It was a mixed month for the Wattle Model Portfolio, as the core domestic holdings benefitted from a Liberal National Party election victory, but the global managed fund exposures were impacted by increasing trade war concerns towards the end of the month. The ASX outperformed it’s global peers for the month, bucking the correction trend due primarily to many income seeking investors returning to the market following the positive result on franking credits and the expectation of several rate cuts to come. Whilst we don’t believe that rate cuts should be the first point of action, it seems inevitable they will be moved, offering opportunities in markets for at least the next 6 to 12months.
The Model Portfolio bucked the trend of most benchmarks, including both union funds and corporate super, delivering a positive return in a generally negative market. This was due to our focus on undervalued, defensive but profitable companies exposed to the few growing sectors in the economy, including the Boral, Ramsay and Telstra. The strongest sectors in the quarter were Communications, as the TPG-Vodafone merger was denied, and Telstra announced further progress in its transformation. Materials benefitted from Fortescue’s special dividend and continued strength in iron ore prices, whilst Energy was hit by weakness in the oil price. Healthcare and Financials both benefitted from the election result, as the potential cap on health insurance premium increases supported the continued volume growth in private hospital admissions. Unfortunately, the global technology stocks and anything exposed to the China-US trade war were hit, yet we remain confident of a final positive outcome before the end of 2019.
Orora Ltd (ORA): The bottle and cardboard box manufacturer had experienced a poor start to 2019, as signs of a slowing US economy impacted the outlook for their growing US business. The share price began to turn as the Federal Reserve put rates on hold and both consumer sentiment and retail sales in the US showed signs of improving. The company has been acquiring numerous business in the retail marketing space in the US and spending substantial amounts on both innovation and energy efficiency within their business. Management announced that they expect earnings to be above FY18 but highlighted a slightly slower than expected start to 2019. They noted the US operations were improving in March/April which bodes well for the close of the financial year. Input costs continue to place pressure on the bottom line, however, purchase agreements for renewable energy supply are offsetting the increased cost of Kraft paper and starch. The company will benefit from the weakening in the AUD and the extraction of synergies from the purchase of Pollock and Bronco Packaging in Texas, which fit the same business model as Australia.
Ramsay Healthcare Ltd (RHC): Ramsay was one of the immediate beneficiaries of the election result, as the business relies on private insurance premiums to fund some 80% of their domestic procedures. The Labor Party had proposed a 2% annual cap on insurance premium increases which the market had assumed would lead to lower revenues for RHC. Right or wrong, the policy was not successful and no cap has been applied. After finalising the acquisition of Capio in Northern Europe, the company now manages some 480 global facilities in 11 countries and employs 77,000 people. Recent data from the UK’s NHS indicated Ramsay’s volume growth is on the improve with operations further supported by the first increase in tariffs in both the UK and Europe in many years. The companies deal with Baxter Healthcare for the bulk purchase of infusion pumps whilst small on its own, indicates the purchase power and cost benefits afforded by its scale. At the end of the month, long-time CFO Bruce Soden made the decision to step down after 31 years.
Qube Holdings Ltd (QUB): The integrated logistics and transport business, Qube, announced the acquisition of mining services business LCR Group during the month. The acquisition was made to allow Qube’s other operating divisions to deliver additional services, including existing customers in heavy transport, mining and mobile crane businesses, with an increasing focus on renewable energy. The business came at a cost of $135m and was funded from undrawn debt facilities, it is unlikely to have a material impact on profits in the short term.
GAM Absolute Return Bond Fund (AFM0002AU): GAM announced the payment of a further 9% of the remaining capital at the beginning of May, taking the total capital return to 80% of that invested. We understand that management have also agreed to sell the remaining assets to an external party at their cost price with the deal expected to be settled in July/August of 2019.
Plato Australian Shares Income Fund (WHT0039AU): The Plato fund was recommended to provide an overweighting to high yielding, fully franked dividend paying Australian companies in the lead up to the Federal Election. In May, investors benefitted from both the announcement and completion of a number of special dividends and buy backs as well as the success of the Liberal Party. The fund benefitted from the Woolworth’s and Caltex buy backs, renewed strength in the banking sector and special dividends from Rio Tinto, Fortescue and BHP. The fund delivered an income of 15.1%, that’s correct, for the 12 months to 30 April, losing 0.8% in capital, but still outperforming the ASX 300 by 2.1%. Whilst the flow of special dividends and buy backs is likely to slow, we continue to see substantial value in this specialist income and franking due to the exposure it provides to the less volatile, more defensive businesses in the Australian economy.