News & Media

Written by RICHARD HEMMING of The Australian

“Hugh Dive manages a “long short” hedge fund for Aurora Funds, which can short sell up to 25 per cent of the value of the stocks it owns. Recently he has had success shorting Flight Centre, Ansell, Orica, Spotless and ALS.”

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Since the GFC one of most unpleasant feelings for an analyst or fund manager is when a company held in their portfolio posts a notice on the ASX of a “Trading Update”. Since 2008, this has almost always been a downgrade of a company’s expected profits, which then results in a sharp price fall, gnashing of teeth and tears from the analyst responsible for recommending the stock. In recent example of this came from Flight Centre  who warned two weeks ago that they were unlikely to meet their targeted profit growth due to consumer confidence over the Australian election and the Brexit referendum in the UK. The company’s share price fell by 17% wiping $627 million of the travel company’s market capitalisation based on a change in expected profit in 2016 of only $30 million! In this week’s piece we are going to look at downgrades and next week I am going to follow up with a piece on earnings shenanigans, or what a company can do to dress up their earnings.

The months leading up to the end of each reporting season are known as “Confession Season”, which is usually May/June and November/ December of each year as the companies become aware that they are not going to meet profit expectations and then “confess” their sins.

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Over the last month we have seen the AUD fall 8% vs the USD, continuing the volatility in the AUD in 2016 which started the year off at 0.72, then fell to 0.68 mid-January before recovering to over 0.78 in mid-April. The fall in May sparked research that was released on Wednesday from ANZ Bank’s foreign exchange strategy team stating that the AUD was overvalued, and could head towards US50¢ as it loses its de facto safe-haven status. In the press large movements in the Australian dollar are often erroneously presented in the press as a vote of confidence in Australia as a nation or the management of our elected leaders. A falling Australian dollar is often viewed as a negative event, raising the cost of online purchases, imported cars and overseas travel. In this week’s piece we are going to look at the AUD and in particular the winners and losers from currency movements.

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A piece of advice that has stuck with me over a number of years has been “In gaining an education in the stock market, you cannot set either the timing or the cost”.  Most articles produced by fund managers focus on great stock picking successes, highlighting brave and courageous decisions made by the fund manager in the face of naysayers and critics. Obviously this is done with the motive of encouraging clients to invest in funds managed by an individual with superior intellect and investment instincts than their peers. These articles are always quite easy to write as they conjure up pleasant memories of investing triumphs.

However I am firmly of the opinion that successes don’t build investing skills, but rather future outperformance is built on the accumulation of knowledge learned from painful experiences. In this week’s piece I am going to look at mistakes that I have made over the past two decades of being a professional fund manager.

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The business of funds management, and in particular the debate over vertical integration of advice, administration and management, has gone quiet after Labor’s Future of Financial Advice (FOFA) was ushered out in March 2016[1]. After a week I have spent poring over bank results and seeing how involved they are in the business of managing Australia’s investments, this week we are going to have a closer look at the funds management landscape in Australia, and in particular the dominance by the largest players of this A$2.6 trillion industry.

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Over the last week investors had a wild ride with bank reporting season, compounded by a somewhat surprising rate cut on Tuesday. Indeed Tuesday’s share price moves in ANZ Bank were some of the wildest I have seen over the past 18 years of covering companies, ANZ opened down -4% as investors were dismayed by the headline numbers before finishing up +5.6% on the back of a strong performance at the results presentation by CEO Elliot and a 0.25% cut in the rate at 2:30pm. These are very unusual intraday moves for a company with a market capitalisation over $70 billion. The 1.75% interest rate represents the lowest official cash rate in Australia since James Cook turned up at Botany Bay in April 1770.

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.

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Last week McGrath (ASX: MEA), an integrated residential real estate services company (which we don’t own) saw a 31% decline in the company’s share price after the company downgraded estimates for future earnings. This was very painful for investors in this recently listed company, but for us was not particularly surprising.

In this piece we are going to look at the mechanisms we use to filter out companies that are more likely to have a higher chance of issues in the future to improve performance and reduce heartache. This exercise is based on the position that removing a few “losers” from the long only portfolio is more consistently beneficial to a portfolio’s performance than focusing on picking the next Aconex (up 207% in the last year). As we can also short stocks this process is also a component of what we use to identify “torpedo” stocks. Also like most investors I am somewhat irrationally loss averse[1] in that I strongly prefer avoiding losses to acquiring gains, even when the probability weighted outcome is the same. One of the mechanisms we use to filter out noise and narrow down our investment universe is our quality filter model (QFM).

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Almost every month the financial press will publish an article lauding the top performing fund manager over the previous 12 month period; generally accompanied by a picture of the manager looking quite pleased with themselves in an expensive suit, together with an after match report detailing which stocks they had in their portfolio that allowed them to outperform their peers. The assumption underlying these articles is that all equity funds are managed using the same investment philosophy and that a manager’s outperformance is solely due to their skill.

In the piece Investing Styles Part 1 we looked at the four basic investment styles (index, growth, value and quality). In this week’s note on investment styles we are going to look at the market conditions under which each style tends to outperform, as no single investment style outperforms in every market condition.

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Last week we looked at Cracks within REITs, which showed some of the worst performing REITs on the ASX being the companies dependent on development profits or trading profits. This is of little surprise to some, especially after the Australian Bureau of Statistics announced last month that the Sydney property market fell in the December quarter of last year – that was the first fall in the Sydney property market since 2012.

BY CHRISTOPHER HALL – APRIL 2016

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Investors looking for a professionally managed Australian equity portfolio face a dizzying array of options. The February Morningstar survey looked at 123 different institutional fund managers delivering Australian equity portfolios and this number expands further when you include model portfolios and stock lists offered by stock-brokers, asset consultants and investment newsletters. The individual stocks in this enormous range of portfolios are selected and then blended into Australian equity portfolios based on a range of investment philosophies or investment styles.

In this week’s piece we are going to look at the different investment styles used to manage equity portfolios and the investing foundations upon which these styles are built.

Read more here.