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Ellerston Australian Market
Neutral Fund
PERFORMANCE REPORT April 2015
Fund performance^ (Net)
Net
Jan
Feb
Mar
April
2015
-0.15%
1.09%
1.41%
1.04%
2014
2.50%
0.33%
0.93%
-0.47%
May
June
July
Aug
Sept
Oct
Nov
Dec
YTD
3.42%
2.31%
2013
3.60%
1.24%
2.42%
3.16%
-0.82%
1.53%
-0.95%
16.82%
0.48%
1.12%
1.74%
1.38%
2.87%
-0.34%
2.54%
10.18%
^ The net return figure is calculated after fees & expenses. The gross return is calculated before fees & expenses. Past performance is not a reliable indication of future performance. The benchmark is the RBA Cash Rate. The Fund
commenced on 3 June 2013.
Return
Net
BM
Alpha
Gross
Portfolio Metrics
1 Month
1.04%
0.18%
0.86%
1.34%
Positive months
3 Months
3.58%
0.55%
3.03%
4.66%
No. Relative Value positions
42
FYTD
10.34%
2.02%
8.32%
13.57%
No. Special Situations
10
1 Year
16.95%
2.44%
14.51%
22.02%
Net equity exposure
20.1%
Since inception^
33.11%
4.83%
28.28%
44.14%
Gross Portfolio Exposure
75.4%
Since inception^ p.a
16.09%
2.49%
13.60%
21.01%
Beta Adjusted
7.8%
Correlation coefficient (vs ASX 200 Accum)
-0.36
78%
Net Sharpe Ratio ( RFR = RBA Cash)
3.1
Performance
The Fund maintained its outperformance in April, generating a net return of +1.0% relative to the benchmark’s return of +0.2%. The
Relative Value strategy produced a gross return of +0.6%, while the Special Situations strategy contributed +0.8%.
Net equity exposure was +20.1% at month-end and +7.8% on a beta-adjusted basis. The gross exposure remained stable, ending
the month at +75.4%, with the lower prevailing gross exposures of late reducing the long-term average gross exposure from 140% to
130%.
Yowie Group (+10.6%) was the primary contributor to the Fund’s performance during April, with the company announcing additional
successful store trials of their confectionary products - on this occasion in twelve Tier 1 grocery retail outlets in Dubai. The Middle
East is emerging as one of the fastest growing chocolate markets across the globe and is said to be set for a compound annual
growth rate of 6.1% from 2014 to 2019. The global chocolate market is expected to grow at just 2.3% over the same period.
Ellerston Capital Limited
ABN 34 110 397 674
AFSL 283 000
Level 11
179 Elizabeth Street
Sydney NSW 2000
Tel: 02 9021 7797
Fax: 02 9261 0528
info@ellerstoncapital.com
www.ellerstoncapital.com
APIR Code: ECL0013AU
The recently listed Touchcorp (+7.7%) had a solid month, announcing the successful completion of a pilot program with Reitan, a
Norwegian wholesaler and retail franchiser. Accordingly, Touchcorp will deliver access to its systems and services to Reitan’s
retailers, and will receive a transaction fee for each billable transaction processed. Astro Japan Property Group (+5.8%) was also
buoyant during April, with both positions continuing to add value to the Fund.
Despite a positive quarterly result, Orion Health (-7.7%) traded lower in the month. The company was actually cash flow positive in
the period, a significant improvement on the previous quarter. Orion continues to successfully migrate clients from a licensing model
to a subscription-based model, which produces a steadier, predictable revenue stream. A transaction in the healthcare technology
space where IBM purchased an Orion competitor at 9x revenue also failed to generate investor interest.
REITs were a good source of returns for the Relative Value strategy, with BWP Trust (+1.3%), Hotel Property Investments (-2.2%),
Dexus Property Group (-2.6%), and Investa Office Fund (-4.6%) all featuring prominently during the month. The chief contributor to
performance however, was a long position in GDI Property Group (+1.6%) hedged with a short in Goodman Group (-1.6%), which
added +0.2% to the Fund’s performance. GDI acquired 80 George St, Parramatta for $38.7 million during the month, with the
building consigned as the sole asset of “GDI No. 40 Office Trust”, a new unlisted property fund to be launched within the next month.
With the vacancy rate in the Parramatta office market being one of the lowest for all CBD office precincts around Australia, we
anticipate strong levels of interest in the new fund as investors pursue the commencement yield of 8.5% p.a.
We established a short in Goodman Group in early April and hedged it with a long in Scentre Group (0.0%). The position remained
open at month-end with the spread narrowing for a modest contribution to the Fund’s performance.
In late April, we took advantage of share price weakness in Spark New Zealand (-4.1%) and relative strength in Telstra Corp (-1.3%)
to initiate a Telecommunications pair. The pair featured a long in Spark New Zealand hedged with a short in Telstra Corp, with the
spread narrowing promptly by month-end for a +0.1% contribution to the Relative Value strategy.
A REIT pair containing a long in Charter Hall Retail (+0.5%) hedged with a short in Shopping Centres Australasia (+5.4%) proved the
largest detractor to the Relative Value strategy. The Shopping Centres Australasia share price rallied during April, with the company
announcing the issuance of a six year A$175 million note, the sale of Margaret River Shopping Centre, and the acquisition of
Whitsunday Shopping Centre. An additional position that featured a short in Shopping Centres Australasia hedged with a long in
Peet (-6.6%) also detracted value.
A Building Materials pair comprising a long position in GWA Group (-3.5%) hedged with a short in Boral (-0.8%) was another
detractor to the Fund’s performance in April. The share price of GWA underperformed during the month, despite their announcement
to divest Gliderol Garage Doors as part of their “returning to the core” strategy. This follows on from the sale of Dux ($46m, Nov
2014) and Brivis ($49m, Dec 2014), which has lead to a proposed capital return (28.8 cps) to shareholders scheduled to be paid next
month.
Activity
Relative Value – Gross Contribution +0.6%
A pair containing a long position in Investa Office Fund hedged against a short position in Dexus Property Group was initiated
early in the month and unwound for a modest profit when Dexus announced an equity raise in late April. Dexus continues to
identify value-enhancing investment opportunities and the equity raising is intended to give the company the flexibility to pursue
these opportunities while simultaneously ensuring gearing remains at the lower end of its target range of 30-40%.
The News Corp pair was unwound during the month, with the spread between the Ordinary (-1.9%) and Class A (-1.4%) shares
narrowing. A Delaware judge dismissed a lawsuit against News Corp during April, ruling the company lawfully extended a
poison-pill provision as the spin-off of Twenty-First Century Fox (+0.7%) meant that News Corp was a new company not bound
by the 2006 agreement.
During the concluding stages of March, we took advantage of share price weakness in Spark Infrastructure Group (-1.5%) to
establish a long position and hedged it with a short in Duet Group (-0.8%). NSW voters returned Premier Mike Baird to office
last month, giving him a mandate for a planned A$20 billion electricity network sell-off. It was subsequently revealed that the
Abu Dhabi Investment Authority intends to join a group of investors, including Spark, in bidding for NSW state electricity assets,
causing the Utilities pair to be unwound after a sharp rally in the share price of Spark.
Special Situations – Gross Contribution +0.8%
Following an announcement regarding the successful refinancing of a SPV, we substantially increased our position in Astro
Japan Property Group. As part of the refinancing announcement, Astro mentioned that in addition to the on-market buyback
(which was active at around $5.00), they were considering implementing an off-market buyback – at a premium to the prevailing
share price. The off-market buyback was confirmed later in the month with the buyback price set at $5.30 – a 6% premium to
our average entry.
We participated in a share placement in Sino Gas & Energy Holdings (-13.2%). The company is a gas producer with reserves in
the highly productive Ordos basin in China. Sino raised $80m in the placement and now have enough capital to take the
company through to its Overall Development Plan. Management is highly regarded, with the recently appointed CEO previously
at Ophir Energy and Temasek Holdings. At the placement price, Sino trades at over a 50% discount to Chinese-listed peers, a
discount that we feel is unwarranted, given they are on the cusp of commercial success.
Sector
Banks
Long Equity
0.0%
Short Equity
0.0%
Net Equity
0.0%
Div Financials
1.4%
0.0%
1.4%
Insurance
0.0%
0.0%
0.0%
REITs
27.5%
-17.0%
10.5%
Financials
28.9%
-17.0%
11.9%
Builders
3.5%
-1.8%
1.7%
Consumer Disc
0.0%
0.0%
0.0%
Consumer Staples
3.7%
0.0%
3.7%
Gaming
0.0%
0.0%
0.0%
General Industrials
0.0%
0.0%
0.0%
Health Care
2.6%
0.0%
2.6%
Infrastructure
0.0%
0.0%
0.0%
Media
5.7%
-5.3%
0.5%
Telcos
2.0%
-1.9%
0.1%
Utilities
0.0%
0.0%
0.0%
Industrials
17.4%
-8.9%
8.5%
Energy
0.8%
0.0%
0.8%
Gold
0.0%
0.0%
0.0%
Resources
0.8%
0.0%
0.8%
Hedge
0.0%
-1.1%
-1.1%
Index
0.0%
-1.1%
-1.1%
Total
47.1%
-27.0%
20.1%
Market Commentary
April proved a cruel and surprisingly volatile month for global investors, many of whom had bet the US dollar would continue to
firm, oil prices would come under further pressure and the rally in global bonds would gain further steam. Instead, trades that had
proved to be winners in the last six months completely backfired, as a confluence of negative economic data suddenly dimmed
the outlook for the US economic recovery, prompting many investors to push back their expectations for when the Federal
Reserve will raise key interest rates
US equities continued to rally in April, with the S&P500 climbing 0.9% to 2,086 and the Nasdaq finishing 0.8% higher at 4,941.
The eagerly awaited US Q1 earnings season kicked off, with analysts expecting the strong dollar and the cold snap to weigh on
corporate profits. Household names like Ford, MMM, LinkedIn and Google all missed analyst expectations, with social-media
company Twitter shares tumbling 22% in the month (in the first quarter, Twitter’s stock rallied a staggering 40%). Of the 75% of
companies that have reported thus far in the US, EPS growth across the S&P500 is running at +1.9%.
China was the standout performer, with the Shanghai Composite Index finishing +18.5%, boosted by further stimulus from the
PBoC which cut the reserve requirement ratios for financial institutions in an attempt to fuel lending and sustain growth. Hot on
the heels of China, Hong Kong equities also rallied, climbing 13% in the period. The moves were fuelled by the opening of “the
connect”, which allows Chinese investors access to Hong Kong markets. Japanese equity markets also climbed over the month,
with the Nikkei putting on an additional 1.6%, taking it to 19,520.
European markets were generally weaker (Germany -4.3%, Spain -1.2% and Italy -0.5%) as enthusiasm for the ECB’s
quantitative easing program waned and uncertainty around Greek debt negotiations continued. The performance was negative,
despite European corporate earnings generally delivering solid results, with 60 out of 107 European firms beating analyst
expectations. The UK market escaped the continent’s fate with the FTSE ending the month 2.8% higher at 6,961, having traded
through 7,000 earlier in the month. This was despite intense campaigning ahead of one of the UK’s most uncertain elections in
decades.
Australia underperformed most global equity markets (MSCI World Index +2.2%) during the month. The S&P/ASX200
Accumulation Index ended the month 1.7% lower, which included a savage three-day sell-off at month-end. Led by the
Energy sector (+8.5%), Resources (+4.3%) outperformed ex Res (-2.7%), while Banks (-5.9%) recorded their weakest
performance in more than 6 months. Over the course of the month, the Australian market repeatedly tried to break the critical
6,000 point barrier, failing on each attempt. In April, we saw a sharp rally in the iron ore price after BHP announced that it would
defer its inner-harbour debottlenecking project, effectively slowing its expansion plans. The Australian dollar rallied to briefly
trade above the US80c mark (the A$:US$ reached a mid-month high of $0.802) before closing up 3c for the month at $0.791.
Currency was a key focus for markets with the US$ reversing its recent upward trend on signs the US economy has hit a soft
patch. Weaker than expected Q1 GDP growth (just 0.2% annualised) and a moderation in labour market strength have pushed
out expectations for Fed tightening, with many observers now ruling out a June “lift-off” and some commentators even
suggesting interest rate rises could be delayed until 2016. The US$ finished the month lower versus most major currencies
including the Euro (-4%), AUD (-4%), GBP (-3%) and CAD (-5%). The move in the currency added to local concerns, with the
stronger A$ weighing on businesses with offshore earnings. Notwithstanding the spate of disappointing economic data, bond
yields backed up with the US 10-year rate climbing +11 basis points over the month to finish at 2.03%.
Oil saw a significant rally in the period with West Texas approaching US$60/bbl and Brent north of US$66/bbl, moves partly
driven by the continued reduction in US rig counts, as well as heightening geo-political tensions in the Middle East. The
escalations in the region and constant naval activity in the Straits of Hormuz added to the tensions, stoking energy prices.
Meanwhile on the domestic front, more positive signs from the labour market (stronger than expected jobs growth, rising
participation and a surprise fall in the unemployment rate to 6.1%), coupled with a benign CPI outcome, saw the RBA cut interest
rates by 0.25% to a historical low of 2% on May 5.
In April, the clear standout was the Energy sector, posting the biggest gain (+8.5%), as the world’s two biggest producers of
LNG, Shell and BG, announced their intent to merge in one of the biggest energy deals in history. The Utilities sector also had a
positive month, returning 2.0% in the period. The worst-performing sector was Financials (-4.2%), followed closely by IT and
Healthcare (both down 4.0%).
This month BHP, ORG, STO, QBE added the most points to the ASX200 index, while WBC, CBA, ANZ, NAB were the biggest
detractors. LNG (+44.3%) was the best performing ASX200 stock this month and roll-up pet care Greencross (GXL) (-16.8%)
was the worst-performer.
Equity capital market activity featured heavily with 17 deals announced or priced in April raising A$1.7bn. Among the bigger
transactions were Slater & Gordon’s (SGH) $890m accelerated entitlement offer used to acquire the Professional Services
Division of Quindell plc and Eclipx Group’s (ECX) $254m Initial Public Offering. Other notable trades included Seven West
Media’s (SWM) $612m accelerated entitlement offer, Dexus Property Group’s (DXS) $400m primary placement and Oaktree’s
$160m block sell down in Nine Entertainment (NEC).
For the month of April, the S&P/ASX Small Ords posted a decent gain of 1.58% in contrast to the broader market
loss of 1.72%. This month saw a reversal of the recent trend, with Small Resources (+4.3%), finishing materially
ahead of the Small Industrials (-2.8%).
The small telcos space has been particularly dynamic during the course of this calendar year. In March we saw TPM (-1.9%)
make an approach to IIN (+12.6%) with a takeover offer at $8.60/share. During April we had MTU (+8.3%) announce it was
coming over the top of TPM with an indicative, non-binding proposal to acquire 100% of IIN. MTU’s bid values IIN at
$11.37/share comprising i) 0.803 MTU shares ($9.25/share) per IIN share; ii) a $0.75/share special dividend (franking to be
confirmed) and iii) estimated synergies of $1.37/share. Then, in early May, TPM countered with a further proposal under the
“matching rights process”, a proposal that the IIN board promptly recommended shareholders accept.
Relative Value Gross Contribution
+0.6%
Positive
Special Situations Gross Contribution
+0.8%
Positive
GDI PROPERTY GROUP - GOODMAN GROUP
0.17%
YOWIE GROUP
0.47%
GOODMAN GROUP - SCENTRE GROUP
0.10%
ASTRO JAPAN PROPERTY GROUP
0.32%
DEXUS PROPERTY GROUP - INVESTA OFFICE FUND
0.09%
TOUCHCORP
0.13%
SPARK NEW ZEALAND - TELSTRA CORP
0.09%
SINO GAS & ENERGY HOLDINGS
0.01%
BWP TRUST - HOTEL PROPERTY INVESTMENTS
0.08%
CALTEX AUSTRALIA
0.01%
Negative
Negative
CHARTER HALL RETAIL REIT - SHOPPING CENTRES
AUSTRALASIA
-0.08%
ORION HEALTH GROUP
-0.22%
BORAL - GWA GROUP
-0.05%
NUFARM FINANCE
-0.01%
PEET - SHOPPING CENTRES AUSTRALASIA
-0.04%
ABACUS PROPERTY GROUP - BWP TRUST
-0.03%
APN NEWS & MEDIA - FAIRFAX MEDIA
-0.03%
Distribution of Strategy Returns (Net)
Key Information
16
Fund Inception Date: 3 June 2013
Frequency
14
Liquidity: Daily
12
Management Fee: 1.20%
10
Performance Fee: 20% of outperformance
Buy/Sell Spread: 0.25%
8
Application price: $1.1391 (Cum Dist)
6
Redemption price: $1.1334 (Cum Dist)
Fund AUM: $81.49M
4
Core Concentrated Team AUM: $2,981M
2
Firm AUM: $4,140M
% return for the month
4 to 5
3 to 4
2 to 3
1 to 2
0 to 1
-1 to 0
-2 to 1
0
Key Service Providers

Registry: Link Market Services Limited

Auditor: Ernst & Young

Prime Broker & Derivative Counterparty:
Morgan Stanley Intl & Co PLC

Administrator: BNP Paribas Securities
Services
TOP RELATIVE VALUE POSITIONS










TWENTY-FIRST CENTURY - TWENTY-FIRST CENTURY NEW
BORAL - GWA GROUP
GDI PROPERTY GROUP - GOODMAN GROUP
GDI PROPERTY GROUP - MIRVAC GROUP
CHARTER HALL RETAIL REIT - SHOPPING CENTRES AUSTRALASIA
SPARK NEW ZEALAND - TELSTRA CORP
GOODMAN GROUP - SCENTRE GROUP
FEDERATION CENTRES - NOVION PROPERTY GROUP
PEET - SHOPPING CENTRES AUSTRALASIA
DEXUS PROPERTY GROUP - MIRVAC GROUP
Material Matters
During the month there were no material changes to
the Fund in terms of its risk profile, investment
strategy or changes to investment staff which would
impact this strategy. There have been no changes to
the key service providers described above.
TOP SPECIAL SITUATION POSITIONS









ASTRO JAPAN PROPERTY GROUP
YOWIE GROUP
ORION HEALTH GROUP
TOUCHCORP
S&P/ASX 200 INDEX
SINO GAS & ENERGY HOLDINGS
NUFARM FINANCE
SUNCORP FLOATING RATE NOTES
NATIONAL AUSTRALIA BANK NOTE
Further Information
Retail investors
ECS Investment Partners
NSW/QLD/ACT
Adam Coughlan 0418 653 560
acoughlan@ecsip.com.au
VIC/TAS/SA/WA
Andrew Seddon 0417 249 577
aseddon@ecsip.com.au
DISCLAIMER
This newsletter has been prepared by Ellerston Capital Limited ABN 34 110 397 674 AFSL 283 000, the responsible entity of the Ellerston Australian Market Neutral Fund ARSN 168 025 670
(Fund) without taking account of the objectives, financial situation or needs of investors. Before making an investment decision about the Fund persons should obtain advice from an appropriate
financial adviser and consider their own individual circumstances and obtain a copy of the Product Disclosure Statement dated 31 March 2014 for the Fund which can be obtained by contacting
info@ellerstoncapital.com. Actual performance for your account will be provided in your monthly account statement which may vary from that set out in this newsletter and will vary for investments
made in different classes, or at different times throughout the year.
This material has been prepared based on information believed to be accurate at the time of publication. Assumptions may have been made which may prove not to be accurate. Ellerston Capital
undertakes no responsibility to correct any such inaccuracy. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information. To the full extent
permitted by law, none of Ellerston Capital Limited, or any member of the Ellerston Capital Limited Group of companies makes any warranty as to the accuracy or completeness of the information
in this newsletter and disclaims all liability that may arise due to any information contained in this newsletter being inaccurate, unreliable or incomplete.
Past performance is not indicative of future performance.