The Fund is suitable for investors seeking to distill out the influence of the returns of the largest 20 listed companies on the ASX and looking to tilt towards growth. As a result, the fund invests in stocks outside of the top 20 subsets of the market but with at least a minimum of $250m market cap. The manager is more of a purist stock picker who seeks to invest in companies he feels are on a genuine earnings growth path and feels that such companies are not common and to find these companies requires thorough and focused bottom up research process.
Investment Team:
The BAEP investment team consists of Mark East: Chief Investment Officer and Portfolio Manager, Keith Hwang: Director, Quantitative Research, Neale Goldstone-Morris: Senior Investment Analyst, Strategy, Kieran Sisson, Doug Macphillamy, Brad Clibborn, Jack Briggs: Senior Investment Analyst and Todd Briggs: Investment Analyst
Key Highlights:
- The manager conducts deep dive, bottom-up research on companies it invests in. With a thorough understanding of their stock positions, the manager takes high conviction and genuinely active bets relative to the benchmark.
- The fund has been investing since 2009 – the immediate aftermath of the global financial crisis. Since then, there have been several periods where market volatility has tested the manager’s ability to generate returns while following their investment process.
- The Fund’s focus on stocks outside of top 20 ASX listed companies provides investors an opportunity to diversify and distil growth from typical core domestic equity strategies that are heavily influenced by the performance returns of shares in the top 20 listed companies.
- The team of eight experienced analysts includes the PM.
- The fund’s macro analyst provides top down insights on the macro and guides the team to where the team should focus their research.
Downside Risks:
• An economic recession in Australia/globally, leading to earnings recession
• Stock selection fails to yield alpha
• Key man risk – the PM (Mark East) departs – given he has the ultimate responsibility of running the strategy
Investment Process:
- From all of the stock listed on the ASX, BAEP applies a screen to derive an Investment Grade Universe from which to find investment opportunities. The filters include a market capitalisation of greater than $250 million, sufficient liquidity, an earnings track record.
- Idea Generation aims to identify those stocks within the Investment Grade Universe that warrant particular attention, thereby focusing research efforts on the most prospective candidates. The ideas build up into the Focus List.
- Stock analysis is extensive and includes quantitative and qualitative analysis including field research.
- Portfolios are constructed on a stock-by-stock basis. The inclusion, sale and weighting of a particular stock is determined by reference to a number of factors
- The portfolio is constantly monitored, tested and optimised with ongoing changes.
Performance:
Fund Positioning:
About Fund:
The Fund’s objective is to outperform the S&P/ASX 300 Accumulation Index excluding the portion of return attributed to the S&P/ASX 20 Leaders Index, by 4% p.a. after fees on a rolling 3-year basis. The Fund invests primarily in Australian shares with high quality business models, strong growth, and underestimated earnings momentum and prospects.
(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.
Business Strategy and Outlook
Vistra Energy’s emergence from the Energy Future Holdings bankruptcy in 2016 has been a success for the most part. Despite Vistra’s sensitivity to volatile commodity prices and legacy fossil fuel generation, it has produced solid returns. The only significant bump in the road has been winter storm Uri that hit Texas in February 2021, causing more than $2 billion of losses.
Vistra’s clean post bankruptcy balance sheet allowed it to acquire Dynegy in 2018 for $2.27 billion, more than tripling the size of its generation fleet and introducing Vistra to power markets outside Texas, notably the Midwest and Northeast. The rock-bottom price Vistra paid and cost synergies have made the deal value-accretive. Vistra produces substantial free cash flow before growth given minimal core investment needs. Management is expanding the retail energy business to hedge its wholesale generation market exposure and is investing in clean energy projects like utility-scale solar and batteries.
Financial Strength
After the setback from the Texas winter storm losses in February 2021, Vistra’s quest to earn investment-grade credit ratings and reach 2.5 net debt/EBITDA stalled. However, it remains in a solid financial position with plenty of liquidity. Management has shifted its focus toward returning capital to shareholders through stock buybacks and dividends rather than earning investment-grade credit ratings immediately. Vistra’s $1 billion preferred issuance in late 2021 with an 8% dividend floor all but ensures it will take several more years to earn investment-grade ratings.
The board authorized a $2 billion share repurchase plan in late 2021, replacing a largely unused $1.5 billion plan from 2020. The combination of stock buybacks and $300 million annual allocation to the dividend means the dividend could top $1.00 per share by 2025, up from $0.50 when the board initiated the dividend in 2019 and surpassing management’s initial 6%-8% annual growth target. Vistra exited bankruptcy in 2016 with just $4.5 billion of medium-term debt. Consolidated debt grew to $11 billion after the 2018 Dynegy acquisition before Vistra began reducing its leverage.
Bulls Say’s
- Vistra’s debt reduction in 2019-20 gives it financial flexibility to repurchase stock, raise the dividend, and invest in growth projects in 2022 and beyond.
- Vistra’s gas fleet benefits from historically low gas prices in most of the regions where it operates, allowing for higher operating margins.
- The retail-wholesale integrated business model reduces risk and market transaction costs, allowing Vistra to be a low-cost provider, especially in its primary Texas market.
Company Profile
Vistra Energy emerged from the Energy Future Holdings bankruptcy as a stand-alone entity in 2016. Vistra is one of the largest power producers and retail energy providers in the U.S. It owns and operates 38 gigawatts of nuclear, coal, and natural gas generation in its wholesale generation segment after acquiring Dynegy in 2018. Its retail electricity segment serves 5 million customers in 20 states. Vistra’s retail business serves almost one third of all Texas electricity consumers
(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.
