News Archives 2015

Dogs of the ASX …. Ruff Ruff!

December 18th, 2015

The “Dogs of the Dow” is an investment strategy that is based on buying the ten worst performing or highest yielding stocks in the Dow Jones Industrial Average (DJIA) at the beginning of the year. The strategy then holds these ten stocks over the calendar year and sells these stocks at the end of December. The process then restarts, buying the ten worst performers or highest dividend yielders from the year that has just finished.

Following outsourcing services provider Spotless’ 49% fall in December (which wiped A$1.2 billion off its market capitalisation), in this week’s piece we are going to look at the “dogs” of the ASX, focusing on large capitalisation Australian companies with falling share prices.  Additionally I am going to sift through the trash to try to discern any fallen angels.

Unloved Mutts

The Dogs of the Dow made famous by O’Higgins in his 1991 book “Beating the Dow” and seeks to invest in the same manner as deep value and contrarian investors do. Namely, invest in companies that are currently being ignored or even hated by the market; but because they are included in a large capitalisation index like the DJIA or ASX 100, these companies are unlikely to be permanently broken and may have the financial strength or understanding capital providers; (shareholders and banks), that can allow the company to recover over time.

Read more here.

Joys of riding short-term moves

November 30th, 2015

Written by Vesna Poljak and Philip Baker – Australian Financial Review

Unlike most investors, John Corr does not want to be the next Warren Buffett, the legendary value manager who is considered the greatest of all time. Certainly Buffett’s style of long-term investing, as well as the old adages of buying good companies at the right price and the value of fully franked dividends, will always be important.

But equally, there’s money to be made every single trading session by riding the short-term moves, taking advantage of stocks that rise and fall too much, and that is where Corr does his best work.

“What we try and do in our business is a lot of short-term trades. We think a lot of the market in Australia concentrates on trying to be the next Warren Buffet and focuses very much on picking long-term earnings and waiting for share prices to reflect that,” the Aurora chief investment officer says.

So instead of waiting for shares to go up and panicking when they don’t, he concentrates on other opportunities often using derivatives and options. This style of investing is broadly known as alternatives.

“I believe there’s a lot of value in trying to pick long-term earnings and long-term investments. I don’t think there’s a lot of value in all your portfolio being in that long-only style. Some people are very good at it and you should stick with those people, but we’re not like that,” he says. “We like volatility, we like things to move around.”


Corr, who started his career as a bank teller at the Commonwealth Bank in Warrawong near Port Kembla in 1982, is an investor who looks for numbers that just don’t add up.

Working through the 1987 sharemarket crash as an advisor at AC Goode showed him how quickly markets can turn, and those lessons have always stayed with him.

For a start, there can be a greater risk reward trading in options and derivatives than just buying stocks and going long.

Rather than estimating how high a stock can go, the first question that Corr always asks is: what can possibly go wrong?

“For most parts of ’87 I thought this was the greatest thing in the world, and how good was I? Of course October ’87, as markets do teach you great humility, I went from thinking I was really rich to realising technically I was broke. The important thing about that is one of the philosophies of our fund is the markets can be much more volatile than people expect and that’s certainly a lesson from that part of my career,” he says.

“I know markets can go to irrationally high levels and markets can go to irrationally low levels … if there’s no catalyst, markets can go off on their merry way for a long, long time.”


Referencing John Maynard Keynes, “markets can be illogical much longer than I can be solvent”, he adds.

A fertile ground for Aurora has been trading around renounceable rights issues, which have been popular in 2015 amid huge capital raising efforts. The recent Westpac issue was a good example.

The bank raised $3.5 billion in a one-for-23 entitlement offering in order to strengthen its capital reserves to meet new regulatory requirements. Renounceable rights can lapse or be traded if a recipient doesn’t want to subscribe for more equity.

“Generally we look for the share price to bottom about the time that the rights trading finishes, we tend to buy a lot of the renounceable rights when they’re trading on market because they give us a limited downside.

“We were buying Santos rights when they finished trading for as low as 20¢ because they give us all the upside on the shares for the next couple of weeks with a very limited downside.”

Aurora hedges the position post the rights trading, as the share price tends to recover.


“It’s something we used to do on the retail desk at AC Goode, that’s how long it’s been happening.

“There is a supply of equity or equity exposure that comes out and it tends to come out at relatively cheap prices. When that supply dries up there’s a natural opportunity for the market to bounce.”

The September quarter was strong for Aurora amid a revival in volatility. Back when Corr was running Fortitude Capital, which he set up in 2004, the hedge fund got to $200 million from a $2 million start. A 12 per cent return in 2008 was not enough, however, as the fund-of-funds model went quickly out of favour.

Fortitude merged with Aurora, which earlier this year was acquired by Keybridge Capital. The absolute return fund offers bond-like volatility, has never had a negative year in 10½ years and delivers similar returns to equity.

Corr, who is a passionate South Sydney fan, always thought he would end up in accounting having grown up in a working class area, but financial markets deregulated at the right time, creating lots of demand for numerate people who could communicate.

“I think I was very lucky,” he says. “I just think I had a bit of a natural skill set that was needed, and was happy to work hard. There were some long hours then because there was a lot more paperwork and laborious work before things were so computerised.”

Read more:

Profits, a look beyond the Headline!

November 13th, 2015

Over the last few weeks Westpac, NAB, ANZ collectively reported profits of $20.8 billion dollars. This resulted in some commentary in the press about banks being too profitable, especially in light of moves to recent moves to reprice loans upward for both investors and owner occupiers. Whilst large corporations generate large profits in dollar terms; what is often ignored in much of the debate on corporate profitability is that these profits have to be shared amongst millions of individual shareholders. For example Commonwealth Bank has almost 790,000 individual shareholders with 1.7 billion shares outstanding, all of which have a claim over the $9.1 billion in cash profit that the bank reported in August. In this piece we are going to look at different measures of corporate profitability for large Australian listed companies, looking beyond the billion dollar headline figure.

Read more here.

Banks Report Card 2015

November 6th, 2015

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.

Victors and Vanquished

October 30th, 2015

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 23rd 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.


Losing Money in the Market

October 23rd, 2015

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

Read more here.

Searching for Yield

October 16th, 2015

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.

What to do with Resources

October 2nd, 2015

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.

Read more here.

Stock-picking Stockbrokers???

September 25th, 2015

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.

The four sins of cashed up Australian companies

September 22nd, 2015

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.

Read more

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