its shareholders in the last 15 years. In its first week of trading, South32 has performed well (outperforming BHP by 11% adjusting for the split).  Whilst this confounded predictions of weakness, we note that most of the gains occurred on Tuesday’s session and pricing may be tested next week on the back of index-related selling from European investors. In this week’s piece we are going to look at the rationale behind spinning out assets to form a new company, together with the other two spin-offs previously completed by BHP.

Read more here.

Investing in biotech and pharma

May 18th, 2015

Written by Hugh Dive

Biotechnology and pharmaceuticals are probably the most seductive and exciting sectors of the market to invest in. Not only can investors have the warm and fuzzy feeling that they are helping humanity (an emotion not readily generated by buying shares in Westpac or BHP), but when drugs or devices are developed and successfully adopted, it can be very profitable. Furthermore healthcare as a sector exhibits little correlation with Chinese growth, the health of the domestic economy or US interest rates and has some powerful demographic tailwinds.

It can be volatile, too. Recently, for example, Sirtex (STX) announced that trials of its eagerly awaited SIRFLOX liver cancer treatment had failed to show a statistically significant increase in survival in patients with liver cancer, though the company noted that liver cancer ultimately has a 90% level of morbidity. The announcement of this news wiped $1 billion off Sirtex’s market cap as the stock fell 55%.

For reference the difference between biotech and pharmaceutical companies is that biotechs like CSL use microorganisms or biologicals to perform a process, whereas pharmaceutical companies such as Pfizer employ a chemical-based synthetic process to develop small-molecule drugs.

Fat profit margins

Most large corporations require substantial and continuing capital investments to maintain the quality of their assets. The major banks are required not only to set aside capital to back their lending, but have consistent expenditure on information technology (IT); for example the Commonwealth Bank spends over $1.2 billion per year on IT services. As the other banks match this expenditure, it does not result in any improvement in profit margins. Similarly, manufacturing companies such as Bluescope produce cardboard boxes and steel from capital equipment that can readily be bought by their competitors. This results in minimal barriers to entry beyond a company’s cost of capital and thus gives low single digit profit margins and growth in line with GDP.

Conversely biotechnology and pharmaceutical companies can enjoy both high growth and high profit margins when a treatment they own and develop is successful and is adopted. For example in 2009 when Sirtex gained traction with their targeted liver cancer treatment SIR-Spheres, the company saw an annual revenue increase of 72% and profits increase from $1.2 million to $18.2 million. Demand for new and potentially life-saving treatments is relatively price inelastic. Furthermore patents and the time and effort required to obtain regulatory approvals for new drugs provide strong barriers to entry for other companies looking to produce competing products.

At the larger end of town in 2014 Pfizer, Hoffmann-La Roche, AbbVie, GlaxoSmithKline (GSK) and CSL all generated profit margins in excess of 20%. Conversely global car makers delivered a profit margin of only 3% and steelmakers -4%. For many drugs, the marginal costs of producing these drugs is small. The best selling drug of all-time is Pfizer’s cholesterol drug Lipitor that generated US$123 billion in sales from 1998 until its patent expired in 2011.

Pitfalls

As the Sirtex announcement showed, the sector can be a challenging place for retail and professional investors alike. Aside from determining whether a company’s drugs will be successful, investors also require that the product be adopted by physicians and often that it be included on a government’s list of approved and subsidised treatments such as Australia’s Pharmaceutical Benefits Scheme (PBS). In 2014, Australian taxpayers spent $9.1 billion on the PBS and listing every medicine on the PBS would quickly make the scheme unsustainable. For example, there is a good chance that an expensive new drug might not be listed on the PBS if it is deemed to only provide a marginal benefit over existing alternatives. Governments globally are looking to curtail healthcare spending that has been consistently growing at a multiple of tax revenue growth.

What to look for before investing

Security of patents. What is the life of the new and existing patents? After Lipitor’s cholesterol patent rolled off, the cost of the treatment dropped from US$500 per month to US$50. The impact of this was an 81% reduction in sales in the US for Pfizer. Investors should be aware whether competitors have similar treatments undergoing approval or if another entity is disputing a company’s patents.

Approval status. Where is a company’s treatments in being registered for clinical use with the US FDA (Food and Drug Administration)? FDA approval is a requirement for sale in the most profitable healthcare market in the world. Companies with at least one product in end-stage trials are safer investments than those just beginning the investigative phases of development. I have seen many companies issue exciting prospectuses and raise capital based on the results of their treatment on mice, with minimal further developments many years later. On average it takes 12 years and over US$350 million to get a new drug from the laboratory onto the pharmacy shelf, with a 3% success rate for drugs to move from pre-clinical trials to full approval.

Financial strength and cash reserves. Whilst this point is germane to investing in all companies, the length and cost of the approval process for a drug is greater and more uncertain than for a new gold miner or retailer. If the company is required to make multiple dilutionary share issues just to keep in the game, its attractiveness as a potential investment declines.

Diversity of the company’s pipeline. The number of investors that have made huge gains in one tiny biotech are dramatically outweighed by those that have seen share prices crater after a company’s only drug failed to win FDA approval. CSL shrugged off the failure of a competitor’s parallel trial of a plasma-derived product used to treat Alzheimer’s, as it had a range of other treatments both in the market and in clinical trials.

Size of the addressable market. Whilst investing in companies treating niche ailments can be profitable, the addressable market is far greater in areas such as HIV/AIDS, cancer, heart disease, diabetes, neurological disorders and immunological diseases. Furthermore companies operating in these areas are more likely to attract a takeover bid from the big pharma companies looking to restock their pipelines.

Complex sector

Looking across the biotech and pharma sectors in the table below, there are 70 companies listed on the ASX, but only six pay a dividend and out of the 70 only 14 are profitable! Furthermore the pharmaceuticals and biotechnology sector encompasses a wide range of companies specialising in very niche areas. Even where an investor possesses a strong understanding of a particular area of medicine such as liver cancer, this knowledge may be of little use in evaluating CSL’s blood plasma treatments. Conversely when investors are analysing the prospects for Boral, insight can be gained from examining competitor CSR’s building products division and speaking with their management team.

HD Table1 150515

Source: IRESS

 

Hugh Dive is a Senior Fund Manager for Aurora Funds Management Limited. 

Aurora Funds Appoints New Senior Portfolio Manager

May 4th, 2015

Aurora Funds Management Limited, a fully owned subsidiary of Keybridge Capital, is pleased to announce the appointment of Hugh Dive as a Senior Portfolio Manager. Hugh will work with the existing investment team, focusing on the Aurora Dividend Income Trust and the Aurora Property Buy-Write Income Trust. This appointment is a demonstration of the group’s ongoing expansion and commitment to providing risk adjusted returns to investors.

“Aurora offers retail investors access to liquid institutional-grade investment funds listed on the ASX, with ten year track records of delivering high and consistent income to investors, whilst reducing the risk of capital loss through employing novel derivative strategies. I’m excited to have the opportunity work together with the experienced and well-regarded Aurora investment team” Hugh said.

Prior to joining Aurora Fund Management, Hugh was Head of Listed Securities at Philo Capital and responsible for managing over A$1 billion in three strategies: Core Australian Equities, Listed Property and Interest Rate Securities. Hugh was also previously Head of Basic Materials at Citigroup Investment Research and in the 2011 Reuters StarMine Equity Analyst Awards, he was rated 5th overall amongst Australian analysts for stock-picking. Hugh has extensive portfolio management experience gained at Investors Mutual and at CC&L Investment Management in Vancouver, Canada’s largest independent fund manager. Hugh holds bachelor degrees in both Economics and Law from Sydney University, Canadian Securities Course (Honours) and is a CFA charter holder.

“I see that valuations in global equity markets are looking stretched and that prevailing interest rates provide insufficient income to satisfy the requirements of most investors. Consequently Aurora’s Dividend Income Trust and Property Buy-Write Income Trust will clearly appeal to investors interested in generating a high yield on their capital, but who are also concerned about limiting the risk of capital losses” .

His appointment followed the employment of Stephen Karrasch as Aurora’s new head of distribution and the sale of the funds management business to Keybridge Capital. CEO Simon Lindsay said “The balance sheet strength of Keybridge continues to gives Aurora the confidence to invest in additional investment talent to support the existing staff and improve the quality of the Aurora’s investment offer”.

Aurora manages funds of approximately $150 million on behalf of over 2500 retail investors.

Aurora appoints new Head of Distribution

April 9th, 2015

Aurora has appointed Stephen Karrasch as its new head of distribution.

Prior to Aurora, Karrasch held roles at Macquarie Bank and Rothschild Australia. He was a founding member of OneVue and was most recently head of sales at Philo Capital Advisers.

In his new position Karrasch will manage sales, distribution and adviser support for the $220 million funds manager.

Aurora managing director Simon Lindsay said, “After the record profit announcement for the 2014 year, Aurora has been investing in its future growth and Stephen’s appointment is part of this strategy being implemented.”

Karrasch added, “After a number of years of building and distributing platform and managed account administration services, I’m excited to return to the investment side and work closely with a team of dedicated investment professionals innovating for the adviser and self-managed superannuation fund markets.”

By Alex Burke

Chairman Address

March 23rd, 2015

In recent years Aurora has seen significant growth in its retail funds under management. However, in the retail world we operate in today, being a boutique funds management business requires capital to invest in future growth. Keybridge currently have $37m of Net Assets and with the support of Keybridge, Aurora will have access to capital to invest in its future growth. Additionally the investment expertise within Keybridge will help Aurora issue new products to additional distribution channels. It will also give Aurora the opportunity to market the existing infrastructure and services of Aurora to other investment professionals. The Board believe this is the right step forward for Aurora to continue to prosper.

Click here to read

New Head of Distribution

March 12th, 2015

In a move designed to demonstrate its continued commitment to the retail funds management arena, Aurora Funds Limited has announced the appointment of Stephen Karrasch as its new Head of Distribution. This follows the promotion of Simon Lindsay to Managing Director and the recently announced sale of the funds management business to Keybridge Capital Limited.

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Extraordinary General Meeting

February 24th, 2015

The purpose of the EGM is to seek Shareholder approval for the proposed sale of Aurora Funds Management Limited to Keybridge Capital Limited.

The Transaction represents an excellent opportunity to establish a strong financial base to enable Aurora Funds Management Limited to fully fund its growth potential.

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