Rio Tinto’s fourth-quarter production was overall mildly softer than expected. The company’s share of iron ore Pilbara shipments, the key earnings driver, finished the year at 268 million tons. Shipments were down on 2020’s 273 million tonnes with headwinds from weather, delayed expansions and traditional owner relationships post the Juukan Gorge disaster. COVID-19 also reduced labour availability. The destruction of the caves sees the major Pilbara iron ore miners facing additional scrutiny around traditional owner relationships. This has slowed output and growth somewhat but has not materially impacted the value of Rio Tinto shares, given the supportive iron ore price has more than made up for the lower volumes.
Aluminium, alumina, and bauxite production was marginally below our full-year expectations. Copper output in 2021 was about 3% lower than expected and down 7% on 2020 levels. Weaker grades and COVID-19 restrictions on labour hindered output. On guidance for 2022, the main change is an approximate 2% reduction in expectation for Pilbara shipments, which reflects continued headwinds from COVID and traditional owner issues. Shipments are expected to be of 277 million tonnes in 2022, up by 3%.
Financial Strength:
The fair value estimate of Rio Tinto has been increased to AUD 91 per share. The increase reflects higher the stronger iron ore futures curve and the softer AUD/USD exchange rate, partly offset by weaker production forecasts. The iron ore price is expected to average USD 110 per tonne to 2024, versus our prior USD 100 per tonne assumption. Shares have rallied about 25% in the past two months and are again overvalued.
The dividend yield generated by the company is a whopping 6.3% during the duration of the 2019 ad 2020.
Company Profile:
Rio Tinto searches for and extracts a variety of minerals worldwide, with the heaviest concentrations in North America and Australia. Iron ore is the dominant commodity, with significantly lesser contributions from aluminium, copper, diamonds, gold, and industrial minerals. The 1995 merger of RTZ and CRA, via a dual-listed structure, created the present-day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Ampol says the Lytton refinery is expected to deliver the highest quarterly replacement cost EBIT result in more than four years. Regional refiner margins rose well above the five-year historical average as supply and demand fundamentals improved. Lytton refinery production was also strong for the period at 1.6 billion litres. And given the strong refiner margin environment, the company does not anticipate receiving any Fuel Security Service Payment, or FSSP, in the fourth quarter.
The midcycle Lytton refiner margin assumption remains USD 10 per barrel in real terms, around 10% below the fourth-quarter 2021 actual. Material synergies can be expected from an Ampol/Z Energy tie-up. The Z board recommended scheme remains subject to New Zealand regulatory approval and a subsequent Z shareholder vote on the Scheme, expected early this year. The takeover of Z Energy seems logical. The companies have very similar business models, but Z shares have fallen from NZD 8.65 peaks due to intense retail fuel competition in New Zealand and COVID-19 disruption. Ampol can fund the Z transaction within its target 2.0-2.5 net debt/EBITDA framework while maintaining a 50%-70% dividend payout ratio. It will also consider capital returns when net debt/EBITDA is less than 2.0. Ampol’s healthy franking balance and moderate debt has long had investors marking it a favourite for capital initiatives.
Financial Strength:
The fair value of Ampol Ltd. has increased to AUD 32 and it reflects a combination of time value of money, with an increase in expected near-term refiner margins.
Ampol’s healthy franking balance and moderate debt has long had investors marking it a favourite for capital initiatives. The fair value estimate equates to a 2025 EV/EBITDA of 5.5, P/E of 12.2, and dividend yield of 4.9%. A five-year group EBITDA CAGR of 15.5% to AUD 1.4 billion by 2025, the CAGR flattered by the COVID-impacted start year. A nominal midcycle retail fuels margin of AUD 2.03 per litre versus first half 2021’s AUD 1.85 actual, but broadly in line with the three-year historical average. These estimates don’t yet include the Z transaction, but Ampol is targeting double-digit EPS accretion and 20% plus free cash flow accretion in 2023 versus pre-acquisition levels.
Company Profile:
Ampol (nee Caltex) is the largest and only Australian-listed petroleum refiner and distributor, with operations in all states and territories. It was a major international brand of Chevron’s until that 50% owner sold out in 2015. Caltex transitioned to Ampol branding due to Chevron terminating its licence to use the Caltex brand in Australia. Ampol has operated for more than 100 years. It owns and operates a refinery at Lytton in Brisbane, but closed Sydney’s Kurnell refinery to focus on the more profitable distribution/retail segment. It currently has NZD 2.0 billion bid on the table for New Zealand peer Z Energy.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud, which is now offered via a subscription model. The company has added new products and features to the suite through organic development and bolt-on acquisitions to drive the most comprehensive portfolio of tools used in print, digital, and video content creation The benefits from software as a service are well known in that it offers significantly improved revenue visibility and the elimination of piracy for the company, and a much lower cost hurdle to overcome ($1,000 or more up-front, versus plans as low as $10 per month) and a solution that is regularly updated with new features for users.
Adobe benefits from the natural cross-selling opportunity from Creative Cloud to the business and operational aspects of marketing and advertising. On the heels of the Magento and Marketo acquisitions in the second half of fiscal 2018 and Workfront in 2021, Morningstar analysts believe Adobe to continue to focus its M&A efforts on the digital experience segment and other emerging areas.
Adobe believes it is attacking an addressable market greater than $205 billion. The company is introducing and leveraging features across its various cloud offerings (like Sensei artificial intelligence) to drive a more cohesive experience, win new clients, upsell users to higher price point solutions, and cross sell digital media offerings.
Financial Strength
Morningstar analysts believe Adobe enjoys a position of excellent financial strength arising from its strong balance sheet, growing revenues, and high and expanding margins. As of November 2021, Adobe has $5.8 billion in cash and equivalents, offset by $4.1 billion in debt, resulting in a net cash position of $1.6 billion. Adobe has historically generated strong operating margins. Free cash flow generation was $6.9 billion in fiscal 2021, representing a free cash flow margin of 43.7%. Morningstar analysts believe that margins should continue to grind higher over time as the digital experience segment scales. In terms of capital deployment, Adobe reinvests for growth, repurchases shares, and makes acquisitions. The company does not pay a dividend. Over the last three years Adobe has spent $2.8 billion on acquisitions, $9.6 billion on buy-backs, while share count has decreased by 15 million shares. It is believed that the company will continue to repurchase shares as its primary means of returning cash to shareholders over the medium term. Morningstar analysts also believe the company will continue to make opportunistic and strategic tuck-in acquisitions.
Bulls Say
Adobe is the de facto standard in content creation software and PDF file editing, categories the company created and still dominates.
Shift to subscriptions eliminates piracy and makes revenue recurring, while removing the high up-front price for customers. Growth has accelerated and margins are expanding from the initial conversion inflection.
Adobe is extending its empire in the creative world from content creation to marketing services more broadly through the expansion of its digital experience segment. This segment should drive growth in the coming years.
Company Profile
Adobe provides content creation, document management, and digital marketing and advertising software and services to creative professionals and marketers for creating, managing, delivering, measuring, optimizing and engaging with compelling content across multiple operating systems, devices and media. The company operates with three segments: digital media content creation, digital experience for marketing solutions, and publishing for legacy products (less than 5% of revenue).
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
The investment objective of the scheme is to provide the investors an opportunity to predominantly invest in corporate bonds rated AA+ and above to generate additional spread on part of their debt investments from high quality corporate debt securities while maintaining moderate liquidity in the portfolio through investment in money market securities.
Approach
The fund’s strategy is to generate attractive returns through high-quality corporate bonds and short duration mandates. It employs a bottom-up approach combined with a top-down overlay to generate superior risk adjusted returns. The managers use various qualitative and quantitative parameters and put a lot of emphasis on a company’s management, business, and financial health. They also use the analysis of sell-side research and credit rating agencies to form a view on the creditworthiness of companies but to a limited extent. The credit committee then reviews the rated securities, and the approved securities are assigned credit and tenor limits. While constructing the portfolio, the managers have the flexibility to implement the trades with reasonable leeway to express their views. The risk-management team periodically reviews the portfolio to ensure the managers adhere to the guidelines. We believe the flow of ideas/information is effective and fits nicely with the process in place, supporting an Above Average Process rating.
Portfolio
The fund has a higher credit-quality portfolio, making it more liquid and less prone to credit risk. The fund maintains 100% of its assets in AAA rated bonds, despite having the flexibility to take some allocation in lower-rated instruments. The duration of the portfolio is well managed between one and three years. The fund also invests in government securities based on portfolio manager’s view on interest rates, but this does not account for more than 20% of its net assets. But high allocation is made to state development loans, given attractive spreads with regard to central government securities.
The portfolio of the fund is well diversified. The manager also intermittently holds higher cash/money market instruments to take opportunistic trading calls when markets are bumpy.The strategy, however, is not without risk. The fund may underperform its peers if the market favours high-yielding bonds. Also when interest rates are falling, the fund may struggle to outperform its category peers that invest in a portfolio with a little longer duration.
Performance
Under a short tenure of the fund’s existence (February 2019 to December 2021), the fund’s direct share class has posted an excellent annualised return of 8.36% as against the category average (7.14%). The portfolio manager’s research-intensive approach has helped the fund generate superior returns, placing the fund in the first quartile.
In terms of year-on-year returns, the fund’s performance has been inconsistent. The fund outperformed most category peers by a wide margin in 2019 and 2020. However, the 2021 performance got impacted because of the fund’s conservative approach with regard to its peers. On expectation of normalisation of interest rates by the RBI, the manager kept the duration below two years. This resulted in the fund ranking in the fourth quartile as against its category peers. However, the fund has the potential and could bounce back going ahead.
About the fund
The investment objective of the scheme is to provide the investors an opportunity to predominantly invest in corporate bonds rated AA+ and above to generate additional spread on part of their debt investments from high quality corporate debt securities while maintaining moderate liquidity in the portfolio through investment in money market securities.
The fund follows a disciplined and risk-conscious investment process that draws extensively from the in depth expertise of the investment team. The process is bottom-up with a focus on high-quality business models with a top-down overlay. The team’s understanding of the markets and frequent interaction with its equity team and parent company give it an edge in forming views on the business and creditworthiness of the companies. Furthermore, it has built some additional aspects into the approach. They now do an even more detailed analysis of the group and the promoter-linked entities in which they invest.
The execution of the process has been above average with limited credit risk and a short duration strategy. Despite having the flexibility to invest up to 80% of its portfolio in AAA and AA+ rated corporate bonds, the manager constructs the portfolio with a primary focus on liquidity, avoiding exposure to the below AAA rated segment, and keeping the duration between 1 and 3 years
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Alibaba BABA is a Big Data-centric conglomerate, with transaction data from its marketplaces and logistics businesses allowing it to move into omnichannel retail, cloud computing, media and entertainment, and online-to-offline services. It is believed a strong network effect allows leading e-commerce players to extend into other growth avenues, and nowhere is that more evident than with Alibaba.
Alibaba’s Internet services had annual active consumers of 953 million as of September 2021, versus the 1.2 billion online population in September 2021 per Questmobile and the 1.4 billion population in China. This provides Alibaba with an unparalleled source of data that it can use to help merchants and consumer brands develop personalized mobile marketing and content strategies to expand their target audiences, increase click-through rates and physical store transactions, and bolster return on investment. Alibaba’s marketplace monetization rates have reduced recently, due to increased compliance of antitrust laws, more competition, and weak consumer sentiment. Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.
While it is perceived the Taobao/Tmall marketplaces as Alibaba’s core cash flow drivers, it is also seen AliCloud and globalization offer long-term potential. While AliCloud will remain in investment mode in the medium term, accelerating revenue per user suggests a migration to value-added content delivery and database services that can drive segment margins higher over time. On globalization, third-party merchants are successfully reaching Lazada’s users across Southeast Asia, something that should continue as the company rolls out incremental personalized mobile marketing and content opportunities.
Financial Strength
Alibaba is in sound financial health. As of December 2020, the company had CNY 456 billion in cash and unrestricted short-term investments on its balance sheet against CNY 117 billion in short- and long-term bank borrowing and unsecured senior notes. Although Alibaba remains in investment mode, it is held the strong cash flow profile of its e-commerce marketplaces offers it the financial flexibility to continue investing in technology infrastructure and cloud, research, marketing, and user experience initiatives through its current balance sheet and strong cash flow profile. Additionally, it is alleged the company has the capacity to add leverage to its capital structure, which could allow it to take advantage of low borrowing rates to fund growth initiatives, introduce a cash dividend when it sees limited investment opportunities with good returns on investment, or repurchase shares. It is likely for the company to pursue acquisitions that could further improve its ecosystem, including online-to-offline, physical retail, and increased logistic capacity or capabilities.
Bulls Say’s
Monthly gross merchandise volume per annual active user was CNY 770 for the year ended March 2021 for Alibaba, higher than CNY 176 in 2020 for Pinduoduo and CNY 461 in 2020 for JD.
Core annual active users on Alibaba’s China retail marketplaces had a retention rate of over 90% for the year ended September 2021.
Alibaba’s core commerce (which includes China marketplace-based businesses and other loss-making businesses) adjusted EBITA margin was 26.2%, higher than JD retail’s 2.3% non-GAAP EBIT margin and PDD’s 15.2% non-GAAP EBIT margin for the September quarter of 2021.
Company Profile
Alibaba is the world’s largest online and mobile commerce company as measured by gross merchandise volume (CNY 7.5 trillion for the fiscal year ended March 2021). It operates China’s online marketplaces, including Taobao (consumer-to-consumer) and Tmall (business-to-consumer). Alibaba’s China commerce retail division accounted for 63% of revenue in the September 2021 quarter. Additional revenue sources include China commerce wholesale (2%), international retail/wholesale marketplaces (5%/2%), cloud computing (10%), digital media and entertainment platforms (4%), Cainiao logistics services (5%), and innovation initiatives/other (1%).
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
fintech icon on abstract financial technology background represent Blockchain and Fintech Investment Financial Internet Technology Concept.
Business Strategy and Outlook
COVID-19 continues to materially affect Wynn’s Macao operations (50% of estimated 2024 EBITDA), which we view as transitory. But the Macao government continues to heavily regulate VIP play, elevating long-term operational risk. Wynn has outsize exposure to the expected long-term shift away from VIP gaming revenue toward nongaming and mass play. Still, we see an attractive long-term growth opportunity in Macao, with Wynn’s high-end iconic brand positioned to participate.
Long term, we see solid visitation and gaming growth for Macao, aided over the next several years as key infrastructure projects to alleviate the region’s congested traffic (Pac On Terminal and Hong Kong Bridge opened in 2018, the light-rail transit at the end of 2019, reclaimed land, and development of Hengqin island) continue to come on line, which should expand constrained carrying capacity, thereby driving higher visitation and spending levels. Our forecast for annual mid-single-digit visitation growth over the next decade is supported by China outbound travel that we expect will average high-single-digit annual growth over the next 10 years. On Jan. 14, the Chinese government announced its intention to renew Wynn’s Macao gaming license (the source of the company’s narrow moat) for 10 years, which along with plans to develop further with its Crystal Pavilion project stands to benefit the company with regard to the region’s growth opportunity. Still, the Macao market is highly regulated, and as a result, the pace and timing of growth are at the discretion of the government. We expect upcoming developments that add attractions and improve Macao’s accessibility will improve the destination’s brand, supporting our constructive long-term view on Macao.
The Las Vegas region (50% of estimated 2024 EBITDA) doesn’t offer the long-term growth potential or regulatory barriers of Macao, so we do not believe it contributes to Wynn’s moat. Still, its Wynn Interactive sports betting and iGaming brand, Boston property Encore (opened June 2019), and Vegas project (convention centre plus room and golf renovations) are set to provide incremental growth.
Financial Strength
Wynn’s financial health is more stressed than that of peers Las Vegas Sands and MGM, but the company has taken steps to lift its liquidity profile, including suspending its dividend, cutting discretionary expenses, tapping credit facilities, and issuing debt. As a result, the company has enough liquidity to operate at near-zero revenue through 2022. Should the pandemic’s impact last longer, we expect the company’s banking partners will continue to work with Wynn, given its intact regulatory intangible advantage (the source of its narrow moat), which drives cash flow generation potential. This view is supported by narrow-moat Wynn Macau surviving through 2014-15 when its debt/EBITDA temporarily rose to around 8 times, above the 4.5-5.0 covenants in those years. Finally, we believe the Chinese government could aid Macao operators if necessary, given that the nation wants the region to become a world destination resort. Wynn entered 2020 with debt/adjusted EBITDA of 5.7 times, but the metric turned negative in 2020 and was elevated in 2021 (estimated at 15.4), as demand for leisure and travel collapsed during the this period due to the COVID-19 outbreak. As demand recovers in the next few years, we expect leverage to reach 9.9 times, 7.7 times, and 6.5 times in 2022, 2023, and 2024, respectively.
Bulls Say’s
Wynn is positioned to participate in the long-term growth of Macao (76% of pre-pandemic 2019 EBITDA) and has room share of 9% with the opening of its Cotai Palace property in 2016.The ability to continuously innovate and commercialize new technologies should enable Aptiv to generate excess returns over its cost of capital.
Wynn has a narrow economic moat, thanks to possessing one of only six licenses awarded to operate casinos in China.
A focus on the high-end luxury segment of the casino industry allows the company to generate high levels of revenue and EBITDA per gaming position in the industry
Company Profile
Wynn Resorts operates luxury casinos and resorts. The company was founded in 2002 by Steve Wynn, the former CEO. The company operates four megaresorts: Wynn Macau and Encore in Macao and Wynn Las Vegas and Encore in Las Vegas. Cotai Palace opened in August 2016 in Macao, Encore Boston Harbour in Massachusetts opened June 2019. Additionally, we expect the company to begin construction on a new building next to its existing Macao Palace resort in 2022, which we forecast to open in 2025. The company also operates Wynn Interactive, a digital sports betting and iGaming platform. The company received 76% and 24% of its 2019 pre-pandemic EBITDA from Macao and Las Vegas, respectively
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Rio Tinto is one of the world’s biggest miners, along with BHP Billiton, Brazil’s Vale, and U.K.-based Anglo American. Most revenue comes from operations located in the relatively safe havens of Australia, North America, and Europe, though the company has operations spanning six continents.
Rio Tinto has a large portfolio of long-lived assets with low operating costs. The recent focus has been to run a strong balance sheet, tightly control investments, and return cash to shareholders. The company’s major expansion projects are Amrun bauxite, the Oyu Tolgoi underground mine, and the expansion of the Pilbara iron ore system’s capacity from 330 million tonnes in 2019 to 360 million tonnes. Those projects are expected to be completed in the next few years. Otherwise, the focus is on incremental expansions through productivity and debottlenecking initiatives. These will be small but capital-efficient and should modestly improve unit costs.
Iron Ore Price Rise More than Offsets Rio Tinto’s Modest Production Weakness
Rio Tinto’s fourth-quarter production was overall mildly softer than expected. The company’s share of iron ore Pilbara shipments, the key earnings driver, finished the year at 268 million tonnes, slightly below Morningstar analyst forecast. Shipments were down on 2020’s 273 million tonnes with headwinds from weather, delayed expansions and traditional owner relationships post the Juukan Gorge disaster. COVID-19 also reduced labour availability. The destruction of the caves sees the major Pilbara iron ore miners facing additional scrutiny around traditional owner relationships. This has slowed output and growth somewhat but has not materially impacted the value of Rio Tinto shares, given the supportive iron ore price has more than made up for the lower volumes. Morningstar analysts have raised its fair value estimate for no-moat Rio Tinto to AUD 91 from AUD 89 per share. The increase reflects higher the stronger iron ore futures curve and the softer AUD/USD exchange rate, partly offset by weaker production forecasts.
Financial Strength
Rio Tinto’s balance sheet is strong with net cash of $3.1bn. For FY 2020 the revenue stood at USD Million 44,611 and USD Million 44,661 estimated for FY 2021. The strong balance sheet may allow the company to make targeted investments or acquisitions through the downturn, important flexibility. But it appears management is favouring distributions to shareholders. The progressive dividend policy was canned in 2016, providing important flexibility to increase or reduce dividends as free cash flow allows.
Bulls Say
Rio Tinto is one of the direct beneficiaries of China’s strong appetite for natural resources.
The company’s operations are generally well run, large-scale, low-operating-cost assets. Mine life is generally long, and some assets, such as iron ore, have incremental expansion options.
Capital allocation has improved following the missteps of the China boom with management generally preferring to return cash to shareholders than to make material expansions or acquisitions.
Company Profile
Rio Tinto searches for and extracts a variety of minerals worldwide, with the heaviest concentrations in North America and Australia. Iron ore is the dominant commodity, with significantly lesser contributions from aluminium, copper, diamonds, gold, and industrial minerals. The 1995 merger of RTZ and CRA, via a dual-listed structure, created the present-day company. The two operate as a single business entity. Shareholders in each company have equivalent economic and voting rights.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Golden bitcoins. Cryptocurrency on computer motherboard.
Torus Kling Blockchain IFSC, a joint venture between Mumbai-based Cosmea Financial Holdings and Hyderabad-based Kling Trading India, and the Bombay Stock Exchange’s (BSE) international branch, India INX, have signed a memorandum of understanding (MoU) to create digital asset-based products in India.
GIFT city’s IFSC will be used to trade the product (International Financial Services Centre). This will be done in a “sandbox” environment made feasible by the International Financial Services Centres Authority (IFSCA), which is in charge of regulating financial centres within SEZs (Special Economic Zones).Regulatory sandboxes are testing grounds for live trials of new fintech goods or services that are currently not subject to any regulatory oversight, in a controlled environment and under close supervision, with the goal of balancing product innovation and consumer protection.
Post obtaining all regulatory approvals, Indian investments in the ETF will be streamlined through RBI’s liberalised remittance scheme. The trading is expected to be allowed through a regular investment account, bypassing the risks associated with cryptocurrency exchanges.
Torus Kling Blockchain, which will also handle global distribution, is aiming for $1 billion in assets under management (AUM) from consumers that participate in these blockchain-backed products through ETFs and Discount certificates in the first two years.
This follows the lead of US regulations, which approved a Bitcoin Futures ETF last year, and the approval of Bitcoin and Ethereum spot ETFs to be listed on the Toronto Stock Exchange by Canadian financial regulatory authorities.
Crypto ETFs allow an investor to track cryptocurrency returns without having to invest in the digital tokens themselves, thereby circumventing the hassles and concerns associated with usual cryptocurrency exchanges.
(Source: The Times of India, Moneycontrol)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
The investment process is based around searching for stocks that have “future quality.” To achieve the investment objective, the analyst’s undertakes bottom-up fundamental research seeking quality of franchise (competitive advantages), quality of balance sheet (low debt), quality of management (strong stewardship), and quality of future valuation (sustainable but growing cash flow). The first step is developing stock ideas; the analyst’s makes use of third-party research, personal insights, company meetings, site visits, conferences, and input from other Nikko AM investment teams. Ultimately, the investment universe is restricted to companies with market caps above USD 1 billion and daily traded liquidity of more than USD 10 million. The next step is thorough fundamental bottom-up research on the firm’s business model, management and balance sheet. Detailed financial models, based on long-term cash flow forecasting, are built to establish a future quality valuation. The individual portfolio managers summarise the company research in a standard template and present stock ideas formally at a weekly meeting, where open critique is undertaken by the analysts. The investment philosophy is high-conviction, with the analysts adopting a largely index-agnostic strategy, which slightly favours growth and results in an active share of 90%-95%. Ultimately, stock selection plays a key role in the process.
Portfolio
The portfolio construction methodology is disciplined and repeatable, using a proprietary ranking tool to grade stocks in terms of expected alpha and risk. The resulting portfolio contains the analyst’s highest conviction 40-50 stock ideas. The investment process typically leads the team to construct a portfolio with a higher weighting in defensive sectors, including healthcare and consumer staples, and typically a lower weighting in cyclicals, namely, consumer discretionary and financials. However, these allocations depend on stock opportunities and economic conditions. At 31 Oct 2021, the portfolio had an active underweighting in defensive sectors, with healthcare heavily favoured and an active overweighting in cyclical sectors, with industrials and consumer discretionary stocks favoured. Regional allocation typically tends to be similar to the index. However, at 31 Oct 2021, the portfolio was only overweight in two regions: the United States and Hong Kong/Singapore. A comprehensive risk-management process is implemented to ensure no unintended sector, geographic, or commodity risk is included in the portfolio. The portfolio is also monitored from an environmental, social, and governance risk perspective. Risk-management guidelines include that no more than 10% of net assets may be invested in any one stock.
People
The investment team includes five highly experienced portfolio managers (William Low, James Kinghorn, Iain Fulton, Greig Bryson, and Johnny Russell) who operate as global generalists but with sector-specific responsibilities. In addition, two portfolio analysts, who mainly undertake thematic or project research joined the team in 2019. Low leads the team; he joined Nikko AM in mid-2014 as a portfolio manager with overall responsibility for the global-equity team (the team moved across from Scottish Widows Investment Partnership where they previous managed global equity strategies together). He has more than 30 years’ experience in the investment/finance industry, previously working for BlackRock and Dunedin Fund Managers as a portfolio manager and investment manager. Kinghorn and the other team members joined Nikko AM in mid-2014; Kinghorn had been at SWIP since 2011. Fulton joined after previously working at SWIP as head of research since 2005. Bryson joined after working at SWIP since 2007. Russell joined Nikko AM after working at SWIP since 2002. The team has access to the extensive global resources of Nikko AM, which boasts more than 100 portfolio managers and 50 analysts.
Performance
In mid-2015, the existing Nikko AM global-equity fund was restructured from a multimanager approach to its current structure of direct investment in stocks in the MSCI ACWI, under the guidance of the incumbent five portfolio managers. This team arrived at Nikko AM in 2014, having previously worked at Scottish Widows Investment Partnership. Since the strategy and personnel changes, this fund has outperformed its Morningstar Category index (MSCI World Ex Australia NR Index) and most peers in the five years to 30 Nov 2021, on a trailing returns basis. Individual calendar-year results have been strong from 2015 through 2020, with standout 2018 and 2020 years, and 2016 the lone blot against the team. In 2017, outperformance was relatively slender,
and positive contributors included Sony and Tencent. The strategy had a stronger 2018 with positive attribution from LivaNova. Returns were again solid against the index and peers during 2019, with Chinese sporting goods company Li Ning Company and US software giant Microsoft among the top contributors. Both the index and peers were thumped in 2020 by the team, which managed a softer drawdown during the first-quarter correction and adding alpha each of the remaining quarters. In the 11 months to 30 Nov 2021, the strategy have struggled, as style headwinds had an impact on performance, despite solid attribution from SVB Financial Group and Bio-Techne Corporation.
About Fund:
Nikko AM Global Share is a strategy with sturdy foundations, thanks to its highly experienced team of portfolio managers and well-structured investment process. The Edinburgh-based investment team functions in a very cooperative, transparent, and mutually respectful manner, adopting a flat operating structure, with individual portfolio managers having specific sector responsibility on a global basis. The resulting portfolio of typically around 40-50 stocks is slightly growth-orientated and high conviction, with around 35% of FUM in the top 10 stocks. The strategy benchmarks to the MSCI All Country World Index, giving it rein to venture into emerging markets, but this allocation is rarely more than 10% of assets.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
AMP Capital Corporate Bond provides exposure to a wide range of credit securities within Australian, global, investment-grade, corporate bond, and high yield. The benchmark changed from the Bloomberg AusBond Credit 0+Yr Index to the Bloomberg AusBond Bank Bill Index in February 2016, reflecting the fund’s capital preservation and income emphasis since 2012. Monthly distributions are announced and reviewed biannually, which helps income-focused investors manage their expectations. Credit analysis is done on two accounts; first, a quantitative and qualitative assessment of the broader industry sector, and second, issuerand security-specific analysis.
The analysis is conducted in line with a “score card” methodology that incorporates fundamentals, technicals, and valuations. The primary weighting is to the valuation and fundamental factors as the team believes this is the primary determinant of a positive outcome for investors over the longer term. The duration view is led by the macro team and is established through a similar score card system, which again considers fundamental, sentiment, and technical factors, with the analyst view of valuation playing a key part. The credit strategy panel, comprising senior investment staff, set the overall credit strategy, risk budget, and sector allocations. However, the ultimate duration and credit exposures are determined by comanagers Sonia Baillie and Nathan Boon.
Portfolio:
The vehicle chiefly comprises Australian credit, though it does hold around 5% each in US and UK names. The strategy can hold up to 10% in high yield and 15% in unrated bonds but is usually well below these limits. The portfolio is largely BBB and A rated corporate bonds, with the BBB names providing a slightly larger proportion of the fund’s asset value at nearly 44% to October 2021. Following the coronavirus-driven dislocation, the team took opportunistic exposures in long duration REITs and industrials, some of which have seen partial profit taking with significant spread tightening throughout 2021. 2019 saw the fund rotate back into corporate bonds following the late-2018 sell-off.
The team believes credit fundamentals are improving and technicals supportive, but valuations indicate little expectation of further spread compression. It wants to maintain income by holding credit, albeit at a reducing amount to late-2021, also using credit derivatives to insulate from wider spreads. The fund’s duration limits were adjusted from plus or minus 1.5 years versus the old credit benchmark, to absolute terms of zero to 4.5 years in October 2014. The fund has been positioned within a duration range of 0.2-0.8 years since the start of 2017 (0.6 years in October 2021), meaning the sensitivity to rising interest rates is low. FUM has steadily declined over the past few years and currently sits at AUD 855 million as of October 2021.
People:
Sonia Baillie (head of credit) has led this portfolio since October 2017, joined by Nathan Boon (head of credit portfolio management) in March 2018. This group, however, is currently transitioning into the Macquarie fixed-income team as part of AMP Capital’s sale to that organisation; completion is expected by mid-2022, creating some uncertainty. The duo gets significant input from head of macro Ilan Dekell, and a team of analysts spread between Sydney and Chicago. Head of credit research Steven Hur was previously a key member until he left the group in December 2021. The fixed-income team is headed by Grant Hassell, who has more than 30 years of experience, though he is the sole member of this quartet not joining the Macquarie investment team in the same capacity.
Hassell contributes to overall discussions through team meetings and investment committees, acting as the sounding board for the various heads to bring ideas together into a portfolio. While there has been staff turnover among the credit analyst and credit portfolio managers–former managers Jeff Brunton and David Carruthers left in 2014 and 2016, respectively–most key staffers have long tenure. For example, while Baillie was appointed portfolio manager only in 2017, she has been with the team since 2010, has held other senior roles, and worked in the firm’s Asian fixed-income business. Furthermore, AMP Capital has taken steps to improve staff incentives and address staff turnover.
Performance:
Over the long run, this fund has outdone the Bloomberg AusBond Bank Bill Index and the average credit fund. That’s not necessarily compelling, given the fund has been running substantially more credit and/or duration risk than those yardsticks. Since AMP Capital slashed the fund’s duration, rival credit funds are a more reasonable benchmark looking ahead; the fund’s historically high duration means we also compare the fund’s history against the Bloomberg AusBond Credit Index, where this strategy has underperformed. The fund’s track record has benefited from higher-than-average credit risk, as well as significant interest-rate risk, that has paid off as rates declined to historically low levels. returns, yet three- and five-year returns fail to beat the average category peer. Given declining global interest rates, the fund reduced its distribution in mid-2017 to 0.275% per month, and then 0.25% per month at the beginning of 2018. This continued through 2021 when distributions dropped to 0.175% by year-end, the shop expects it to remain at these compressed levels, barring unforeseen circumstances. The rate peaked at 0.55% per month in 2012, highlighting that while these distribution indications can be helpful in the short run, they should not be relied on for long-term income expectations.
About Funds:
Though a new home will bring positives to AMP Capital Corporate Bond, it also introduces uncertainties for this diversified credit strategy. AMP Capital’s Global Equities and Fixed Interest business is in the midst of a sale to Macquarie Asset Management, which is expected to complete by mid-2022. Head of global fixed income Grant Hassell is leading the integration. The strategy has benchmarked to the Bloomberg Ausbond Bank Bill Index since early-2016, reflecting the income goals with capital stability. This move followed a history of changes, which under Macquarie’s guidance going forward could see further revisions in approach.
(Source: Morningstar)
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