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AMP Capital Corporate Bond Fund Outdoing the Bloomberg AusBond Bank Bill Index and The Average Credit Fund

Process:

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)

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 Research Sectors

Nikko AM Global Share Fund: Solid Strategy, Experienced Team and Remarkable Process

Approach

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.

Categories
Funds Funds Research Sectors

AMP Capital Corporate Bond Fund Outdoing the Bloomberg AusBond Bank Bill Index and The Average Credit Fund

Process:

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)

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
Technology Stocks

Johnson Controls Is Well Positioned to Capitalize on Healthy and Smart Buildings Trends

Business Strategy and Outlook

Before 2016, the market had long viewed Johnson Controls as an automotive-parts company because about two thirds of its sales came from automakers. However, after merging with Tyco and spinning off its automotive seating business, now known as Adient, in late 2016, Johnson Controls is now a more profitable and less cyclical pure-play building technology firm that manufacturers heating, ventilation, and air-conditioning systems; fire and security products; and building automation and control products. In early 2019, Johnson Controls sold its power solutions business to a consortium of investors for $11.6 billion of net proceeds. The firm used proceeds to pay down debt and repurchase shares.

It is believed that Johnson Controls’ prudent capital allocation strategy in tandem with its simplified business model that is clearly showing improving fundamentals has been catalysts for the stock. As a pure play building technologies and solutions business, Johnson Controls stands to benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building products and solutions. It is also expected that the COVID-19 pandemic will increase the market opportunity for healthy building solutions, such as air filtration and touchless access controls.

 These secular tailwinds should allow Johnson Controls to grow faster than the economies it serves. Indeed, over the next three years (through fiscal 2024), the firm is targeting revenue growth at a 6%-7% compound annual rate, compared with expectations of 4%-5% market growth. Key levers behind Johnson Controls’ targeted outperformance include continued product innovation (supporting market share gains and pricing); increased service penetration (a higher margin opportunity); and the firm’s participation in meaningful growth themes (for example, energy efficiency, smart buildings, and indoor air quality solutions).

Financial Strength

After selling its power solutions segment in April 2019, which netted Johnson Controls $11.6 billion, the firm paid down $5.3 billion of debt and repurchased 191 million shares (21% share reduction) for approximately $7.5 billion. The firm’s balance sheet is now in great shape, with a net debt/2021 EBITDA ratio of about 1.8, which is below management’s targeted range of 2.0-2.5. The firm finished its fiscal 2021 with $7.7 billion of debt, about $1.3 billion of cash on the balance sheet, and $3 billion available on two credit facilities. We see the firm’s significant liquidity as dry powder for additional buybacks or acquisitions

Bulls Say’s

  • Johnson Controls should benefit from secular trends in global urbanization and increased demand for energy-efficient and smart building solutions.
  • The COVID-19 pandemic should increase the market opportunity for air filtration and touchless access control solutions.
  • Johnson Controls’ free cash flow conversion has been improving, exceeding 100% in 2020-21. A 100% free cash flow conversion is in line with other world-class firms.

Company Profile 

Johnson Controls manufactures, installs, and services HVAC systems, building management systems and controls, industrial refrigeration systems, and fire and security solutions. Commercial HVAC accounts for about 40% of sales, fire and security represents another 40% of sales, and residential HVAC, industrial refrigeration, and other solutions account for the remaining 20% of revenue. In fiscal 2021, Johnson Controls generated over $23.5 billion in 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.

Categories
Global stocks

BlackRock: Largest AUM, Backed by iShares Platform

Business Strategy and Outlook

BlackRock is at its core a passive investment shop. Through its iShares exchange-traded fund platform and institutional index fund offerings, the wide-moat firm sources two thirds of its managed assets (and close to half of annual revenue) from passive products. In an environment where retail-advised and institutional clients are expected to seek out providers of passive products, as well as active asset managers that have greater scale, established brands, solid long-term performance, and reasonable fees, it is apprehended that BlackRock is well-positioned. The biggest differentiators for the firm are its scale, ability to offer both passive and active products, greater focus on institutional investors, strong brands, and reasonable fees. It is alleged that the iShares ETF platform as well as technology that provides risk management and product/portfolio construction tools directly to end users, which makes them stickier in the long run, should allow BlackRock to generate higher and more stable levels of organic growth than its publicly traded peers the next five years. 

With $10.010 trillion in total assets under management, or AUM, at the end of 2021, BlackRock is the largest asset managers in the world. Unlike many of its competitors, the firm is currently generating solid organic growth with its operations, with its iShares platform, which is the leading domestic and global provider of ETFs, riding a secular trend toward passively managed products that began more than two decades ago. This has helped the company maintain above average levels of annual organic growth despite the increased size and scale of its operations. Although it is held the secular and cyclical headwinds to make AUM growth difficult for the U.S.-based asset managers over the next five to 10 years, it is still perceived BlackRock generating at least 3%-5% average annual organic AUM growth, driven by its commitment to passive investing, ESG strategies, and geographic expansion, with slightly higher levels of revenue growth on average and stable adjusted operating margins (range-bound between 46% and 48% of revenue) during 2022-26.

Financial Strength

BlackRock has been prudent with its use of debt, with debt/total capital averaging just over 15% annually the past 10 calendar years. The company entered 2022 with $6.6 billion in long-term debt, composed of $750 million of 3.375% notes due May 2022, $1 billion of 3.5% notes due March 2024, EUR 700 million of 1.25% notes due May 2025, and $700 million of 3.2% notes due March 2027, $1 billion of 3.25% notes due April 2029, $1 billion of 2.4% notes due April 2030, and $1.25 billion of 1.9% notes due May 2031. The company also has a $4.4 billion revolving credit facility (which expires in March 2026) but had no outstanding balances at the end of September 2021. Expecting the firm to fully repay the notes due this year, and assuming that BlackRock matches analyst’s earnings projections for 2022, the firm should enter next year with a debt/total capital ratio of less than 15%, debt/EBITDA (by our calculations) at 0.8 times, and interest coverage of more than 30 times. BlackRock has historically returned the bulk of its free cash flow to shareholders via share repurchases and dividends. That said, the firm did spend $693 million on two acquisitions in 2018, $1.3 billion on eFront in 2020, and $1.1 billion for Aperio Group in early 2021, so bolt-on deals look to be part of the mix in the near term. As for share repurchases, BlackRock expects to spend $375 million per quarter on share repurchases during 2022 but will increase its allocation to buybacks if shares trade at a significant discount to intrinsic value. The company spent $1.2 billion on share repurchases during 2021. BlackRock increased its quarterly dividend 18% to $4.88 per share early in 2022. 

Bulls Say’s

  • BlackRock is the largest asset manager in the world, with $10.010 trillion in AUM at the end of 2021 and clients in more than 100 countries. 
  • Product diversity and a heavier concentration in the institutional channel have traditionally provided BlackRock with a much more stable set of assets than its peers. 
  • BlackRock’s well-diversified product mix makes it fairly agnostic to shifts among asset classes and investment strategies, limiting the impact that market swings or withdrawals from individual asset classes or investment styles can have on its AUM.

Company Profile 

BlackRock is the largest asset managers in the world, with $10.010 trillion in AUM at the end of 2021. Product mix is fairly diverse, with 53% of the firm’s managed assets in equity strategies, 28% in fixed income, 8% in multi-asset class, 8% in money market funds, and 3% in alternatives. Passive strategies account for around two thirds of long-term AUM, with the company’s iShares ETF platform maintaining a leading market share domestically and on a global basis. Product distribution is weighted more toward institutional clients, which by our calculations account for around 80% of AUM. BlackRock is also geographically diverse, with clients in more than 100 countries and more than one third of managed assets coming from investors domiciled outside the U.S. and Canada.

(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

BlackRock Advantage International Fund K: Fund which aims to outperform the MSCI EAFE Index

BlackRock Advantage International Fund K seeks long-term capital appreciation, with a focus on risk management.Powered by innovation and technology driven investment process having exposures to international portfolio at a low cost.

Approach

The strategy aims to outperform the MSCI EAFE Index by combining bottom-up and top-down factors into a stock-selection model that uses roughly 40-60 signals that fall into three broad buckets: fundamentals, sentiment, and macro themes. Fundamental signals include factors such as management quality, valuation, and profitability; sentiment signals include analyst-, investor-, and broker-sentiment indicators; and macro signals include factors specific to industries, countries, and investment styles. The model weights the signals roughly evenly between the three buckets.

The team keeps a tight lid on the 375- to 715-stock portfolio’s tracking error (the volatility of its relative performance) by keeping its sector and industry weights within 4 percentage points of the index’s, generally. It mitigates stock-specific risk by typically keeping individual positions within 1-1.5 percentage points of the benchmark’s.

The systematic approach has a short time horizon of six to 12 months, which can lead to portfolio churn and higher trading costs. The strategy’s annual portfolio turnover has ranged from 106% to 247% during the past four years, much higher than the average foreign large-blend category peer’s 43%-51%.

Portfolio

In contrast to other foreign large-blend funds, the managers here allocate the strategy’s assets across positions that stick, deviated most at around 0.9 percentage points larger than the index’s share, as of November 2021. While the portfolio mostly invests in benchmark constituents, 5%-15% of assets are in stocks unique to the portfolio. Indeed, close to the MSCI EAFE Index’s weights. Its 1.1% stake in the world’s third-largest tobacco company, Japan Tobacco 10.1% of assets were invested across roughly 150 offbenchmark stocks such as Rexel SA RXL, Rightmove PLC RMV, and Électricité de France EDF.

The strategy typically has a bit more exposure to mid-cap stocks than does the index. As of November, the portfolio’s allocation to mid-caps stood at 15% versus the index’s 10%. As a result, the portfolio’s $41 billion average market cap was slightly below the index’s $47 billion.

Performance

The fund has earned mixed results since BlackRock’s Systematic Active Equity team took over in mid-2017. From July 1, 2017, through Dec. 31, 2021, the Institutional shares posted a 7.3% annualized return, which beat the foreign large-blend category’s 7.1% but trailed the MSCI EAFE Index’s 7.5%. Its risk-adjusted results don’t look much better. 

The fund has fared worse than the index during severe market drawdowns but has outperformed the benchmark during prolonged rallies. The strategy’s calendar 2021 results were solid: The fund’s 13.0% gain beat the average peer’s 9.8% return as well as the index’s 11.3%. The portfolio benefited from good stock selections in the financial services and industrials sectors, namely Nordea Bank and Recruit Holdings, respectively.

Top 10 Holdings

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About the fund

BlackRock Advantage International’s experienced and well-resourced research team plies a suitable quantitative approach and earns the strategy’s share classes Morningstar Analyst Ratings of Bronze or Neutral, depending on fees.

The team’s quant-driven approach has a lot of moving parts. It analyzes 40-60 signals that fall into three broad buckets–fundamentals, sentiment, and macro themes–that collectively consider both bottom-up and top-down factors. The strategy aims to outperform the MSCI EAFE Index by combining bottom-up and top-down factors into a stock-selection model that uses roughly 40-60 signals that fall into three broad buckets: fundamentals, sentiment, and macro themes. Fundamental signals include factors such as management quality, valuation, and profitability; sentiment signals include analyst-, investor-, and broker-sentiment indicators; and macro signals include factors specific to industries, countries, and investment styles. The model weights the signals roughly evenly between the three buckets. The team keeps a tight lid on the 375- to 715-stock portfolio’s tracking error (the volatility of its relative performance) by keeping its sector and industry weights within 4 percentage points of the index’s, generally. It mitigates stock-specific risk by typically keeping individual positions within 1-1.5 percentage points of the benchmark’s.

 (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
Dividend Stocks

Wells Fargo: One of The Top Deposit Gatherers In USA

Business Strategy and Outlook

Wells Fargo remains in the middle of a multiyear rebuild. The bank is still under an asset cap imposed by the Federal Reserve, and it’s not seen as if, this restriction coming off in 2022. Wells Fargo has years of expense savings related projects ahead of it as the bank attempts to get its efficiency ratio back under 60%. It is also seen a multiyear journey of repositioning and investing in the firm’s existing franchises, including growing its capital markets wallet share, bringing an increased focus on cards, and revitalizing an advisory group that has lost advisors for years. It’s already started to be visible, that glimpses of the transition to offense from defence, as the bank released two new card products in 2021, the first attempt to do so that it can be thought of in years. However, it is anticipated the full transition to be a multiyear undertaking. 

Despite the bank’s issues, Wells Fargo remains one of the top deposit gatherers in the U.S., with the third most deposits in the country behind JPMorgan Chase and Bank of America. Wells Fargo has one of the largest branch footprints in the U.S., excels in the middle-market commercial space, and has a large advisory network. It is apprehended this scale and the bank’s existing mix of franchises should provide the right foundation to eventually build out a decently performing bank. Well Fargo may not reach the types of returns and efficiency that peers like JPMorgan and Bank of America have achieved, but it is foreseen for Wells Fargo to remain larger than any other regional bank and stay competitive as such. It is also gaining confidence that CEO Charlie Scharf is guiding the bank in a new and positive direction. 

With all anticipated asset sales completed (WFAM, corporate trust, international wealth, student lending), results should be less noisy. For now, the bank needs to consistently hit the expense targets it is laying out. Wells Fargo achieved them in 2021, and it is likely to do so again in 2022, achieving another year of net expense reductions while peers see expenses rise. Wells Fargo is also one of the most rate sensitive names under analysts’ coverage, which should help to offset some of the growth pressure from being unable to grow its balance sheet.

Financial Strength

It is perceived Wells Fargo is in sound financial health. Its common equity Tier 1 ratio stood at 11.4% as of December 2021. Given its history of prudent underwriting and current economic developments, it is alleged the bank arguably holds excess capital. 

As of December 2021, the bank estimates its liquidity coverage ratio was 118%, in excess of the minimum of 100%. The bank’s supplementary leverage ratio was also 6.9%, well in excess of the minimum of 5%. Wells Fargo’s liabilities are prudently diversified, with over 70% of assets funded by deposits. Roughly $20 billion in preferred stock was outstanding as of the end of last year. 

Wells had to cut its dividend during the height of the COVID-19 pandemic and is still in the process of bringing its dividend payout ratio back up. Over the long run, it is foreseen, the bank to return to a dividend payout ratio of roughly 30% through the cycle, a bit more conservative than what the bank has had in the past. 

In the meantime, as Wells Fargo produces plenty of capital, it is projected high share repurchase levels, projecting that 70% of earnings will be used for repurchases over the next several years. Barring other opportunities, buybacks should be outsized for the bank for the time being.

Bulls Say’s

  • Wells Fargo has some of the highest rate sensitivity among the big four U.S. banks, giving it an extra earnings boost as the next rate hike cycle occurs. 
  • Wells Fargo’s retail branch structure, advisory network, product offerings, and share in small and medium-size enterprises is difficult to duplicate, ensuring that the company’s competitive advantage is maintained. 
  • Wells Fargo hit its expense guidance in 2021, and the bank expects a net reduction in expenses in 2022 while peers are expected to see expenses increase. Wells should have several years left of net expense reductions.

Company Profile 

Wells Fargo is one of the largest banks in the United States, with approximately $1.9 trillion in balance sheet assets. The company is split into four primary segments: consumer banking, commercial banking, corporate and investment banking, and wealth and investment management. It is almost entirely focused on the U.S.

(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
Global stocks

PG&E on Path to Test California Wildfire Insurance Fund After Dixie Fire Report

Business Strategy and Outlook

PG&E emerged from bankruptcy on July 1, 2020, after 17 months of negotiating with 2017-18 Northern California fire victims, insurance companies, politicians, lawyers, and bondholders. Shareholders lost some $30 billion in settlements, fines, and costs, but PG&E exited with bondholders made whole and shareholders still in control.

PG&E will always face public and regulatory scrutiny as the largest utility in California. That scrutiny has escalated with the deadly wildfires and power outages. Legislative and regulatory changes during and since the bankruptcy have reduced PG&E’s financial risk, but the state’s inverse condemnation strict liability standard remains a concern. CEO Patti Poppe faces a tall task restoring PG&E’s reputation among customers, regulators, politicians, and investors

PG&E is well positioned to grow rapidly, given the investment needs to meet California’s aggressive energy and environmental policies. PG&E is set to invest $8 billion annually for the next five years, leading to 10% annual growth. After suspending its dividend in late 2017, PG&E should be positioned to reinstate it in 2024 based on the bankruptcy exit plan terms.

California’s core ratemaking regulation is highly constructive with usage-decoupled rates, forward-looking rate reviews, and allowed returns well above the industry average. California regulators are expected to support premium allowed returns to encourage energy infrastructure investment to support the state’s clean energy goals, including a carbon-free economy by 2045. This upside is partially offset by the uncertain future of PG&E’s natural gas business, which could shrink as California decarbonizes its economy.

The $59 billion bankruptcy was PG&E’s second in 20 years and likely its last. The bankruptcy exits terms all but guarantee a state takeover if PG&E has any safety or operational missteps. PG&E is still under court and regulatory supervision following the 2010 San Bruno gas pipeline explosion. The  estimated fines and penalties from the San Bruno disaster and allegations of poor recordkeeping resulted in $3 billion of lost shareholder value.

Financial Strength

Following the bankruptcy restructuring, PG&E has substantially the same capital structure as it did enter bankruptcy with many of the same bondholders after issuing $38 billion of new or reinstated debt. PG&E’s $7.5 billion securitized debt issuance would eliminate $6 billion of temporary debt at the utility and further fortify its balance sheet. The post-bankruptcy equity ownership mix is much different. PG&E raised $5.8 billion of new common stock and equity units in late June 2020, representing about 30% ownership. Another $3.25 billion of new equity came from a group of large investment firms. The fire victims trust owned 22% and legacy shareholders retained about 26% ownership at the bankruptcy exit. The fire victims’ trust plans to sell its stake over time but had not sold any shares as of late 2021. It is expected that PG&E to maintain investment-grade credit ratings. Also, it is expected consolidated EBITDA/interest coverage will remain near 5 times on a normalized basis. State legislation in 2019 will help mitigate some of PG&E’s fire-related risks and support investment-grade credit ratings. Bankruptcy settlements with fire victims, insurance companies, and municipalities totalled $25.5 billion, of which about $19 billion was paid in cash upon exit. PG&E entered bankruptcy after a sharp stock price drop in late 2018 made new equity prohibitively expensive and the company was unable to maintain its 52% required equity capitalization. It is estimated that PG&E will invest up to $8 billion annually during the next few years. Tax benefits and regulatory asset recovery should eliminate any equity needs at least through 2023. It is also estimated that PG&E’s bankruptcy exit plan restricts it from paying a dividend until late 2023. Before PG&E cut its dividend in late 2017, the anticipated 6% annual dividend growth, in line with earnings growth. In May 2016, PG&E’s board approved the first dividend increase since the 2010 San Bruno gas pipeline explosion.

Bulls Say’s

  • California’s core rate regulation is among the most constructive in the U.S. with usage-decoupled revenue, annual rate true-up adjustments, and forward-looking rate setting.
  • Regulators continue to support the company’s investments in grid modernization, electric vehicles, and renewable energy to meet the state’s progressive energy policies.
  • State legislation passed in August 2018 and mid-2019 should help limit shareholder losses if PG&E faces another round of wildfire liability.

Company Profile 

PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.3 million electricity customers and 4.4 million gas customers in 47 of the state’s 58 counties. PG&E operated under bankruptcy court supervision between January 2019 and June 2020. In 2004, PG&E sold its unregulated assets as part of an earlier post-bankruptcy reorganization.

 (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
Global stocks

Normalizing Capital Markets Revenue Is a Theme for Goldman Sachs and Other Investment Banks

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

Business Strategy and Outlook

Goldman Sachs is already making progress on the strategic plan that it laid out at the beginning of 2020. The company’s financial targets include a return on equity greater than 13% and a return on tangible equity greater than 14%. COVID-19 boosted revenue in 2020 and 2021 with high trading caused by economic uncertainty and companies issuing debt and equity to initially bolster capital and then later issuing debt and equity to take advantage of low interest rates and a strong stock market. Over the next five years, Morningstar analyst model Goldman Sachs achieving a normalized return on equity of around 12% and a return on tangible common equity of 13%.

Given Morningstar analyst forecast, Goldman Sachs should trade at about 1.4-times tangible book value. Its investment management business has become a priority. Assets under supervision exceeded $2.1 trillion at the end of 2020, while related investment management fees have exceeded 15% of net revenue compared with 11%-12% before 2008. Investment management is a relatively stable, higher return-on-capital business that is well suited to the current regulatory environment. Goldman has also built out a large virtual bank and had deposits of $260 billion at the end of 2020 compared with $39 billion in 2009. The deposit base and related net interest income will add more stability to the company’s revenue stream and balance sheet.

Normalizing Capital Markets Revenue Is a Theme for Goldman Sachs and Other Investment Banks

Goldman Sachs’ revenue remained relatively strong in the fourth quarter of 2021, but expenses, including compensation, seemed to be a bit higher than expected. The company reported net income to common shareholders of $3.8 billion, or $10.81 per diluted share, on $12.6 billion of net revenue. Net revenue of $12.6 billion in the fourth quarter was about 13% higher than the company’s 2020 quarterly average and 45% higher than its 2017 to 2019 quarterly average and cemented 2021 as a year of record revenue totaling $59 billion. Return on tangible equity was a very healthy 16.4% in the quarter and 24.3% for the year. With all that said, the fourth quarter’s revenue and net earnings were also the lowest of 2021 and determining a more normal level of revenue for the company will be primary theme for Goldman Sachs and other investment banks in 2022 and 2023. We don’t anticipate making a significant change to our $356 fair value estimate for narrow-moat Goldman Sachs.The recent record revenue at Goldman Sachs can roughly be broken down into two parts: more volatile capital markets-related and steadier client asset-based. The more capital markets-related revenue (such as underwriting, institutional trading, and equity investment gains) are over 70% of net revenue and contributed about $19 billion of the $23 billion of net revenue growth at the company since 2019, according to Morningstar analyst calculations. 

Bulls Say 

  • More-stable investment management and net interest income could cause investors to reassess Goldman’s earnings quality and increase their willingness to pay a premium for it. 
  • The company has a record of success with higher-volume, lower-margin businesses, and this capability could prove useful in adapting to over-the-counter derivatives reform and changes in fixed-income trading. 
  •  Several of the company’s primary U.S. and European competitors have been forced to restructure, which could give Goldman an opportunity to gain market share

Company Profile

The Goldman Sachs Group, Inc. is a leading global financial institution that delivers a broad range of financial services across investment banking, securities, investment management and consumer banking to a large and diversified client base that includes corporations, financial institutions, governments and individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in all major financial centers around the world.

 (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
Dividend Stocks

Wesfarmers’ Christmas Spoilt by COVID-19, however recovery is expected

Business Strategy and Outlook:

Wesfarmers hasn’t been immune to the recent rise in Australian coronavirus cases and the retail trading restrictions which were in effect in the first half of fiscal 2022. Subdued foot traffic to retail outlets has presented a challenging start to the fiscal second half but we expect recovery during the period. Although Wesfarmers’ discount department store segment, Kmart Group, is relatively small in relation to Bunnings, and only accounted for 20% of group operating profit in fiscal 2021, it is the chief culprit in the pronounced decline in first half fiscal 2022 NPAT.

Government mandated store closures and waning foot traffic heading into the key Christmas trading period weighed heavily on sales. While Kmart Group had shored up sufficient inventory in anticipation of shipping constraints, once stores reopened isolation policies resulted in staff shortages and empty shelves. The impact of operating deleverage on Kmart Group’s cost structure from the 10% decline in sales at the Kmart and Target chains was exacerbated by rising freight fees, as well as greater warehousing expenses to accommodate the elevated inventory levels.

Financial Strength:

The fair value estimate of Wesfarmers given by the analysts remain unchanged, driven by the recovery which is expected during the period which witnessed challenges earlier. The stock offers attractive dividend yields.

The conglomerate estimates profits declined by between 12% and 17% in the first half of fiscal 2022, versus the previous corresponding period. For the full fiscal year 2022, our underlying NPAT estimate of AUD 2.2 billion is unchanged- a decline in EPS of 10% versus fiscal 2021. And it is still expected that a strong 11% rebound in earning in fiscal 2023, driven by a post-pandemic recovery at Kmart Group and earnings growth at the core Bunnings business. From fiscal 2024, solid earnings growth in the mid-single digits are expected, underpinning our unchanged fair value estimate of AUD 39.50.

Company Profile:

Wesfarmers is Australia’s largest conglomerate. Its retail operations include the Bunnings hardware chain (number one in market share), discount department stores Kmart and Target (number one and three) and Officeworks in office supplies (number one). These activities account for the vast majority of group earnings before taxes, or EBT. Other operations include chemicals, fertilisers, industrial and medical gases, LPG production and distribution, and industrial and safety supplies. Management is focused on generating cash and creating shareholder wealth in the long term.

(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.