Category: Sectors

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ETFs ETFs

Vanguard Australian Shares ETF (ASX: VAS)

Vanguard Australian Shares ETF (ASX: VAS) is an appealing and efficient alternative for investors seeking exposure to the broader Australian equities market. The strategy’s cost-value balance, in particular, is unrivalled. At 0.10 percent per year, it is one of the most affordable exchange-traded funds that provide diversified domestic equities exposure. Vanguard Australian Shares ETF seeks to provide broad Australian share market exposure in a passively managed, tax-efficient vehicle. To achieve that goal, the strategy uses an index-replication approach to track the S&P/ASX 300 Accumulation Index. The fund’s large size brings economies of scale to the effort and allows Vanguard to invest in virtually all the securities that make up the index. Security weightings are approximately the same proportion as the index’s weightings.
However, the portfolio will deviate from the index when the managers believe that such deviations are necessary to minimize transaction costs. Such strategies have helped keep annual tracking error as low as 0.20% and annual turnover below 2%. So, while the passive approach means the strategy is unlikely to depart far from the index, it offers a low-cost and reliable way to get Australian share market exposure. 		 
Vanguard Australian Shares ETF aims to track the S&P/ASX 300 Accumulation Index, a free-float-adjusted, market-cap-weighted index. It is one of Australia’s best-known stock market benchmarks and covers about 85% of Australian equity market capitalization. While the S&P/ASX 300 Index is dominated by giant- and large-cap companies, the fund has exposure to small caps, with an approximate weighting of 7.5%. The portfolio is top-heavy, with about 29% of the index in the top five companies.
The concentration in banks skews the fund’s sector weightings, with financial services forming around 26% of the portfolio. The basic-materials sector also looms large, but its dominance declined as the mining boom waned. Basic materials peaked around 31% of the portfolio in 2008 but shrank to around 18% by March 2020, while energy fell from around 8% to around 4% during the same period. Some sectors that are prominent on the global stage are underrepresented in the Australian market. Technology and to a lesser extent healthcare (thanks to the share price rise of CSL) combined make up around 17% of the index–a lower proportion than equivalent US and European indexes.		 
Company’s Performance outlook
Vanguard Australian Shares ETF (ASX: VAS) has rewarded investors well over time ahead of an average category peer. Given its exposure to small caps, which have underperformed large caps in the last 10 years, the strategy has modestly underperformed category index, S&P ASX 200 Index. On the other hand, the category relative outperformance has been led by the strategy’s higher market-cap exposure than an average category peer. More recently, when COVID-19 wrecked the market in the first quarter of 2020, Vanguard ceded 20.3% in line with the broader market sell-off and more than the category average. But the rebound was equally strong with 34.4% that ended the year for the strategy at just 20 basis points lower than its peers. In terms of risk-adjusted returns, Vanguard has delivered middling performance over long haul.		 

(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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Technology Stocks

Micron’s Dividend Initiation Makes Sense Based on Healthier DRAM Fundamentals (NASDAQ: MU)

The cyclicality of the memory industry often led to bouts of weak performance that could threaten the financial health of suppliers such as Micron, thus putting potential dividends at risk. However, management now believes

Micron is enjoying strong and sustainable secular demand across a variety of end markets as well as slowing industry supply growth due to consolidation, slowing of Moore’s Law, and an increasing focus on maximizing ROICs. Specifically, Micron has aligned its capital expenditure plans with stable memory bit supply market share targets while tactically adjusting utilization and holding higher levels of inventory during weaker demand periods. We agree with this thesis that Micron and its memory peers are better equipped to maintain healthy investment levels during downturns as well as a quarterly dividend.

Net capital expenditure as a percentage of revenue is now expected to be in the mid-30s versus low-30s previously. Overall, we think Micron’s DRAM business is well-positioned to generate cross-cycle excess ROICs, thanks to a more consolidated market.

Company’s Future Outlook

Our fair value estimate for Micron remains $90 per share, and we think shares look modestly undervalued at current levels. Management also updated its capital allocation plan. While the firm continues to target the return of 50% of cross cycle free cash flow, Micron will now pay a dividend that it intends to grow in addition to a more opportunistic approach to share repurchases In contrast, Micron’s NAND business is likely to continue to face more severe swings in profitability. Given that DRAM accounts for over 70% of Micron’s revenue, we expect the firm will be able to sufficiently fund its dividend.

Company Profile

Micron historically focused on designing and manufacturing DRAM for PCs and servers. The firm then expanded into the NAND flash memory market. It increased its DRAM scale with the purchase of Elpida (completed in mid-2013) and Inotera (completed in December 2016). The firm’s DRAM and NAND products tailored to PCs, data centers, Smartphone, game consoles, automotives, and other computing devices.

 (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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Fixed Income Fixed Income

UBS Diversified Fixed Income Fund (UBSFIXD)

an experienced investor with more than two decades of industry experience and around nine years at UBS. Grow steers the portfolio from its baseline allocation of 50/50 exposure to global and local fixed-interest markets.

The group philosophy is to find the best return available for a given level of risk, no matter where a bond is issued. Grow expresses thoughtful ideas via an allocation to several internal UBS funds, mostly in the International Bond Fund and the locally domiciled Australian Bond Fund. Further adjustments through overlays shape the portfolio when well-reasoned opportunities arise

Bonds and credit securities can be sourced locally and globally

The fund invests in a number of UBS pooled funds, which can include Australian Bond, Global Credit, International Bond, Asset Backed Securities, Asian Bonds, and cash. The fund uses the split benchmark for portfolio positioning, but the final portfolio has differed meaningfully in the past. This also means that the portfolio’s composition can move around quickly as the team’s view changes and markets move.

As at November 2019, there was around 40% allocated to the international strategy and 44% to the Australian strategy. The fund will also take significant duration and credit bets. During 2014, the fund’s duration position got as large as 1.8 years shorter than the benchmark in 2014 and contributed meaningfully to tracking error. While it was neutralised in April 2015, as at October 2019, it stood around 0.5-year longer than the benchmark.

The portfolio is predominantly made up of investment-grade exposure (typically 60% is in AA and above), but high-yield investments have featured (limited to 30% of the portfolio). China policy banks have been a new exposure since 2019 as they present a relatively attractive yield. As at June 2020, the team managed around AUD 2.6 billion in this strategy.

A balanced and experienced team

The UBS Australian Fixed Income team has been led by head of fixed-income Australia Anne Anderson and senior portfolio manager Tim van Klaveren. They have been with the business for more than 20 years and make for aformidable partnership. However, in October 2020 Anderson announced her retirement from UBS to seek advisory work in a part-time capacity. This means van Klaveren will take leadership of the Australian portfolio management team, and the responsibilities of senior portfolio manager Jeff Grow will increase.

Both are highly experienced with 31 and 26 years’ in the industry. Duties have typically been separated; van Klavaren is chair of the global IG subcommittee and is primarily focused on sector and credit allocation, while Grow is heavily involved in rates and currency positioning. Two additional portfolio managers assist here. On the credit side, Ben Squire leads the research efforts in APAC and has local analyst support. The Australian team has continual access to its global colleagues via the global macro committee, which produces key research for this strategy.

(Source: Fact Set)

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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Funds Funds

Fidelity Global Equities Fund Overview

Our Opinion…

•New PM has solid investing experience, backed by a wider Fidelity analyst team.

On Mr. Kochar’s credentials and whether he is suitable to manage the Fund, Radhika Surie, Investment Director at Fidelity, highlighted in our meeting, that Mr. Kochar is “an experienced global growth-oriented Portfolio Manager. Ashish joins from Columbia Threadneedle and has over 16 years’ investment experience spanning across management of US, Global and Absolute Return products. He previously managed the Threadneedle Global Extended Alpha, American Extended Alpha, American Absolute Alpha and American Select funds. Prior to his 13 plus years at Columbia Threadneedle, he worked at hedge-fund manager, North Sound Capital, and Merrill Lynch. Ashish holds an MBA from Mason School of Business”. Mr. Kochar is expected to work closely with the broader global equities team and leverage the expertise of the 162 strong Fidelity global analysts

•Undermined investment process

 On what will be the investment process which Mr. Kochar will adopt; Ms. Surie highlighted that the process remains to be officially determined (with the Fund’s documents to be updated). However, Ms. Surie highlighted “Ashish is a bottom-up fundamentals-based stock picker. His background in the hedge fund industry has given him a unique perspective, where he approaches investing in public markets like a private equity investor i.e. he likes to take an owner operator approach to stock selection – understanding business model is key. Ashish focuses on three main factors: high return on capital, strong management team and industry analysis which results in a portfolio that has a quality bias. A key metric is total earnings yield. In particular, a focus on operating earnings yield and factors that support growth in operating earnings, whether they come from businesses acquiring growth via factors like M&A; or restructuring via, say, divestitures; developing new products, adding production or distribution capacity. In evaluating management teams, he focuses on management compensation, track record, strategic plan, management accessibility and compensation. At any given point in time, Ashish looks to identify companies that meet a 15% total operating earnings yield potential”.

Downside Risks…

•          PM Ashish Kochar departs Fidelity or the Fund or fails to fit well within Fidelity.

•          The Portfolio Manager/analysts miss-calculate their bottom-up valuation.

•          Deterioration in global economy which affect company fundamentals.

•          Liquidity risk and volatility risk.

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.

Categories
Fixed Income Fixed Income

TCW Core Fixed Income I (TGCFX)

while the more expensive N share class is rated Silver. This strategy is hemmed in compared with others they run given its 5% limit on high-yield corporate, and in practice it has had very little exposure there. As a result, the strategy outpaced 80% of peers in 2020, its best calendar year relative to peers since 2012. Among traditional core bond offerings, this is one of the best options available to investors.

Executing and refining

The strategy has long exhibited a strong balance between flexibility and discipline, while smaller, more recent improvements should continue to differentiate it from peers. As a result, its Process Pillar rating is upgraded to High from Above Average. This strategy is run by value investors looking to buy bonds when they’re cheap and sell them when they get expensive. They also dial risk up and down in a predictable fashion, and have made slight changes in recent years, such as an adjustment to more dynamically manage duration, which has resulted in the strategy being more competitive.

Back on defense

As of December 2020, the strategy’s largest allocation was to U.S. Treasuries, which soaked up 41% of assets. This was up dramatically from just a few months prior; Treasuries accounted for 30% of assets at the end of 2019 before managers drew down that stake to fund purchases during the sell-off, and by March 2020 it had fallen to under 9%. Agency mortgage-backed securities were the next-largest allocation at 30% of assets, a number that also moved around dramatically throughout the last year.

The managers dropped it to 5.2 years when the Fed cut rates in early 2020 but have since been increasing it as the economy and market recovered.

Rock steady

From January 2010 (the team’s first full month) through March 2021, the strategy’s institutional share class returned 4.3% annualized, beating roughly four fifths of distinct intermediate core bond peers; the peer group’s median return over the same period was 3.8%, while the benchmark Aggregate Index returned 3.7%. Though this strategy has less flexibility to invest in high-yield than Metropolitan West Total Return Bond (this one can own up to 5%, while its sibling can hold 20%), its overall positioning has mirrored the firm’s flagship strategy. Conservative positioning heading into 2020 led the strategy to hold up better than two thirds of distinct peers in the COVID-19 sell-off between Feb. 20, 2020, and March 23, 2020. As a result, the strategy beat out 80% of peers for calendar-year 2020.

(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.

Categories
Funds Funds

ClearBridge RARE Infrastructure Value Fund

Our Opinion…

  • Well-resourced with a highly experienced team. RARE’s investment team is one of the largest in global listed infrastructure with 11 investment professionals focused on analysis of infrastructure securities solely. The Fund is managed by Nick Langley, Shane Hurst and Charles Hamieh and more recently Simon Ong who possess strong credentials and investment experience. PMs Mr. Hurst and Mr. Hamieh are also responsible for the governance and management of the investment process and the Sydney-based Infrastructure Investment team. They report to ClearBridge’s co-Chief Investment Officers and PMs Scott Glasser and Hersh Cohen, who are located in New York, but by and large are left alone to manage the Fund.
  • Strong interest alignment. Relative to peers, the Manager has one of the best remuneration programs which aligns the interest of the investment team with investors. PM remuneration focuses on delivering 1-, 3-, and 5-year performance versus benchmark and peer group whilst research analysts compensation is skewed towards new idea generation, best ideas as measured in the performance model and PM feedback.
  • Investment process yielding proprietary investment Universe. RARE utilises a list of 200 infrastructure companies known as the ‘RARE 200’ as its proprietary investment universe. The ‘RARE 200’ consists of 200 of the most liquid, high quality, high concentration infrastructure companies globally. Additionally, these stocks are screened for specific characteristics including long duration in assets, predictable cash flows, low volatility, inflation protection, and monopolistic or little competition.
Main Details   APIR Code
TGP0034AU
Asset Class
Global Shares
Market Capitalisation Large
Style
Neutral (Value bias)
Fund Size
$846.6m
Fees (MER)
0.974% p.a.
Distribution
Quarterly

Downside Risks…

  • Rising interest rate environment.
  • Deterioration in growth of economies that the Fund invests in. This includes

unfavorable regulations towards infrastructure assets.

  • Key man risk – departures of any personnel on the investment team, but especially, Nick Langley, Shane Hurst and Charles Hamieh and Simon Ong.

Source: ClearBridge Investments Ltd.

Fund Performance

Figure 1: Fund historical performance (as at 30 Jun 2021) – Currency Unhedged

    
(%)FundBenchmark**Out-performance
1-mths+1.5+1.0+0.5
3-mths+5.4+2.8+2.7
1-year (p.a.)+12.0+7.5+4.5
3-year (p.a.)+8.1+7.1+0.9
5-year (p.a.)+7.5+7.3+0.2
Inception*+9.9+7.1+2.8

Source: ClearBridge Investments Ltd. Past performance is not indicative of future performance.

* Internal calculations for ClearBridge RARE Infrastructure Value Fund – Unhedged Class A Units. All index data sourced from FactSet. Results over one year annualised. Fund performance is net of fees, assuming all distributions are reinvested and before tax. Performance inception date for ClearBridge RARE Infrastructure Value Fund – Unhedged Class A Units is 31/05/2011.

** OECD G7 Inflation Index +5.5% over a market cycle (rolling 5-year periods)

Fund Positioning

Figure 2: Fund Characteristics and Top 10 Positions (as at 30 Jun 2021)

    
Portfolio Weighted Avg Top 10Weight (%)
Avg Market Capitalisation60.7bnEnbridge Inc5.11
Div Yield (Fwd) Gross3.10%Union Pacific4.85
5 Yr DPS Growth (PA)8.10%Vinci4.57
Gearing (Current)34.00%Exelon Corp4.37
Interest Cover (Historic)3.7xGetLink4.07
EV/EBITDA (Forward)17.20%Cheniere4.06
  American Tower3.93
  Cellnex3.78
  Public Services Enterprise Group3.75
  Ferrovial3.50
  Total42.00

Figure 3: Fund allocation breakdown (as at 30 Jun 2021)

Source: ClearBridge Investments Ltd.

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.

Categories
Funds Funds

Altius Bond Fund

Our Opinion…

  • Well-resourced, capable and experienced investment team. We regard the CIO and investment team of Altius as very experienced and capable investment managers.
  • We like the total return focus, to protect capital in a rising yield environment. The Manager has an absolute return focus and is looking to protect capital in a rising interest rate environment. Whilst global rates are likely to be lower for longer, a specialist manager that can adequately navigate this risk is highly desirable.
  • Being benchmark unaware requires conviction. We agree that most managers will look to manage their portfolios relative to a benchmark, which leads to risk managed on a relative basis (rather than absolute) and foregoing opportunities to drive alpha. This is where we expect Altius’ investment team to exercise significant investment experience and investment process to deliver superior returns.
  • Scenario analysis critical to the investment process. In our view, the key component of the investment process is the scenario analysis forecasting and building a case for Best Case, Central Case and Worst Case. Putting a well thought-out and researched narrative around each case allows the investment team to answer critical questions and define the macro economic landscape. In our discussions with the team, we broadly agree with their current view under each case and analysis to support it. Whilst agreeing to their view is not so important to us, what we appreciate is the analysis (and logic) and how the narrative was articulated to us. We believe the Manager understands the market and critical drivers.
  • Focus on liquidity management. The Manager embeds risk management in strategy formulation, with the liquidity risk being a key consideration during the security selection process and managed through a 10% buffer of cash-like assets, giving the fund some downside protection from impaired liquidity when credit cycles turn.
Main Details 
APIR CodeWFS0486AU
Asset ClassAustralian Fixed Interest
Inception date14 June 2011
StyleAbsolute Return
Fund Size$133.39m
  Fees (MER)0.46% p.a. + expense recovery
DistributionQuarterly
  
Portfolio Characteristics
    Benchmark  50% Bloomberg AusBond Composite (0+Y) + 50% RBA Cash Rate
  Yield to maturity (%)1.17 (versus 0.58 benchmark)
Modified duration (years)1.91 (versus 3.02 benchmark)

Downside Risks…

  • Interest rate risk (however the Fund’s total return focus should limit this).
  • The Manager gets the thematic and top down view wrong.
  • Key man risk – Bill Bovingdon, Chris Dickman and Gavin Goodhand.
  • Key man risk – Bill Bovingdon, Chris Dickman and Gavin Goodhand.

Source: Altius Asset Management

Fund Performance

Figure 1: Altius Bond Fund historical performance (as at 30 June 2021)

(%)FundBenchmark**Out-performance
1-month-0.16+0.35-0.51
3-months+0.38+0.77-0.39
1-year (p.a.)-0.48-0.32-0.16
3-years (p.a.)+1.53+2.49-0.96
5-year (p.a.)+1.66+2.13-0.47
7-year (p.a.)+2.27+2.73-0.46
10-year (p.a.)+3.53+3.45+0.08
Since inception (p.a.)*+3.54+3.46+0.08

Source: Altius Asset Management; Past performance is not an indicator for future performance. * Inception date for performance calculations is 14 June 2011. ** Effective 1 July 2016, Benchmark is 50% Reserve Bank of Australia Cash Rate and 50% Bloomberg AusBond Composite 0+Yr Index and applied retrospectively for all periods.

Fund Positioning

Figure 2: Fund sector allocation (as at 30 June 2021)

   
 Fund %Benchmark %
Australian Commonwealth Government6.4428.65
Supranational15.064.63
Industrials17.062.08
Financials18.631.50
Asset Backed9.620.00
Agencies10.590.14
11am0.970.00
Cash at Bank0.690.00
RBA Cash0.0050.00
Semi Government20.9513.00

Source: Altius Asset Management

Figure 3: Top 10 holdings (as at 30 June 2021)

   
 Fund %Benchmark %
New South Wales Treasury Corp11.133.09
National Housing Finance & Investment Corp10.600.05
Australian Commonwealth Government6.4428.25
Asian Development Bank4.940.40
Treasury Corp Victoria4.342.78
Queensland Treasury Corp3.283.09
Inter-American Development Bank3.220.33
UBS Ag Australia2.920.04
Intl Bank Reconstruction & Development2.210.35
McDonalds Corp1.890.00

Source: Altius Asset Management

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.

Categories
Global stocks Shares

Square, Inc. has announced plans to acquire Afterpay, which will strengthen and enable stronger collaboration among its seller and cash app ecosystems.

The agreement’s specifics

Square, Inc. and Afterpay Limited confirmed today that they have signed a Scheme Implementation Deed through which Square has come to terms to purchase all of Afterpay’s issued shares through a court-approved Scheme of Arrangement.

Jack Dorsey, the CEO of Twitter, is leading a $29 billion acquisition of Australian Afterpay

The deal is expected to be paid in all stock and has an indicated value of about US$29 billion (A$39 billion) based on the closing price of Square common stock on July 30, 2021. The merger will allow the organizations to achieve more enticing financial goods and services to more clients, as well as boost profits for retailers of all sizes. The deal is expected to close in the first quarter of 2022, depending to the fulfilment of certain closing terms stipulated.

Square’s strategic ambitions for its Seller and Cash App ecosystems will be accelerated by Afterpay, the world’s first worldwide “buy now, pay later” platform. Afterpay will be integrated into Square’s current Seller and Cash App business units, allowing even the tiniest retailers to offer BNPL at checkout, allowing Afterpay consumers to handle their instalment payments directly in Cash App, and allowing Cash App customers to discover merchants and BNPL offers directly within the app.

With such a best-in-class solution and a strong cultural alignment with Square, Afterpay is an industry leader. As of June 30, 2021, Afterpay had over 16 million customers and approximately 100,000 merchants worldwide, including major shops in fashion, home goods, cosmetics, athletic goods, and more.

Customers can buy with control of their finances

Afterpay enables customers to get the products they want and need while also enabling them to stay in control of their finances. Afterpay also helps merchants expand their operations by encouraging repeat purchases, increasing average transaction sizes, and allowing customers to pay over time. Afterpay is dedicated to assisting consumers in spending responsibly without incurring service fees, interest, or revolving debt, and currently supports customers in a number of countries spanning APAC, North America, and Europe (including under its Clearpay brand).

Source: squareup.com

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.