Agricultural Investment in Australia

November 18th, 2016

Over the last few weeks it appears that Gina Rinehart’s Australian Outback Beef (67% Hancock Prospecting/33% China’s Shanghai CRED) has won the bidding war for the Adelaide-based pastoral company S.Kidman & Co Ltd.  If this $365 million deal is approved by the Foreign Investment Review Board (FIRB), the combined pastoral empire will own 11.9 million hectares or 1.5% of Australia.  Food production/agriculture is an area in which Australia possesses a global comparative advantage in production, unlike car manufacturing where taxpayers may have trouble discerning the benefit they have received from the billions “co-invested” in the production of motor vehicles which will cease in 2017 with the closure of Holden’s factory at Elizabeth in South Australia.

In this note we look at the extent to which opportunities for investors in getting exposure to listed agricultural companies has diminished over the last ten years by takeovers,  and the depth of foreign interest in ASX-listed agricultural companies.

Time Horizons

We see that the biggest factor in the reduction in the number of listed agricultural companies is the mismatch in investment horizons between equity owners such as institutional fund managers and foreign buyers like sovereign wealth funds. Fund managers (including the author of this piece) spend too much energy focusing in on delivering quarterly returns ahead of their peers to retain funds under management, whereas foreign buyers can often take a longer view that the value of food or the supply of arable land servicing the growing urban populations of Asia will be worth more in coming decades.

Read more here.

Banks Report Card 2016

November 11th, 2016

Over the last two weeks investors have had a wild ride with the markets fretting over the outcome of the US election, and in the middle of this the Australian banks reported their profit results which gained very little attention. We have no intention of adding to the pile of “expert opinions”, nor commentating on what a Trump presidency means for Australian equities, as we see it as having a pretty minimal impact. Market pundits fretting over the impact of the US starting a trade war with China; ignore the fact that China holds 10% of the $10 trillion publically traded US debt. Given the new government’s fiscal stimulus plans and the associated deficits and thus increased borrowing; it makes little sense for the US to antagonize its largest creditor.

In this piece we are going to look at the common themes emerging from the banks’ results, differentiate between them and hand out our reporting season awards to the financial intermediaries that grease the wheels of Australian capitalism.

Read more here.

Resumption of Extraordinary Meeting

November 8th, 2016

Attached is the Notice of Adjourned Meeting, setting out the items of business to be considered and voted on by AFARF unit holders, together with important information and a proxy form. Aurora
recommends all unit holders carefully read the Notice of Adjourned Meeting prior to deciding on how to vote on each resolution and submitting any further proxy forms.

Unit holders who have previously submitted a proxy vote are encouraged to submit a new proxy form directing their proxy how to vote on all resolutions to be considered at the Adjourned Meeting. Only unit holders listed on the AFARF unit register as at 10:30am on 28 November 2016 (being the record date) are entitled to vote on the Proposed Resolutions.

Read more here.

Closing out a Short Position

November 4th, 2016

“You’ve got to know when to hold ’em, Know when to fold ’em, Know when to walk away and know when to run, You never count your money when you’re sittin’ at the table, There’ll be time enough for countin’ when the dealin’s done”.


A key component in short selling is knowing when to close out a short or in the words of the Gambler knowing when to walk away. Earlier this week we closed out the one of our largest short positions in the Dividend Income Fund, a long standing short in Seven West Media.  We see that investment research from the investment banks is generally near to useless for investors looking to close out a short as either a) the bank has ceased coverage of the stock, b) the company is still covered by the analyst who still has a buy recommendation despite the massive fall, as they are desperately hoping it will recover and they will keep their job or c) the analysis is far too negative and bitter towards the company that they believe has unfairly duped them.

In this week’s piece I am going to look at the mechanics of closing out a successful short position (essentially buying shares on the ASX to deliver back to its original owner), along with the dangers of being too greedy.

Read more here.

ABW Meeting

November 1st, 2016

In accordance with the Listing Rule 3.13.2 and section 251AA(2) of the Corporations Act, the following statistics are provided in respect of proxy votes received for each resolution put to the General Meeting of the Aurora Absolute Return Fund this morning. The instructions given to validly appointed proxies in respect of the resolutions were as follows:

The resolution was rejected.

Read more here.

What’s going on in Listed Property?

October 21st, 2016

Over the last two years listed property has been the top performing sectors on the ASX 200 outperforming the broader equity market. 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, listed property has seemingly sailed under the radar up until mid-July 2016 and has since fallen 12% over the past quarter. In this note we will look at what has caused this fall, 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.

Profits: looking behind the headline number

October 7th, 2016

This week,  the CEOs of the four major banks have been grilled by the House of Representatives’ Standing Committee on Economics, with politicians demanding  to know why Australian banks have higher returns on equity (13.8% ROE)  and profits than those in other Western countries and whether this is due to their market power. This appears to be both an exercise in political point-scoring and data mining, in that I strongly doubt that it would be in the national interest if the Australian banks generated the returns of the European Banks (4% ROE excluding Deutsche Bank). Weak returns limit internal capital generation and increase financial precariousness and thus the risk of taxpayer funded bailouts. Indeed if one looks at a more comparable and similarly structured banking market such as Canada (ROE 14.8%), that has five dominant trading banks, in a highly regulated market; shareholders could make the case that the Australian bank CEOs are not trying hard enough to generate profit!

In this week’s piece we are going to look at different measures of corporate profitability for large Australian listed companies, looking beyond the billion dollar headline figures that have spell bound our politicians.

Read more here.

Return on equity for Canadian banks is higher than Australia’s big four

October 7th, 2016

Written by Vesna Poljak  of the Australian Financial Review.

Australia’s bank bosses fronting the parliamentary inquiry have sought to play down the returns they earn by drawing a parallel with banks in Canada, another commodity economy similar in structure.

In this respect, the big four chief executives are correct. But in reality, comparisons with Canada flatter Australian banks, in the eyes of some investors.

Read more here.

Aurora Global Income Trust announces scrip takeover bid for HHY Fund

September 29th, 2016

Aurora Funds Management Limited (Aurora), as responsible entity of the Aurora Global Income Trust (ARSN 127 692 406) (AIB) and the HHY Fund (ARSN 112 579 129) (HHY), is pleased to announce AIB’s intention to make an off-market takeover offer (Offer) for all of the units in HHY.

Each HHY unitholder that accepts the Offer will receive AIB units such that the net asset value (NAV) of the accepting HHY units will equal the NAV of the AIB units issued.

Based on the last reported NAV of HHY (on 31 August 2016), the Offer equates to 12.52 cents per HHY unit.

The value of the AIB Offer is above the 30, 60 and 90 day historic volume weighted average price, as well as the current trading price of HHY units immediately prior to this announcement.

The directors of Aurora believe that the Offer provides an attractive alternative to HHY unitholders to winding-up HHY, as recently proposed by certain HHY unitholders, which would likely result in a return to unitholders lower than the reported NAV. In particular, HHY unitholders who accept the Offer and receive AIB units will be able to redeem their units for the then applicable NAV of AIB as opposed to selling their HHY units on-market for a discount, as presently is the case.

Aurora, in its capacity as the responsible entity, has been assessing the position of AIB and HHY, and investigating strategies aimed at restoring value to the units of both funds. Aurora has determined that it would be in the best interests of unitholders in both funds to proceed with the Offer. Aurora believes that the combination of two relatively small listed managed investment schemes will increase liquidity to position the combined entity as a sector leading specialist with gross assets in excess of $16 million, as well as reducing the costs applying to the funds on a per unit basis.

The Offer and AIB’s obligation to make the Offer is subject to a range of conditions which are set out in the Annexure attached to this announcement.

 Aurora Global Income Trust (ASX: AIB) intends to make a takeover bid for 100% of the units in HHY Fund (ASX: HHY) at its prevailing NAV.
 Compelling strategic rationale for the HHY Fund acquisition. Bringing together the two funds will likely provide increased scale, liquidity and lower management expense ratios across both funds.
 Under the Offer, the number of AIB units that accepting HHY Fund unitholders will receive will be calculated on the basis of the applicable NAV of each fund.
 Accepting HHY unitholders will have the ability to redeem their AIB units off-market for cash at NAV pursuant to its constitution.

Unitholders in both AIB and HHY do not need to take any action in relation to the Offer at the present time. The indicative timetable in relation to the Offer is set out below:

Key Event
Lodgement of AIB’s Bidder’s Statement with ASIC, ASX and HHY Fund – Late October 2016
Dispatch of Bidder’s Statement – Early November 2016
AIB’s Offer opens – Early November 2016
AIB’s Offer closes (unless extended) – Early December 2016

Rationale for the Takeover
Aurora’s Managing Director John Patton said that the Offer is intended to “create an enlarged platform from which to deliver value added outcomes for both AIB and HHY investors. This Offer gives HHY unitholders the opportunity to convert their HHY units into AIB units at a premium to HHY’s historical trading price, and achieve liquidity at prevailing NAV. It is also considered to provide a superior outcome to that which may be achieved in a wind-up of HHY”.

HHY unitholders will become unitholders in an enlarged listed managed investment scheme with net assets in excess of $16 million (on a pro forma basis assuming 100% acceptances). The Offer provides HHY unitholders with a value accretive exit strategy and also the option to stay invested in the portfolio of HHY (although in a diluted form) with exposure to a more substantial and potentially more diversified investment portfolio. In addition, the Offer will enable HHY unitholders to become unitholders in a fund that allows its unitholders to redeem their investment at a price equal to net asset value via an off-market redemption process.

The Offer will strengthen AIB’s asset base and will provide a complementary, high quality investment portfolio. The increased market capitalisation will provide an improved ability to grow the investment portfolio returns on a measured and sustainable basis leading to enhanced distributions growth without significant increased risk. By virtue of the benefits of economies of scale, the enlarged entity also has the capacity to reduce the management fees currently charged to AIB unitholders on an enduring basis as the costs will be spread over a larger unitholder base. It is also reasonable to anticipate the potential for operating synergies over the medium term including administration and overhead.

The Board of Aurora intends to await the finalisation of the Independent Expert’s Report (see below) before advising how HHY Fund unitholders should respond to the Offer.

Independent Expert’s opinion
The Directors of Aurora intend to appoint an independent expert on behalf of HHY unitholders to prepare an Independent Expert’s Report to assess the merits of the Offer. The Independent Expert will conclude whether the Offer is “fair, reasonable and in the best interest” of HHY unitholders participating in the Offer.

AFARF Meeting

September 26th, 2016

A meeting of the members of the Aurora Fortitude Absolute Return Fund was held at 11.00am on 26 September 2016 in accordance with the Notice of Meeting issued on 18 August 2016.

The independent Chairman, Mr John Malon, opened the meeting and noted that there had been some recent developments in relation to the subject matter of the meeting.  In particular, the Chairman noted that Aurora had informed him that:

(a) It wished to retire as Responsible Entity under section 601FL of the Corporations Act and clause 17.1 of the Fund’s constitution;

(b) It considered it in the best interests of members of the Fund that they have a choice of responsible entities to replace it as responsible entity of the Fund; and

(c) It requested that the meeting be adjourned to allow unitholders the opportunity to consider the alternatives and to receive additional information in relation to them.

The Chairman indicated that it was appropriate to adjourn the meeting to enable additional options to be put before the members of the Fund and for the relevant additional information to be provided to them.

It was indicated that notices of the meetings and additional information would be despatched as soon as possible, expected to be within the next 3 weeks.

The Chairman noted that Aurora was not yet in a position to confirm the date on which the meetings will be held, partly due to uncertainty surrounding the Chairman’s availability for the meeting.  However, it was stated that the objective was for the meetings to be held in early November.

The Chairman declared the meeting of the Fund adjourned to the place and time specified in a notice of adjourned meeting to be issued by Aurora and thanked unitholders for their attendance.

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