KEY MESSAGES. Your Investment Research Team Justin McLaughlin Hamish Bell Alex Harris Jamie Franzen. Page 1 of 17. research@clearview.com.

Transcription

1 KEY MESSAGES Your Investment Research Team Justin McLaughlin Hamish Bell Alex Harris Jamie Franzen Page 1 of 17

2 Table of Contents 1. Chief Investment Officer s Update What s been happening in the markets? Defensive Asset Classes Growth Asset Classes Changes to Model Portfolios Key features of the Macquarie Income Opportunities Fund Strong risk management Better performance Approved Product List Changes CFA APL Changes MPS APL Changes Fund Manager Reviews Fidelity China Fund Grant Samuel Epoch Global Equity Shareholder Yield Fund Investors Mutual Australian Share Fund Schroder Australian Equity Opportunities Fund & Schroder Australian Equity Fund Page 2 of 17

3 1. Chief Investment Officer s Update Well what a month! June saw a kick-up in volatility as the Greek Drama reached its potentially final act. June also saw the extraordinary rally in Chinese mainland shares (so called China A shares) reverse in equally dramatic fashion. Grexit (meaning a Greek exit from the European Union or from the common currency) has gone from being unfathomable just a few weeks ago to a very distinct possibility. The Tsipras led Greek Government now has the democratic mandate to stick to its insistence that a new bail-out program must be negotiated, recognising that there must be some debt relief and a relaxation in austerity. On the other side, Greece s creditors are equally insistent that Greece must make a credible proposal first, before any thought of restarting negotiations can even be contemplated. Meanwhile Greek banks remain shut, and are only being kept afloat by an increasing frayed European Central Bank (ECB) lifeline. The next deadline is July 20 th ; when Greece is due to repay 3.5 billion euros to the ECB. If Greece is unable to reach a deal with its European creditors by then, and defaults on the ECB, a Grexit would be an almost certainty. Given Tsipras had all but conceded on most demands from his Euro area counterparts prior to calling the referendum; and there is broad recognition that there must be some sort of relaxation in repayment demands being made on the enfeebled Greek economy; it would seem that if some trust and good will on both sides can be restored then a deal can still be done. But this will have to occur in a matter of days, not weeks or months. Whilst we have every sympathy for the Greek people who are experiencing serious hardships under the current austerity plan, and view the European (German) handling of this situation as having been very badly managed, we should understand that Grexit in and of itself would have minimal impact on us as Australian based investors. Even in the Euro area any contagion should be contained. Given the protracted nature of the crisis, there has been plenty of time to prepare. This has resulted in exposures being pulled right back from where they were in 2012 when Grexit last looked a possibility. The chart below shows European banks exposure to Greece: Source: BIS Page 3 of 17

4 Of a lot more importance is the impact on that distinctly flighty creature, sentiment. In the next sections of this report we show the movement of different asset classes and markets. Looking at the table below it seems that markets to date have largely taken the Greece debt crisis in their stride. The worst performer was Australian shares which has no direct linkages to Greece per se, (but is clearly starting to be impacted by a weakening China as we have been warning for some time). How the different asset classes have fared: (as at 30 June 2015) Asset Class 1 mth 3 mth 6 mth YTD 1 yr 3 yr 5 yr 10 yr Cash Australian Bonds International Bonds Australian Shares International Shares Unhedged International Shares Hedged Emerging Markets Unhedged Listed Infrastructure Unhedged Australian Listed Property International Listed Property 10 Unhedged Bloomberg AusBond Bank 0+Y TR AUD, 2 Bloomberg AusBond Composite 0+Y TR AUD, 3 JPM GBI Global Ex Australia TR Hdg AUD, 4 S&P/ASX All Ordinaries TR, 5 MSCI World Ex Australia NR AUD, 6 MSCI World ex Australia NR AUD Hedged (as at ), 7 MSCI EM NR AUD, 8 S&P Global Infrastructure NR AUD, 9 S&P/ASX 300 AREIT TR, 10 FTSE EPRA/NAREIT Global REITs NR AUD But will that continue to be the case? This is where we move into the realms of behavioral finance. We do know that risk premia have been compressed across all asset classes and markets as central banks bond buying programs (aka QE ) push down yields and purposely drive investors to reach for yield (i.e. take on more risk than they would normally prefer to, in order to generate an acceptable return on their investment). This has seen share markets move to ever greater price to earnings (P/E) multiples; despite the absence of actual economic growth and sustainable organic earnings growth. Now that the US central bank (the Fed ) has ended QE and has its finger poised to hit the button on moving rates off emergency levels of near zero, share markets will need to stand on their own feet. Increasing interest rates means the net present value of a companies future earnings must fall in the absence of sustainable growth in free cash flow (as the discount factor has increased). With long term valuation measures in many markets (the US being one obvious Page 4 of 17

5 example) being at historic highs once the distortion of unsustainably high profit margins is removed; combined with compressed risk premia springing back to more normal levels as the downward pressure of central banks is removed; creates the sort of environment where changes in investment sentiment can trigger significant moves in markets. The experience of Chinese investors is a live example of this. In the eternal tug of war between greed and fear, greed was the overwhelming victor. At least until mid-june. Then, as we discuss further below, fear very rapidly became the overwhelming emotion at play. Even the perceived all powerful central government planners in Beijing appear to be at a loss as to how to shift sentiment back to the greed side of the dial (after just finishing trying to nudge it gently over to fear). All in all, investors worldwide are becoming acquainted again with that four letter word: risk. For our part we have never let the relationship cool. We have consciously resisted the siren call of the reach for yield and have positioned our model portfolios and funds with risk very much at front of mind. This is modeled through our Scenario 4 where we explicitly shock our portfolios with significant and sudden double digit falls on stock markets. The results of this stress testing are shown below: We want to emphasise that we are not suggesting that this scenario is, by any stretch of the imagination, the most likely scenario we face; it is not. Rather, that we have factored it into our model construction elements of risk management to mitigate risks should things turn out to be worse than we expect. Page 5 of 17

6 2. What s been happening in the markets? 2.1. Defensive Asset Classes Return 1 Mo 3 Mo 6 Mo YTD 1 Yr 3 Yr 5 Yr 10 Yr Asset Class Index Date p.a. p.a. p.a. Cash Bloomberg Bank 0+Y TR AUD 7/7/ Australian Bonds Bloomberg AusBond Composite 0+Y TR AUD 7/7/ Global Government Bonds JPM GBI Global Ex Australia TR Hdg AUD 7/7/ High Yield Corporate Bonds Credit Suisse HY USD 30/6/ hasn t been a great year for bond investors so far. So is this the dying of the Great Bond Bull market? We think while this bull market in bonds is now long in the tooth, to paraphrase Twain, reports of its death have been greatly exaggerated. Recent bond market sell-offs have been largely driven by over excited bund (German government bonds) traders. European Central Bank (ECB) QE s stated bond buying targets are greater than the available bond supply. Greater demand than supply in the German bond market would suggest that higher prices/lower yields are likely. And so it proved to be, with our now salivating bund traders, over enthusiastically buying even when yields (which move in the opposite direction to bond prices) got to absurdly low levels (and even negative for maturities below 10 years). As often happens, investor/trader enthusiasm swung from greed to fear in short order and conspired to kill the golden goose. When Euro area inflation ticked up, and despite the assurances of ECB president Mario Draghi, the market started to doubt whether the ECB was really committed to QE all the way out to September A series of crowded, leveraged trades in European bonds all rapidly collapsed as everyone tried to fit through the same small exit. As a result bunds rapidly reversed direction with yields increasing and prices decreasing: resulting in significant capital losses for investors. The shockwaves spiraling out from the bund shakeout reverberated through to the biggest in the world, that for US government bonds, and through to our own bond market. However, we believe these are more short term technical factors at work and this is not the start of the end of bonds: ECB QE is still firmly in place. It will put a cap on any further sell-off in bunds. The more risk adverse climate induced by the Greek crisis and Chinese stock turmoil could be expected to see investors retreat to perceived safe haven assets, such as developed market government bonds. The 1 st half slowdown in the US economy may well see Fed liftoff pushed out further than expected. Evidence of the Yellen led Fed s dovishness in this regard was on display at the last FOMC meeting. Page 6 of 17

7 More importantly, there are strong secular drivers that will act to prevent yields normalising to pre-gfc levels. The most important of these is a continued global savings glut. The collapse in the oil price has seen the oil producers saving less; but China, Japan and the Euro area continue to be big savers and hence exporters of capital. What s more, the effective cash transfer (from oil producers) that households in Germany and the US received courtesy of the lower oil price has largely gone into increased savings. A good proportion of this capital will find its way into bonds: ensuring bonds are bid and putting a natural lid on any major, sharp bond sell off Growth Asset Classes Asset Class Index Return Date 1 Mo 3 Mo 6 Mo Australian Shares Australian Shares ASX Acm All Ords 7/7/ Australian Listed Property ASX 200 Acm AREIT 7/7/ Global Developed Market Shares Developed market shares MSCI World 8/7/ Dev mrkt Unhedged A$ MSCI World Unhgd 7/7/ Dev mrkt Hedged A$ MSCI World Hedged 7/7/ Dev mrkt listed property US$ MSCI World REIT 8/7/ Dev mkt listed infra unhgd A$ FTSE Dev Infr 50/50 7/7/ US Shares S&P 500 8/7/ European Shares MSCI Europe 8/7/ Japanese Shares Nikkei 8/7/ Global Emerging Markets Shares Emerging Markets in A$ MSCI EM 8/7/ Emerging Markets Infra S&P EM Infra 8/7/ N/A Chinese Shares MSCI China 8/7/ Chinese Mainland Listed MSCI China A 7/7/ YTD 1 Yr 3 Yr p.a. 5 Yr p.a. 10 Yr p.a. P/E 1 EV/ EBITA 2 Price to book EV/ Sales 3 Debt/ EV 4 1 Share Price/12 month trailing earnings per share 2 Enterprise Value (total value of equity + debt) / Earnings Before Interest, Tax, Depreciation and Amortisation 3 Enterprise Value (total value of equity + debt) / 12 month trailing sales 4 Total debt / Enterprise Value (total value of equity + debt) Page 7 of 17

8 Chinese Hong Kong Listed MSCI China H 8/7/ Indian Shares MSCI India 7/7/ Brazilian Shares Bovespa 8/7/ Russian Shares MSCI Russia 8/7/ Asset Class Index Return Date Other Iron Ore in US$ FOB China 62 Fe 7/7/ AUD:USD exchange rate AUDUSD Spot 8/7/ AUD:Trade weighted Morgan Stanley 6/7/ Mo Commodities TR/CC CRB ER 8/7/ Gold in AUD ETFS Physical Gold 8/7/ Catastrophe Bonds Swiss Re Cat Bond 30/6/ Mo Despite all the headlines of the ongoing Greek saga, market reaction has been muted thus far. As shown above, European stocks fell by just 3 over the last month (month on month as at 8 th of July). 6 Mo In China the market is the headline. The Chinese mainland stock exchanges of Shenzhen and Shanghai are, in contrast to most other stock exchanges worldwide, dominated by retail investors (as opposed to institutional investors, such as super funds). Many of these retail investors have also used margin loans to leverage their exposure. It was the Chinese government s attempt to limit this margin lending that set off the increasingly frenzied selling. Beijing s subsequent attempts at putting the genie back in the bottle have floundered so far and added to the sense of panic. YTD 1 Yr 3 Yr p.a. 5 Yr p.a. 10 Yr p.a. Page 8 of 17

9 The Matrix models do have some direct exposure to China via the Fidelity China Fund. This fund s performance has held up very well in the face of difficult market conditions in China: Fidelity China Fund As at June 30 th Month 3 Months 1 Year Closer to home, the iron ore price came in for another period of sustained selling pressure after recovering a little earlier in the year. The spot price has now fallen by over 20 in just one month. This should continue to depress the A$. 3. Changes to Model Portfolios In the Matrix Models we have removed a manager; Aberdeen and replaced them with another - Macquarie, on a one-for-one basis as shown below: Model Aberdeen Floating Rate Income Fund (CSA0029AU) REMOVED Macquarie Income Opportunities Fund (MAQ0277AU) ADDED Series 6 High Growth 80/20 0 (Previously 5) 5 (Previously 0) Series 6 Growth 70/30 0 (Previously 5) 5 (Previously 0) Series 6 Balanced 50/50 0 (Previously 15) 15 (Previously 0) Series 6 Moderate 30/70 0 (Previously 15) 15 (Previously 0) Series 7 Balanced Income Seeker 0 (Previously 15) 15 (Previously 0) We see this change as largely replacing one conservative credit manager, Aberdeen, with a better alternative. We would expect that over time the Macquarie Income Opportunities Fund would generate better returns than the Aberdeen Floating Rate Income Fund which has to date underperformed term deposits. The risk levels inherent in the Macquarie product are slightly higher than the Aberdeen fund, but still very low. The mix of fixed interest investments is also more diverse. We may be in a low interest rate environment for some time. Fighting hard for what small incremental gains are available in this sector is important, hence the change. Page 9 of 17

10 We emphasise that we see no risks in the Aberdeen fund. It is a conservative credit fund and there is no suggestion that the manager is not managing the fund in accordance with its investment parameters. Accordingly, we do not see a need for planners to immediately down tools and change all their clients portfolios immediately if they do not wish to do so. Client portfolios could be changed at review time if that is deemed more appropriate. The reason for the switch is to incrementally add additional value to client portfolios in a low returning asset class Key features of the Macquarie Income Opportunities Fund Sector Description Manager Range Current (as at 31/5/15) Australian investment grade Cash and high quality investment grade Australian 66.1 corporate bonds (i.e. with a credit rating of at least BBB-) In house Cash 7.5 Hybrids Securities with bond and equity characteristics In house Int. investment grade High quality investment grade international corporate Rogge (London) bonds Global high yield Sub investment grade corporate bonds (i.e. BB and Wellington (Boston) below) EM debt The government bonds of emerging market countries Stone Harbor (NYC) Credit opportunities E.g.Australian RMBS (Residential Mortgage Backed Securities); Offshore ABS (Asset Backed Securities); Loans (loans made by a syndicate of banks and then traded on the secondary market) In house We see this fund as a high quality conservatively managed credit fund. Page 10 of 17

11 We are not adding duration risk (i.e. risk of capital losses as a result of interest rates going up) to the Matrix portfolios. The Macquarie Income Fund s duration (0.2) is actually lower that that of the Aberdeen Floating Rate Income Fund (0.7) Strong risk management The investment management team at the fund has a strong track record of risk management in difficult circumstances. The chart above shows the performance of the fund during the global financial crisis (the green line is the fund, the black line the All Ordinaries). The fund experienced very modest losses that were quite quickly recovered in what was an extremely difficult set of circumstances. Page 11 of 17

12 3.3. Better performance The chart below shows the risk and return characteristics for both the Aberdeen fund (pink square) and the Macquarie fund (blue dot).. In summary, we are clearly replacing a conservative fund with another conservative fund; but with one that has better performance prospects. Page 12 of 17

13 4. Approved Product List Changes There have been a number of changes to the Approved Product Lists of ClearView Financial Advice (CFA) and Matrix Planning Solutions (MPS) CFA APL Changes Additional Platform available for CFA advisers: AustralianSuper Managed fund additions to the APL: Pan-Tribal Global Equity Fund (ETL0419AU) Australian Super Cash AustralianSuper Australian Fixed Interest AustralianSuper Diversified Fixed Interest AustralianSuper International Fixed Interest AustralianSuper Property AustralianSuper Stable AustralianSuper Conservative Balanced AustralianSuper Index Diversified AustralianSuper Balanced AustralianSuper High Growth AustralianSuper Australian Shares AustralianSuper Australian Sustainable Shares AustralianSuper International Shares AustralianSuper International Shares (Hedged) AustralianSuper International Sustainable Shares Managed funds removed from the APL (and WealthSolutions platform): Perennial Growth High Conviction Share Trust (IOF0089AU) Perennial Growth Shares Wholesale Trust (IOF0048AU) Page 13 of 17

14 4.2. MPS APL Changes Managed funds additions to the APL: Schroder Equity Opportunities Fund (SCH0035AU) Pan-Tribal Global Equity Fund (ETL0419AU) Macquarie Income Opportunities Fund (MAQ0277AU) The hold, close, sell status of funds has been removed from the MPS APL. Going forward managed funds are either approved or not approved. Based on these changes the following funds have been added to the approved list from Hold status: Aberdeen Australian Fixed Income Fund (CRS0004AU) Aberdeen Australian Equities Fund (MGL0114AU) AMP Capital Res Inv Leaders Intl Share A Fund (AMP0455AU) Antares Elite Opportunities Fund (PPL0115AU) BlackRock WS Australian Share Fund (PWA0823AU) EQT SGH WS Absolute Return Trust (ETL0030AU) Investors Mutual Industrial Share Fund (IML0004AU) Ironbark Global Diversified Alternatives (DEU0109AU) UBS Clarion Global Property Securities I Fund (HML0016AU) UBS Diversified Fixed Income Fund (SBC0007AU) Addition of the FirstChoice variant of the above funds, where available: Aberdeen Australian Fixed Income Fund Antares Elite Opportunities Fund Macquarie Income Opportunities Fund UBS Diversified Fixed Income Fund Managed fund removed from the APL: Clime Australian Value Fund (CRE0005AU) BlackRock Equity Opportunities Fund (MAL0072AU) Page 14 of 17

15 5. Fund Manager Reviews The research team reviewed a number of managers over the past month. We give a quick summary of our thoughts following the review below. For the full reports on these managers please go to the Matrix website (Research & Product >Monthly Key Messages & Tools) or the CWT document library (05 Research > Manager Reports) Fidelity China Fund The manager argues that the rally particularly in the A' shares was due primarily to retail investors moving from property to share investing. Compounding this is that many of these investors were seeking quick significant gains by utilising margin loans (borrowing to purchase shares). The recent sharp correction in this market can be primarily attributable to the authorities imposing restrictions on this type of leveraging. The manager still remains cautious on banks and currently has this sector underweight by 5. Credit misallocation and a need to improve their balance sheets justifies Fidelity s position. Valuations have become less attractive generally across the different types of Chinese shares ( A, H, etc) however on a relative basis (compared to developed markets) and to their own history they are not stretched (particularly after recent falls) Grant Samuel Epoch Global Equity Shareholder Yield Fund The manager advised that the portfolio has remained fairly stable since the last review (12mth turnover to was 20). On a relative basis the portfolio remains heavily weighted to utilities and telecommunications sectors given their dividend generating nature. Utilities have been the main detractor to performance over the past 6 months with the manager noting a fall off in the sector following a strong rally in Q4 last year. There were also some stock specific issues that weighted on performance (SSE, National Grid and Electricite de France) 5.3. Investors Mutual Australian Share Fund The manager argues that with Australian economic growth remaining below long term trend, corporate earning growth will be sluggish & patchy throughout 2015, even for those companies assessed as high quality. Thus, identifying opportunities in this environment will remain challenging. Page 15 of 17

16 Some opportunities the manager has found however are:: Restructures: This can occur where companies invest/divest parts of their business to obtain synergies. Steadfast: is the largest general insurance broker network, and has continued to successfully expand through strategic acquisitions of businesses throughout Australia. The company also has good relations with reinsurers. Aurizon: this is the new name for the privatised QR National rail business. Other positions - manager remains cautious on: Resources Banks 5.4. Schroder Australian Equity Opportunities Fund & Schroder Australian Equity Fund The manager continues to believe valuations remain stretched. However historically low bond yields, and the associated reach for yield may result in this environment continuing for sometime. They remain concerned of the increased M&A activity and share buybacks suggesting many in the market are not assessing risk appropriately. With the global bond sell off in recent weeks, banks have underperformed, whilst resources, energy and industrials outperformed. This resulted in the fund outperforming for the month. The manager argues that the underperformance in banks is more a function of regulatory requirements to hold more capital (Basel III) compared to a drop off in earnings. The manager therefore believes the banks remain priced to perfection, and have remained underweight. The manager remains constructive on the energy and commodities sectors arguing that long term return on capital rather than short term pressures from price deflation should drive valuations. They therefore believe that prices for many stocks in these sectors have overshot on the downside. The manager has also been focusing on the consumer staples sector given its defensive qualities. Page 16 of 17

17 Disclaimer The information contained in this document is current as at date of publication unless otherwise specified and is provided by ClearView Financial Advice Pty Ltd ABN , AFS Licence No (ClearView) and Matrix Planning Solutions Limited ABN , AFS Licence No (Matrix). Any advice contained in this material is general advice only and has been prepared without taking account of any person s objectives, financial situation or needs. Before acting on any such information, a person should consider its appropriateness, having regard to their objectives, financial situation and needs. In preparing this presentation, ClearView and Matrix have relied on publicly available information and sources believed to be reliable. Except as otherwise stated, the information has not been independently verified by ClearView or Matrix. While due care and attention has been exercised in the preparation of the presentation, ClearView and Matrix give no representation, warranty (express or implied) as to the accuracy, completeness or reliability of the information. The information in this document is also not intended to be a complete statement or summary of the industry, markets, securities or developments referred to in the document. Any opinions expressed in this document, including as to future matters, may be subject to change. Opinions as to future matters are predictive in nature and may be affected by inaccurate assumptions or by known or unknown risks and uncertainties and may differ materially from results ultimately achieved. Past performance is not an indicator of future performance. Page 17 of 17