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TIAA-CREF Core Plus Bond has an experienced lead manager and the solid process remains intact, while the expansive supporting cast has only broadened. Veteran manager Joe Higgins, who has led the sibling strategy TIAA-CREF Core Bond TIBDX since 2011, took over this strategy at the end of 2020 when longtime lead manager Bill Martin retired.
Approach
Lead manager Joe Higgins continues the thoughtful relative value approach that has been in place both here and on his other charge, TIAA-CREF Core Bond TIBDX. This strategy earns an Above Average Process Pillar rating. Higgins has the ultimate authority in ensuring what holdings go into the portfolio but draws heavily on the strength and expertise offered by the sector managers, analysts, and macroeconomic strategists in identifying relative value opportunities across the fixed-income universe. The strategy can invest in everything from corporate bonds and mortgages to municipal bonds and emerging-markets debt, with the higher-risk sectors like high-yield bonds, bank loans, and emerging-markets debt ranging between 10% and 30% depending on the team’s outlook and risk appetite.
Portfolio
As of December 2021, the portfolio’s largest exposures were to investment-grade corporate bonds (24.2% of assets), agency mortgage-backed securities (18.6%), and emerging-markets debt (10.2%). The emerging markets exposure rarely if ever broke double-digit threshold, but its allocation has been on the upswing since March 2020 given the portfolio managers’ belief in its ability to outperform over the long term. The emerging markets’ relative lack of direct correlation to domestic corporate moves, as well as premium on offer from new issuance, make them attractive.
People
Joe Higgins, who replaced longtime lead manager Bill Martin at the end of 2020, is a seasoned and capable manager supported by three experienced comanagers and a robust analyst team. The strategy earns an Above Average People Pillar rating.
Performance
The strategy under Joe Higgins’ tenure has bested almost 70% of distinct peers in the intermediate core-plus bond category, keeping up with the record his predecessor Bill Martin set during his tenure from September 2011 to December 2020. Over that period, the Institutional share class returned 4.5% annualized and outpaced roughly two thirds of peers. While lagging performance punctuated this record at various points, most notably in March 2020, by and large “measured consistency” was the characteristic on display for this strategy’s performance.
(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.
This UK vehicle has formally adopted a sustainability mandate since April 2021. The investment process starts with hard exclusions, which contains firms with material exposure to weapons, tobacco, coal miners, and oil/gas extraction, among others. The exclusion list was further extended in 2021 to include oil/gas/ nuclear power utilities and firms that the team marked to have “deteriorating” ESG momentum within their sustainability rating framework, but it still accounted for less than 5% of the MSCI AC Asia ex Japan Index, and it hasn’t been seen trigger any material changes to the portfolio over the past year. Dhananjay Phadnis has long favoured quality companies run by strong management teams that can demonstrate cinsistent value creation. It is considered the adoption of a sustainability framework a formalisation of the approach that he has already employed rather than a material change. Phadnis focuses on a firm’s competitive advantages, management quality, potential for improvement on ESG practice, and valuations in stock selection. The end portfolio consists of 50-70 names, which typically are fundamentally sound businesses trading below their intrinsic values and out-of-favour stocks with turnaround catalysts. Sector and country allocations are a residual of stock selection, though weights must stay within 10 percentage points of the index. Phadnis has done an excellent job extracting performance out of the strategy’s risk budget, and his investment savvy brings a further edge to the approach’s execution. Overall, the strategy maintains Process rating of High.
Portfolio
Dhananjay Phadnis increased the portfolio’s exposure to financials to 28.1% as of December 2021 from 19.3% a year ago, which represented a 9.4% overweighting compared with the MSCI AC Asia ex Japan Index. He added to AIA, despite it being a major underperformer in 2021. At Analysts’ January 2022 meeting, Phadnis remained positive on the insurer’s growth outlook, noting that it managed to expand its agent head count and branch out into new provinces in China when other Chinese insurers experienced difficulties in maintaining their agency force in 2021. Conversely, his conviction in Ping An Insurance waned given its slower-than-expected agency reform and its questionable decision of buying a majority stake in bankrupt Founder Group, and he has therefore exited his position. Meanwhile, the December 2021 portfolio continued to have an overweight position in information technology, where its 27.3% stake was above the index’s 25.8%. Phadnis liked SK Hynix, believing that the chipmaker’s acquisition of Intel’s NAND unit will enhance its competitiveness in the global memory market and that it has better corporate governance among Korean companies. Within consumer discretionary (16.1%), Phadnis initiated a stake in Meituan in July 2021 when its valuation became more compelling amid the regulatory crackdown. He believed the food delivery giant’s business model can adapt to new regulatory standards, noting its pricing power and efficient delivery network in the segment.
People
Dhananjay Phadnis brings 20 years of investment experience and has led this strategy’s UK and Luxembourg-domiciled vehicles since November 2013 and March 2015, respectively. He joined Fidelity in 2004 as an analyst and covered a variety of sectors before being promoted to portfolio manager in 2008. He has since posted excellent results across the single-country and regional mandates under his management, though he now focuses on this sustainable Asia equity strategy, which includes the USD 1.2 billion, Luxembourg-domiciled Fidelity Asian Equity fund that Phadnis took over from former manager Suranjan Mukherjee in August 2021. Phadnis had a total AUM of USD 6.1 billion as of December 2021. It is alleged Phadnis is one of the best Asian equity managers, who has consistently showcased astute investment savvy and a great passion for investing. Director of sustainable investing Flora Wang has been the strategy’s assistant portfolio manager since February 2021, when it formally adopted a sustainability mandate. Most of Wang’s contributions currently lie in the ESG integration front, including engaging with companies and identifying materiality issues. She is also gradually developing her fundamental stock-picking skills under Phadnis’ mentorship, and it is monitored how her role evolves. Phadnis is supported by Fidelity’s deep Asia Pacific ex Japan team of 58 analysts who average nine years of experience and six years with Fidelity. The team has showed greater stability since 2020 and has further grown with six additions in 2021 through September. Overall, the strategy continues to merit a People rating of High.
Performance
Lead manager Dhananjay Phadnis has delivered excellent results since he took over the UK-domiciled vehicle in November 2013. Through 31 Jan 2022, the W Acc share class returned 12.3% per year (in pound sterling), beating the MSCI AC Asia ex Japan Index’s 8.57% gain, the MSCI Emerging Markets Asia Index’s 8.86% gain, and 96% of its Asia ex Japan equity category peers. Its standard deviation was slightly higher than the indexes but in line with typical peers, resulting in robust risk-adjusted results. Indeed, the share class’ Sharpe ratio of 0.58 during the same period outpaced both indexes and 97% of peers. The outperformance was primarily driven by strong stock selection in China and India, with consumer discretionary, communication services, and financials contributing from a sector perspective.
Phadnis’ quality bias and prudent risk management helped buoy the strategy’s relative performance in the 2021 down market. Although the W Acc share class lost 3.2% last year, it outperformed the MSCI AC Asia ex Japan Index by 64 basis points and ranked in the 48th percentile among peers. The vehicle primarily benefited from solid stock picks in the communication services and industrials sectors, with Bharti Airtel, NAVER, and Titan Wind Energy being some of the top contributors. The underweightings in Alibaba and Tencent and not owning Pinduoduo also helped, as they plunged on the back of heightened regulatory crackdowns in 2021. Conversely, stock picks in financials and healthcare detracted.
About Fund:
Fidelity International Limited is mainly owned by management and members of the Johnson family, who founded US-based Fidelity Investments. The entities have been separate since 1980, and though there are some similarities, in practice there is only limited alignment between the two. There were a number of personnel changes in 2018-19, including a change in CEO and the CIOs of equities, fixed-income, and multiasset, but the composition of senior management has been relatively stable since. More important, these changes do not seem to have negatively affected day-to-day investment activities, and on the whole, the initiatives undertaken by new management seem sensible.
(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.
Vanguard’s efficient, low-cost method provides series’ investors with broad market exposure. The sensible and well-executed approach earns a renewed Above Average Process rating. The equity exposure of the four funds in the lineup (Vanguard LifeStrategy Income VASIX, Vanguard LifeStrategy Conservative Growth VSCGX, Vanguard LifeStrategy Moderate Growth VSMGX, and Vanguard LifeStrategy Growth VASGX) is 20%, 40%, 60%, and 80%, respectively. Vanguard’s strategic asset allocation committee and the investment strategy group provide oversight for the fund series. On an annual basis, the committee reviews the allocations, leveraging research produced by the investment strategy group. The committee takes a cautious tack, which results in a relatively modest approach to implementation changes. Prior to 2011, the series included an allocation to a tactical asset allocation strategy, but that piece was removed, resulting in an exclusively passive underlying fund lineup and strictly strategic procedure. International bond exposure was introduced to the series in 2013, and in 2015 international exposure was increased within both the equity and the fixed-income sleeves: non-U.S. stock exposure increased to 40% from 30% and non-U.S. bond exposure increased to 30% from 20%. The firm’s research suggests that a market-cap weighted approach delivers broad exposure and effectively diversifies the funds but cites investors’ home-country preferences.
Portfolio
As of early 2022, the strategies comprising each portfolio receive compelling ratings. The series’ equity sleeves hold Silver-rated Vanguard Total Stock Market Index VTSMX and Gold-rated Vanguard Total International Stock Index VGTSX. On the fixed-income side, the funds tap Vanguard Total Bond Market II Index VTBIX and Vanguard Total International Bond Index VTIBX, both rated Bronze. The latest addition, Vanguard Total International Bond Index II VTIIX, was launched in February 2021 as a clone of Vanguard Total International Bond Index. The fund is exclusively used in the LifeStrategy and the target retirement series, allowing Vanguard to separate transaction costs generated by the massive target retirement series and LifeStrategy from those generated by other investors. Managers began transitioning the international bond exposure to the clone fund in March 2021 and will continue to do so in a tax-sensitive manner. In the wake of a volatile early 2020, the firm updated the threshold rebalancing policy for multi-asset strategies. Prior to 2021, the rebalancing policy stipulated allocation guardrails of 75 basis points; if exceeded, managers rebalanced the allocations to within 50 basis points of the benchmark. As of Jan. 1, 2021, the new guardrails sat at 200 basis points; if exceeded, managers rebalanced the portfolios to within 100 basis points of the target allocations. This change is reasonable and should reduce the strategy’s rebalancing frequency as intended.
People
Experienced leadership, a multigroup approach, and robust teams across Vanguard merit a renewed Above Average People rating. The LifeStrategy series is managed by the same teams that oversee the firm’s target retirement funds. Vanguard’s strategic asset allocation committee is responsible for ongoing oversight of multi-asset funds. The committee’s 10 voting members include senior leaders across the firm, such as its global chief economist, who also serves as the committee chair. The strategic asset allocation committee is supported by the firm’s investment strategy group, which is composed of a global network of more than 70 investment professionals. Their research covers an array of topics ranging from investor behavior to portfolio construction. Management of the underlying index funds remains stable and well-resourced. Gerard O’Reilly and Walter Nejman manage the U.S. equity index fund, while Michael Perre and Christine D. Franquin cover the international counterpart. O’Reilly and Perre each have roughly three decades of tenure at Vanguard. Franquin and Nejman have spent 21 and 16 years at Vanguard, respectively. Fixed-income manager Joshua Barrickman joined the firm in 1998 and assumed the role of head of fixed-income indexing in the Americas in 2013. Barrickman manages both the domestic and international bond strategies.
Performance
Over the trailing 10 years ended January 2022, three of the four funds outperformed their target risk Morningstar Category benchmarks and their allocation fund category peer medians in total annualized returns, respectively. The Moderate Growth fund was the exception: it managed to outpace its Morningstar Moderate Target Risk Index category benchmark but underperformed the typical peer in the competitive allocation — 50% to 70% equity category. On a risk-adjusted basis (as measured by Sharpe ratio) over the same period, all four portfolios outperformed their category benchmarks and their average peer constituent. Notably, the two most conservative funds of the series both landed in the best performing deciles of their respective category peer groups while the most risk-tolerant fund landed in the best performing quintile of the allocation — 70% to 85% equity category group.
The series’ bond sleeves have a higher duration profile relative to peers, which results in greater sensitivity to changes in interest rates. The recent low-yield environment and threat of rising rates presented a challenge to the profiles here, and for the one-year return ended January 2022, all four portfolios underperformed their respective category peer averages and three of the four underperformed their respective category benchmarks. Only the Growth fund outpaced its Morningstar Moderate Aggressive Target Risk Index category benchmark in that period.
About Fund:
The Vanguard Group earns a High Parent rating for its investor-centric ethos, reliable strategies, and democratization of advice. Vanguard is the asset-management industry’s only client-owned firm, and it shows. Vanguard uses the money that its passive strategies make from securities lending to lower if not eliminate headline expense ratios. Modest fees, capable subadvisors, and performance incentives spur its active business to competitive results. Vanguard also offers advice, human and digital, at an accessible cost. All of this helped its global assets under management grow to USD 7.5 trillion as of March 31, 2021. Yet, Vanguard’s non-U.S. business only accounts for a fraction of its assets. Incumbents within many of these markets have sought to keep this low-cost provider at bay. Vanguard has shifted from leading with exchange-traded funds to using advice for entry, such as its joint venture with China’s Ant Financial to offer a mobile-based retail service, which had more than 1 million Chinese users a year after its April 2020 launch.
(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.
Wesco operates in very fragmented markets, but its large scale, global footprint, expansive product portfolio and supplier base, and service offerings differentiate it from smaller local and regional competitors. Service offerings, such as vendor-managed inventory, efficiency assessments, product repairs, and training, generate a meaningful portion of Wesco’s sales and are key components of the firm’s value proposition to customers. Wesco’s size is also an important competitive advantage because the company has the scale to serve large, multinational clients anywhere in the world. Wesco doubled in size after it completed its acquisition of close peer Anixter in June 2020.
Financial Strength
Wesco’s $4.7 billion acquisition of close peer Anixter International in June 2020 caused the firm’s net debt/EBITDA ratio (excluding synergies) to swell to 5.7. However, Wesco’s elevated free cash flow generation in 2020 allowed the firm to reduce net debt by $389 million, finishing 2020 with a 5.3 net leverage ratio. Wesco’s leverage ratio continued to decline as 2021 progressed, and the firm finished the year with a 3.9 net debt/adjusted EBITDA ratio. At the end of 2021, Wesco had $4.7 billion of debt, but modeling about $4.2 billion of free cash flow over the next five years. Wesco has a proven ability to generate free cash flow throughout the cycle. Indeed, it has generated positive free cash flow (defined as operating cash flow less capital expenditures) every year since its 1999 initial public offering, and its free cash flow generation tends to spike during downturns due to reduced working capital requirements.
Wesco delivered 16% organic revenue growth during the fourth quarter, and gross profit margin and adjusted EBITDA margin expanded 120 and 140 basis points to 20.8% and 6.6%, respectively. All three of Wesco’s segments delivered revenue growth and adjusted EBITDA margin expansion during the quarter, and the firm’s backlog has reached a record level, which bodes well for 2022 growth prospects. Management expects revenue to increase 5%-8% in 2022, adjusted EBITDA margin of 6.7% to 7.0% (20-50-basis point improvement), and adjusted EPS of $11.00-$12.00
Bulls Say’s
Wesco’s transformative acquisition of Anixter should result in stronger growth and profitability, which should help the stock fetch a higher multiple.
Wesco’s global footprint and focus on value-added inventory management services help the firm take market share from smaller distributors and support pricing power.
Despite serving cyclical end markets, Wesco’s business model generates strong free cash flow throughout the cycle. The firm will likely continue to use its cash flow to fund organic growth initiatives, acquisitions, and share repurchases.
Company Profile
Wesco International is a value-added industrial distributor that has three reportable segments, electrical and electronic solutions, communications and security solutions, and utility and broadband solutions. The company offers more than 1.5 million products to its 125,000 active customers through a distribution network of 800 branches, warehouses, and sales offices, including 42 distribution centers. Wesco generates 75% of its sales in the United States, but it has a global reach, with operations in 50 other countries.
(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.
Shot of elegant smart businesswoman explaining a project to his colleagues with statistics on the computer on coworking place.
Investment Thesis:
Trading below our valuation.
Fundamentals for the vehicle aftermarket continue to remain strong (with increase in second-hand vehicle sales; travellers seeking social distancing and hence moving away from public transport; with Covid lockdown measures in forced, more people are spending their holidays domestically utilizing their vehicles).
Significant opportunities within BAP to drive growth (expanding network; increase market share by leveraging BAP’s Victorian DC; enhance supply chain efficiencies; driven own brand growth).
Strong earnings growth profile.
Further opportunity to grow gross profit margins from better buying terms with tier one and two suppliers.
Significant distribution network across Australia to leverage from.
Ongoing bolt on acquisitions and associated synergies.
Growing BAP’s own brand strategy, which should be a positive for margins. BAP is on track to reach their 5-year targets to supplement market leading brands with BAP’s own brand products.
Weak macro story of leveraged Australian consumer and lower growth environment persisting.
Thailand represents a meaningful opportunity in our view.
Key Risks:
Rising competitive pressures.
Value destructive acquisition.
Rising cost pressures eroding margins (e.g. more brand or marketing investment required due to competitive pressures).
Given the high trading multiples the stock trades at, a disappointing earnings update could see the stock price significantly re-rate lower.
Integration (and therefore synergies) of recent acquisitions underperform market expectations.
Execution risk around Thailand.
Key highlights:
BAP struggled against Covid-19 lockdowns and restrictions over 1H22, delivering revenue growth of +1.9% over pcp to $900.1m, with own brand sales percentage increasing across all segments, with revenue picking up during 2Q, in line with easing restrictions. Management expects to achieve strong growth in 2H22. 1H22 EBITDA fell -5.8%, impacted by the transition to its Victoria distribution centre and support provided to staff. The Company made some significant leadership changes, appointing former CFO Noel Meehan as the new CEO following CEO/Managing Director Darryl Abotomey’s retirement. BAP has ample balance sheet liquidity.
Capital management.(1) The Board declared a fully franked interim dividend of 10cps, up +11.1% over pcp. (2) The balance sheet remained strong with ample liquidity with cash increasing +101.5% over 2H21 to $79.8m and net debt of $203M (up +23.7% over 2H21) leading to a leverage ratio of 1.0x, providing the Company with significant financial flexibility to be able to respond rapidly to acquisition opportunities and continue to invest in high returning projects. (3) Management continued investments in locations to support Truckline and Autobarn networks, expanded geographic footprint with BAP now having a presence in over 1,100 locations throughout Australia, New Zealand and Thailand, and signed 2 acquisitions adding annualised revenue of $50m at mid-single digit EBITDA multiples (pre-synergies).
Supply chain. Management continued to develop group logistics capabilities, transitioning three largest warehouses in Victoria, Nunawading (Retail), Preston (Trade) and Derrimut (Wholesale) which represent 80% of volumes, to new consolidated distribution centre at Tullamarine, which is expected to deliver operating expense savings of $10m and inventory improvement of $8m.
New CEO appointed. Following CEO and Managing Director Darryl Abotomey’s retirement, the Company has appointed former CFO Noel Meehan as the new CEO, with recruitment for a new CFO currently underway. In our view, this is a good outcome and more likely to lead to a stability in strategy.
Growing proportion of private label sales. Own brand sales percentage increased across all segments, with Bapcor Trade delivering 29.6% (up +50bps over 2H21), Retail delivering 33.9% (up +120bps over 2H21), Speciality Wholesale delivering 54.6% (up +130bps over 2H21) and New Zealand delivering 30.3% (up +40bps over 2H21), with the Company remaining on track to reach its 5-year targets to supplement market leading brands with BAP’s own brand products, which should be a positive for margins.
Company Description:
Bapcor Ltd (BAP) is Australasia’s leading provider of aftermarket parts, accessories and services. The core businesses of BAP are: (1) Trade – Burson Auto Parts is a trade focused parts professional supplying workshops with all their parts and accessories. (2) Retail – Autobarn is the premium retailer of auto accessories and Opposite Lock specializes in 4WD accessory specialists. (3) Independents – supporting the independent parts stores via the group’s extensive supply chain capabilities and through brand support. (4) Specialist Wholesaler – the number 1 or 2 industry category specialists in parts supply programs. (5) Services – experts at car servicing through Midas and ABS.
(Source: Banyantree)
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.
Tile letter on red rack in word ETF (abbreviation of Exchange Traded Fund) on wood background
BetaShares FTSE RAFI Australia 200 ETF QOZ offers distinctive exposure to Australian equities based on a fundamental index. QOZ aims to track the FTSE RAFI Australia 200 Index before fees and expenses. Conforming to a contrarian methodology, the index construction is driven by a four-factor method developed by US-based Research Affiliates. The five-year average of the four metrics (book value, sales, cash flow, and dividend) are used to build a portfolio with reliable but currently undervalued stocks.
Approach
QOZ aims to track the FTSE RAFI Australia 200 Index before fees and expenses. This index eliminates the traditional market-cap-weighted index approach where portfolio weight depends on share price. Instead, QOZ favours stocks with a larger “economic footprint.” The index comprises the top 200 companies listed on the ASX, as measured by four equally weighted fundamental measures: sales, cash flow, dividends, and book value. Five-year averages are used for the first three factors, with the latest available book value applied. Stocks are weighted based upon an equally weighted composite score of these four metrics.
Portfolio
Market-cap-weighted Australian equity benchmarks are dominated by large sectors and companies. A handful of very large financial services and materials companies compose a significant slice of the overall pie. QOZ shares these characteristics, but instead of weighting by market cap, it uses an index based on fundamental metrics in which stocks with bigger economic footprints (earnings, sales, dividends, and book value) receive more prominence.
Performance
Value-titled strategies have faced difficult times over the past decade. The returns have been typically overshadowed by the conventional growth-oriented strategies. However, it should be noted that such factor skews undergo cycles and may see an upturn when the macroeconomic environment changes. As at December 2021, QOZ delivered an annualised five-year return of 8.2% against the S&P/ASX 200’s 9.8%. The year 2016 was a period of contrasting halves as valuations dipped in the first half and quickly raced back and beyond in the latter half. The fund significantly outperformed the broader index over this period, delivering returns of 18.3%. The rally continued in 2017, and the fund ended with over 11.3% returns during the year. In 2018, US-China trade wars surfaced, causing global unrest in the equity markets. As such, the fund witnessed a sharp drawdown in the year’s final quarter.
Company Profile
Cimic is Australia’s largest contractor, providing engineering, construction, contract mining services to the infrastructure, mining, energy, and property sectors. The business structure consists of construction, contract mining, public-private partnerships, and property, along with 45%-owned Habtoor Leighton. Cimic has exited its Middle East business. ACS/Hochtief owns 76% of Cimic.
(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.
As the global leader in the cleaning and sanitation industry, Ecolab provides products that help its hospitality, food-service, and healthcare customers do laundry, wash dishes, and maintain regulatory compliance. With unmatched scale and a solid razor-and-blade business model, Ecolab’s competitive advantages are firmly in place. The company’s cleaning and sanitation scale dwarfs the competition. Ecolab generates over 3 times the revenue of its largest rival. Its industries are fragmented, with many markets made up of regional and local competitors. Ecolab controls roughly 8% of the $152 billion global market.
With its unrivaled scale and breadth of product offerings, the company is an attractive partner to global hospitality and food-service firms. We think it will continue to grow from market share gains and expanding into new markets. The firm uses a razor-and-blade business model by providing cleaning equipment to customers that solely uses Ecolab’s proprietary consumables. This model creates a steady stream of consumables revenue. The installed base and consumables model also leads to high customer switching costs, as clients are generally reluctant to switch out equipment and retrain staff.
Financial Strength
Ecolab is in decent financial health. Net debt/adjusted EBITDA was 3.1 times as of Dec. 31, well above below the company’s long-term goal of 2.0 times. The company’s leverage ratios are currently elevated as it recently closed the $3.7 billion Purolite acquisition, which was mostly financed with debt. Ecolab’s leverage ratio will likely remain elevated throughout 2022. The institutional business continues to recover, with operating income up 73% in 2021 versus 2020, on 11% revenue growth. Segment operating margins expanded 500 basis points to 14% in 2021. While this is still well below pre-pandemic levels above 21%, it shows how volume recovery translates to an outsized profit rebound. This level of margin expansion likely is a result of management’s decision to maintain its workforce throughout the COVID-19 slowdown, despite the sharp decline in volumes.
Bulls Say’s
Ecolab’s focus on delivering savings on labor, energy, and water for customers makes the firm’s products and services attractive even during economic slowdowns.
Ecolab’s customers are willing to pay a premium to protect their own brand reputations. For example, a restaurant knows what a food contamination incident can do to its standing with customers.
Rising fresh water costs will drive demand for industrial water management systems. Ecolab’s water management systems will be able to save its customers water and energy costs, which will increase water business profits.
Company Profile
Ecolab produces and markets cleaning and sanitation products for the hospitality, healthcare, and industrial markets. The firm is the global market share leader in this category with a wide array of products and services, including dish and laundry washing systems, pest control, and infection control products. The company has a strong hold on the U.S. market and is looking to increase its profitability abroad. Additionally, Ecolab serves customers in water, manufacturing, and life sciences end markets, selling customized solutions.
(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.
Unibail-Rodamco-Westfield or URW, was formed in 1968, and it acquired several large malls through to 1995, and offices thereafter. In 2000 it launched a conventions and exhibitions business and is now the European leader in that sector. In 2007 Unibail merged with Rodamco, becoming the largest retail REIT in continental Europe. The group expanded into the United Kingdom and United States via the acquisition of Westfield in 2018.
The Westfield acquisition was via a combination of cash and scrip, and management committed to noncore asset sales to reduce debt. Progress was good until the COVID crisis crimped its previous earnings certainty, and market sentiment toward URW. The group’s assets remain high quality, owning centres that are among the best in Europe and the United States. Its iconic assets include the Carrousel du Louvre in Paris, Westfield Mall of Scandinavia in Stockholm, Westfield centres at Stratford and Shepherd’s Bush in London, the Westfield World Trade Centre in New York, Westfield Valley Fair in the San Francisco region, and many others. It is foreseenURW’s malls to perform strongly once economic conditions return to approximately normal. However, URW’s large debt load combined with an earnings hole of unknown duration has put the balance sheet under pressure.
URW was able to issue debt during the COVID crisis at cheap prices (albeit slightly higher than 2019 levels), but needs to reduce debt. In November 2020, shareholders rejected a proposed EUR 3.5 billion equity raising. URW may instead exit its more than EUR 10 billion of assets in North America, sell more than EUR 2 billion of assets in Europe, pay no distributions until 2023, and cut development spend. Given the fast-changing landscape, it wouldn’t be of surprise to see further adjustments to the strategy, with management taking an opportunistic approach, with options including full or partial asset sales, development partnerships.
Financial Strength
URW is under financial pressure due to its high debt load combined with a hole in its earnings from coronavirus shutdowns, social distancing, and related economic damage. Its loan to valuation ratio of 42.5% (pro forma, as at Dec. 31, 2021) is excessive in Analysts’ view. A proposed EUR 3.5 billion equity raising was rejected by shareholders in November 2020, URW instead raising cash through European asset sales over 2021 and 2022, and potentially EUR 10 billion of sales in North America. It is assumed the capital proceeds will be used to repay debt, and are confident gearing can be brought under 35%, however, to go much lower than that will require favourable conditions for asset sales, which could take time. If the economy approaches normal conditions and other planned cash collection/retention measures proceed, the company should be on a firmer footing. However, if COVID-19 variants result in consumer aversion to public places well into 2022, it is possible URW would have to raise equity again. In the event of dangerous new variants that require longer restrictions on retail trading, there is a remote risk this could completely wipe out current securityholders, though this would be an extreme scenario. A prolonged rise in interest rates is also a risk, though URW’s long-dated debt profile and leases linked to CPI and tenant sales provide some protection from this.
Bulls Say’s
COVID-19 vaccine rollouts, and the milder omicron virus variant, should help URW’s rents and asset sales in coming years.
URW tenants have recovered to sales numbers near pre-COVID-19 levels. Though not maintained, this suggests that rents should eventually recover to preCOVID-19 levels once pandemic issues are in the past.
Although e-commerce competition is intense, a lot of the damage has already been done. URW’s affluent catchments remain desirable for retailers, who require a physical presence to maintain their brand and customer service standards.
Company Profile
Unibail-Rodamco-Westfield, or URW, owns a portfolio of quality malls, about two thirds in continental Europe. Since acquiring Westfield in 2018 URW also has about 10% in the U.K. and about 25% in the U.S., but it plans to drastically reduce exposure to the latter. More than 90% of rent comes from shopping centres, the remainder from offices, mostly Paris, as well as some offices attached to mixed-use assets around the world, and a similar amount from a conventions and exhibitions business in France.
(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.
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Western Asset Australian Bond is a compelling choice for domestic fixed-interest exposure owing to its bestin-class team and straightforward approach. Anthony Kirkham, head of investment/portfolio manager, is the leader of this strategy, and we have high regard for his investment knowledge and skills.
Approach
The philosophy of the team is to identify mispricings within sectors and securities allocating active risk in areas in which it has conviction while ensuring the portfolio remains diversified to avoid singular themes being pervasive through the portfolio. The team takes account of global macro insight from the global investment strategy committee and overlays its domestic market knowledge to come up with a base-case expectation looking forward six to nine months depending upon their conviction. In addition to this, the team develops multiple upside and downside scenarios as a risk-management framework.
Portfolio
The portfolio can invest across government, semi-government, supranational, credit, securitised assets, inflation-linked bonds, and cash. As of November 2021, over 40% of the portfolio was invested in investment grade corporate bonds, around 25% in semi-government issues, 20% in government, 10% in supranational, with a small amount of mortgage-backed and asset-backed securities. Active duration moved short relative to the benchmark around mid-2021 but came back in line with the index around year-end. Similar to most Australian bond managers, they entered 2021 overweight in credit, indicative of their opportunistic profile.
People
The fund is managed by a seasoned team of investors who remain dedicated to this strategy. The team is led by Anthony Kirkham, who has had more than 30 years of wider experience, including nearly two decades at Western Asset Management and leading this strategy since 2002. Kirkham has credit analyst, dealer, and portfolio manager experience working for Commonwealth Bank, Metway Bank, RACV Investments, and Citigroup. He is supported by Damon Shinnick, who is a portfolio manager with a focus on credit portfolios.
Performance
This strategy has performed well over the medium and long term, especially compared with peers. It has delivered returns above the Bloomberg AusBond Composite Index, net of fees, over the past decade. That is ahead of its target return of 75 basis points (gross of fees) over the benchmark and market cycle. A tracking error of 100 basis points is targeted. Perhaps more impressive, though, is that these results put the strategy’s flagship A share class in the first quartile of its Morningstar Category over the trailing three, five, and 10 years to December 2021. Sector allocations and credit exposure continue to drive performance.
(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.
Seek captures 90% of total time spent online searching for jobs, dominating the Australian market. This dominance within a small niche global geographic market, built through a first-mover advantage, represents a strong competitive advantage given its network effect. Australians view seek.com.au as their first port of call for looking for employment, which is why we ascribe a narrow moat to the company.
Seek’s international investments offer strong growth potential. Through a close working relationship with investment group Tiger Fund, Seek has acquired minority shareholdings in the number-one online job sites in Brazil, Mexico, Indonesia, Thailand, Malaysia, the Philippines, and China. Low Internet penetration is a common feature among these countries while gross domestic product growth rates remain comparatively high. The Chinese investment, Zhaopin, is of particular interest, as funds continue to be reinvested back into further establishing its growing online market share. Internet data indicates that Zhaopin and rival 51Job continue to trade the desired number-one market position back and forth from month to month. Morningstar analysts view Seek as an entrepreneurial organisation that is unafraid to create new concepts and push the boundaries in offering a range of new services within education and job-seeking to an online market that is rapidly evolving, compared with traditional business models.
Morningstar analysts have increased our fair value estimate for narrow-moat rated Seek by 8% to AUD 21.50 per share following its stronger than expected first-half financial result. The strong result partly reflects the currently tight job market in Australia but also more maintainable improvements, such as higher revenue per advertisement. The fair value increase reflects a combination of the time value of money boost to our financial model and higher earnings forecasts. For example, we’ve increased our revenue CAGR for the “core” ANZ business to 11% from 8% over the next decade and increased its average EBITDA margin to 63% from 62% over this period.
Financial Strength
Morningstar analysts have increased our fair value estimate for narrow-moat rated Seek by 8% to AUD 21.50 per share following its stronger than expected first-half financial result. The strong result partly reflects the currently tight job market in Australia but also more maintainable improvements, such as higher revenue per advertisement. The fair value increase reflects a combination of the time value of money boost to our financial model and higher earnings forecasts. For example, we’ve increased our revenue CAGR for the “core” ANZ business to 11% from 8% over the next decade and increased its average EBITDA margin to 63% from 62% over this period.
Bulls Say
Seek has a dominant position in the Australian market underpinned by a network effect-based economic moat. This enables strong cash generation to fund other overseas businesses.
Seek has successfully diversified beyond its core Australian business to build a global online employment marketing group.
The network effect, epitomised by successful online market Titans such as Google, eBay, and Facebook, demonstrates the virtuous circle of the largest audiences attracting more and more users because of audience size.
Company Profile
Seek operates the dominant Australian online job advertising website, capturing 90% of time spent online looking for jobs. It also has an education division that provides vocational courses online. Overseas investments provide Seek with market-leading positions in the online jobs market in Asia and Latin America.
(Source: Morningstar)
Relative to the pcp: (1)
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.
Laverne Securities Pty Ltd, ACN 629 216 477, T/As Investor Desk, is a Corporate Authorised Representative of Laverne Capital Pty Ltd (AFSL 482937). This service is administered by OpenInvest Limited ACN 614 587 183 via the OpenInvest Portfolio Service ARSN 628 156 052. This website provides factual information about the service, and any general advice contained does not take into account your objectives, financial situation or needs. Before making any investment decision, please review the PDS and Target Market Determination available at https://www.investordesk.com.au/key-documents/. Should you require assistance in determining whether an investment in the service is right for you, you may wish to seek personal advice from an appropriately licensed financial adviser.
