It was a quarter of recovery for the worst performing companies during August’s reporting season. With long beaten down sectors like Consumer Discretionary, Financials and Energy leading the market, and the Model Portfolio upwards. There were consistently strong returns and few major detractors in another difficult period for markets. Yet, after a strong start to the financial year, the bond proxies weakened in September, likely the result of profit taking and a general preference to move more capital into lower risk investments following a weaker Australian GDP result. This has since been reversed as volatility increased in October.
AMP Ltd (AMP) was one of the standouts for September, with the new-CEO closing out the retail portion of the recent capital raising adding $134m to the wealth management conglomerates balance sheet. Yet it was a combination of good news from the groups AMP Capital business and a hard line in the banks negotiations with aligned advisers that supported the share price. AMP Capital head, Adam Tindall, reported assets under management at the group had ballooned to over $200bn as the global demand for real assets like infrastructure, airports and electricity grids shows no signs of slowing. AMP Capital is highly regarded and trusted in this sector. This follows the division contributing 35% to earnings for the financial year and recording a five year growth rate of 16%. The company remains well positioned as the global ‘search for yield’ continues with institutions and pension funds not willing to lock away capital in negatively yielding bonds.
Boral Ltd (BLD): In a similar vein to AMP, BLD recovered strongly during the quarter, quickly making up the losses following management’s lowering of growth expectations in 2020. The company presented to shareholders and brokers in the US, reporting better than expected supply of fly ash with both prices and margins forecast to improve in 2020. The company also suggested volumes in their US windows and trimming products are improving as the consumer rebound sees an improving outlook for the residential property market. This was also reflected in building approvals spiking 7.7% in August, following an 8.4% gain in July, well above expectations of closer to 3%.
Santos Ltd (STO): STO was a direct beneficiary of the attacks on the Saudi Arabian oil production facilities. However, any rally is likely to be short-lived as OPEC increase supply and it has become evident that the damage was not as substantial as initially reported. The major driver of STO’s profit and share price in the years to come, now that the debt problems have been removed, will be the trajectory of the oil price. The biggest driver of the oil price is generally the level of global trade and economic activity, both of which are showing signs of slowing due to the US-China trade impasse. When combined with increasing pressure on Government’s to take action on climate change, there is no doubt that oil will become increasingly volatile and remain as cyclical as ever.
Orbis Global Equity Fund (ETL0463AU): After an extended period of underperformance, Orbis showed signs of improving, adding 2% for the month of September. The firms strategy has always been about buying companies that are unloved, or the contrarian view to the rest of the ‘market’. This is often confused as being ‘deep value’ or oversold assets, but rather expands to include misunderstood or ignored companies. As highlighted previously, transport consolidator XPO Logistics, which had been subject to a short selling attack, has begun to recover after expanding their service offering into warehousing and logistics for the likes of JD Sports. This is an increasing important sector for consumer facing businesses seeking to improve cost and delivery efficiencies. The largest holding in NetEase, which is a Chinese IT business offering massive multiplayer only games also recover strongly after some weakness in August. Finally, Nasper’s whose largest investment is a 30% stake in Tencent, rallied strongly following the demerger of its investment business. The holding in Tencent had traditionally traded at a substantial discount but it’s separation into a separate entity has seen this almost completely removed, rewarding patient shareholders.
Antipodes Global Fund (IOF0045AU): Along with Orbis, Antipodes experienced a difficult 2018-19 financial year, but for differing reasons. Antipodes is a long-short strategy, that allows the portfolio managers to both buy and sell short individual companies. Through this flexibility they can substantially reduce the level of exposure to global sharemarkets and do so regularly. The managers do this because they are seeking to generate a positive return in all environments, not simply to match the more volatile benchmark index. In the case of Antipodes, management reduces the market exposure to just 50% during December 2018 and only slowing increased it in the 10 months that have followed, missing out on the strong, albeit difficult to justify returns. The fund recovered strongly in September due to a large holding in Samsung Electronics, which benefitted as semi-conductor sales improved once again and Pharmaceutical producer Roche Holdings, which benefitted from a move back into defensive companies following further monetary stimulus announcements.