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Ellerston Overlay ASF
PERFORMANCE REPORT April 2015
The investment objective of the Ellerston Overlay ASF (Fund) is to provide investors with a return that
outperforms the Benchmark over time. The Fund aims to achieve this by investing in a concentrated
PERFORMANCE
February
portfolio
comprisingREPORT
of no more
than 30 2014
ASX listed securities and where possible, enhancing returns or
preserving capital through the use of Derivatives and shorter term trading strategies. The concentrated
portfolio of securities will comprise at least 75% of the Fund and will be aligned to the portfolio of the
Ellerston Australian Share Fund (EASF).
Ellerston Overlay ASF Performance
Gross
Benchmark
Excess
Net
1 Month
2.47%
(1.70%)
4.18%
2.38%
3 Months
10.16%
5.00%
5.16%
9.88%
CYTD
13.60%
8.45%
5.15%
13.22%
FYTD
14.09%
11.15%
2.94%
13.11%
12 Months
13.41%
10.23%
3.18%
12.27%
3 Years p.a
15.51%
14.62%
0.89%
14.23%
Since Inception (p.a) 4 Jan 2012
17.11%
15.95%
1.16%
15.76%
Returns are calculated using the Fund's redemption price and are net of fees and expenses. Returns are also calculated on the basis that distributions are reinvested.
Returns of the Fund may include audited and un-audited results.
The benchmark is the S&P/ASX 200 Accumulation Index. Past performance is not a reliable indicator of future performance.
Since Inception is 4 January 2012.
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
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: ECL0012AU
on corporate profits. Household names like Ford, MMM, LinkedIn and Google all missed analyst expectations, with socialmedia 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%).
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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 share holders accept.
Performance
We are very pleased to report that your Fund delivered a solid performance for the month of April, returning 2.5%
compared to -1.7% for the benchmark. This brings the 3 month return to 10.2%, comfortably outperforming the
benchmark return of 5%.
Key contributors to performance during the month included AWE Limited (+19.6%), Treasury Wine Estate (+8.8%) and
Beach Energy (+9.4%) as well as not owning any ANZ (-7.2%) CBA (-4.9%) or NAB (-4.6%).
Key detractors to the performance were overweight’s in Medibank Private (-4.7%), IAG (-4.8%) and Resmed (-13.2%), as
well as not owning any Origin Energy (+12.6%), Santos (+16.3%) and Oil Search (+12.4%) which all rallied during the month.
Stocks Held
-0.20%, MPL ██████████
-0.15%, IAG ███████
-0.14%, RMD ███████
-0.05%, GWA ██
██████████████████████████████████████ AWE, 0.76%
█████████████████████████████████████ TWE, 0.75%
████████████████████████████████████ BPT, 0.72%
█████████████████████████ GNC, 0.50%
██████████████████ NUF, 0.36%
Stocks Not Held
-0.12%, ORG ██████
-0.08%, STO ████
-0.08%, OSH ████
-0.07%, TCL ████
-0.07%, NCM ███
███████████████████ ANZ, 0.38%
████████████████ CBA, 0.32%
█████████ NAB, 0.18%
███ BXB, 0.05%
██ RHC, 0.03%
Activity
By far the biggest change during April was to take massive profits and sell down the only bank the Fund currently owns (at
all-time highs) which is Westpac (WBC). We have now positioned the Fund significantly underweight WBC for the first time.
As we have been saying for some time, we believe the Bank upgrade cycle has come to an end. There are signs that we are
at the tipping point given impending regulatory change will mean ROE’s have arguably peaked, capital generation is
weakening, BDD’s have bottomed, costs are going up and investors have been mispricing the likely downside risk.
At month end, the Fund’s WBC holding was down to 3.2% compared to 7.9% at the start of the year.
We also significantly reduced the exposure to General Insurance by totally exiting our Suncorp (SUN) holding and by also
culling the position in IAG. Following severe storms/hail in Queensland and NSW, we felt that it was prudent. SUN had
already breached its natural peril allowance even before these recent events and there was a growing risk that IAG would do
the same (which actually came to fruition). The prospect of SUN cutting its dividend will have increased following recent
unfortunate weather patterns. Increasing competition in personal and commercial lines, pricing which may have peaked,
rising claims and low interest rates could potentially push insurance margins back to mid-cycle levels, so we decided to
change tack and take profits.
We also took further profits in Aristocrat (ALL), which continues to rally - the stock has been an amazing performer.
Similarly, we took profits in Tabcorp (TAH), which has also been a tremendous performer. We still like TAH’s defensive
nature, solid yield and willingness to return capital to shareholders, coupled with its effective digital/mobile offering and
Ellerston Overlay ASF – Monthly Newsletter
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strategy, however the potential medium term headwinds regarding rising race field fees prompted us to take more money off
the table.
Following on from last month, we continued to strengthen the Fund’s recently acquired Orica (ORI) holding, along with
Treasury Wines (TWE), QBE and Super Retail Group (SUL), where we see a better medium term risk/reward payoff.
Strategy & Outlook
Outside the key reporting periods of February and August, May has typically represented the peak month of company
earnings updates given firms generally have greater clarity around trading conditions into their year-end. Since 2007, more
than 20% of ASX 100 industrials have seen a consensus earnings change of greater than +/-5% during the month of May.
Historically, revisions have been skewed to the downside, with 12% of stocks being downgraded and only 8% upgraded,
according to the GS data base.
Consensus still expects a stronger 2HFY15, yet we continue to remain sceptical. Expectations for a stronger 2H seem
optimistic given there is little evidence of a broad-based recovery in economic activity. The pickup in non-mining GDP growth
seems to have dissipated and to date, the RBA’s solitary rate cut (to the end of April) appears to have done little to offset the
negative impacts of falling commodity prices and weak investment.
In addition, the recent positive momentum in the housing and retail sectors appear to have stalled. The weakness in the
Australian Dollar should add c.2% to 2HFY15 Industrial EPS, but geographic exposures will be relevant (with the $A/US$
12% lower vs. 1H, but circa 3% higher against the EUR).
Apart from the changes detailed in the activity section, our strategy remains broadly the same as last month. We would not
rule out the prospect of a short term correction in the market during this key reporting period led by the Banks and other
heavyweights like Woolworths.
The proverbial adage "sell in May, go away" might well apply this time around.
Consensus EPSg: FY15 now flat; FY16 at 2%
14%
EPSg
12%
FY17 = 10.3%
10%
8%
6%
FY14 = 5.6%
4%
FY16 = 2.0%
2%
0%
FY15 = -0.7%
-2%
2014
2015
Source: Morgan Stanley
Ellerston Overlay ASF – Monthly Newsletter
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2016
2017
Core Holdings
Active Sector Exposure*
Aristocrat Leisure
Orica
Beach Energy
QBE
15%
10%
5%
BHP Billiton
Rio Tinto
Graincorp
Tabcorp Holdings
0%
(5%)
(10%)
Treasury Wine Estates
(15%)
(20%)
Asset Class Exposures
Effective Cash
100.0%
Utilities
Grand Total
Telecommunication Services
27.9%
Real Estate
Effective Cash
Other (inc Index Hedges)
(23.7%)
Materials
Short Option
Information Technology
0%
Industrials
Long Option
Health Care
95.8%
Financials
Equity
(25%)
Energy
Net
Consumer Discretionary
Exposure (% NAV)
Consumer Staples
Medibank Private
* Active sector exposures are determined by subtracting fund sector weights from
benchmark weights. Positive percentages represent over-weight sector exposures
relative to benchmark and negative percentages represent under-weight sector
exposures relative to the benchmark.
Size Comparison Chart vs ASX 200
Size Comparison Chart vs ASX 200
Active
0.5%
ASX 200
0.0%
11.9%
6.1%
10.9%
18.1%
38.4%
20%
17.4%
14.2%
28.7%
40%
27.5%
Portfolio
60%
0.5%
65.6%
80%
-3.1%
0%
-20%
-36.8%
-40%
-60%
Top 20
Ellerston Overlay ASF – Monthly Newsletter
21 - 50
51 - 100
5
101 - 200
201 - 300
About the Ellerston Overlay ASF
The Fund aims to achieve its performance objectives by adopting a fundamental
“bottom-up” investment approach to stock selection whilst delivering additional
income where possible, through option strategies.
Because of the nature of the strategy, at least 75% of the Fund’s exposure is aligned to the portfolio of
the Ellerston Australian Share Fund.
The Investment opportunities for the Fund are identified by analysing and understanding the factors
affecting (amongst other things): business model, industry structure, management team and overall
valuation.
Ellerston Capital typically favours businesses that can sustain high returns or improve their return on
capital and looks to invest in businesses with a market value below the value we attribute to them.
Benchmark weightings do not drive our stock decisions; our approach is totally benchmark
independent.
Fund facts
Strategy Funds Under Management
$691 Million
Funds Under Management – Overlay ASF
$48 Million
Application Price
$1.1326
Redemption Price
$1.1270
Number of Stocks
20
Inception Date
4 January 2012
Note: Unit prices reflect Class A only.
DISCLAIMER
This newsletter has been prepared without taking account the objectives, financial situation or needs of individuals. Before making an investment decision about
the Ellerston Overlay ASF (Fund) you should read the Fund’s Information Memorandum dated 11 January 2012 which can be obtained by contacting
info@ellerstoncapital.com and obtain advice from an appropriate financial adviser. Units in the Fund are issued by Ellerston Capital Limited. This information is
current as at the date on the first page. The inception date for the Fund is 4 January 2012.
This material has been prepared based on information believed to be accurate at the time of publication. Assumptions and estimates 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 a reliable indicator of future performance.
Ellerston Overlay ASF – Monthly Newsletter
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