Around the markets

As highlighted earlier, the Latitude Financial IPO failed to get off the ground for a second time during the month. In a sign that fund managers are becoming more cautious of accepting any investment that comes to market, the company dropped its price twice before cancelling the float completely. The company offers loans through Harvey Norman and JB Hi-Fi as well as the popular 28 Degress Mastercard. Throughout the process brokers suggested the bid, or demand, for shares was oversubscribed yet investors were obviously concerned about the quality of their loan book in a weaker economic environment.

Elon Musk stunned the doubters as Tesla delivered a $143m profit in the third quarter of 2019. This defied consensus expectations of further losses and came as the company continues to cut costs, improve efficiencies and delivery more and more cars. The company lost over $1bn in the first two quarters but has now successfully commission it’s Shanghai factor, and delivered 97,000 cars in the third quarter. Shares were up 20%, seeing Elon’s fortune increase $2bn.

The airline and airport sector appears to be coming under pressure as consumers rein in spending. Sydney Airport announced that domestic traffic was down 1.1% on the previous year, while international traffic was up just 0.5% on prior and 1.4% year to date. Qantas, on the other hand was punished after a weaker than expected third quarter on the back of declining domestic travel. Jetstar earnings fell 2.6% due to issues in Hong Kong, whilst international travel remains strong, up 4.4%, albeit due to capacity constraints and higher charges. Interestingly, Qantas has teamed up with its competitors to push the Federal Government to more closely regulate the Airport charges that form the majority of SYD’s revenue.

Australian technology and broker darling, Wisetech Global, was called out by J Capital Research during the month. The previously unknown research house accusing the company of inflated profits and seeking revenue growth through questionable acquisitions. As usual, the claims were flatly denied by management, but the shares have since fallen around 30%.

October is the Annual General Meeting season where most companies either reiterate their previous forecasts, or announce weaker than expected first quarter results. The trend this quarter was for profit downgrades:

  • Flight Centre CEO Graham Turner announced that underlying profit in the first half of 2020 would be below that of 2021, as both leisure travel slowed and costs increased.
  • Baby Bunting issued a trading update in which comparable store sales of just 3.1% disappointed the market, but were blamed on the launch of a new web platform. The company is struggling to benefit from various competitor store closures and heavy discounting, by reiterated profit of $20m-22m.
  • After being one of the standouts during reporting season Nick Scali Furniture came back to the pack, announcing that store traffic was down 10-15% as the property slowdown began to hit. The result was a substantial profit downgrade, to $17-19m, from $25m in 2019.
  • Cochlear, which makes in-ear inserts, reiterated FY20 guidance at 9-13% growth, but reduced the Earnings per Share growth triggers in the incentive scheme for executives, which shocked the market. The change reflects a weaker than expected growth outlook, without adjusting their own profit guidance.
  • The biggest disappointment by far was the continued deterioration of earnings at Costa Group. The company is a diversified agricultural production business with monopoly like positions in various sectors like raspberries, mushrooms and citrus in Australia. The company announced that their core production and pricing had continued to worsen and announced a capital raising to assist in paying off debt. It’s becoming increasingly evident that agricultural companies are best suited to unlisted markets given the savage reaction o what is a cyclical company.

Around the markets

Smart Group (SIQ): This small cap darling delivered a better than expected result for the financial year, reporting an increase of 2% in revenue to $125.8m and a 5% increase in net profit to $40.5m. Whilst not high level growth numbers on their own, the fact that they came during an incredibly difficult period for new car sales was seen as a substantial positive by the market. Smart Group is a salary packaging and vehicle leasing specialist, dealing with employees of non-profits and public hospitals as well as many for-profits that offer leases on business vehicles. There was substantial concern that the weakening economy and slowing property market would hit the company much harder. The company continues to benefit from recent acquisitions in a fragmented industry and is boosting margins through cross selling of their various packaging products. The company rallied strongly after the result and is one the core holdings in both the Pengana Emerging Companies and Lennox Australian Smaller Companies Fund.

A2 Milk Ltd (A2M): This high growth company hit a speed bump during the month, falling from a high of $17 to $13.5 at the time of writing. The company announced a strong profit result, increasing 47% to $287m on the back of 41% growth in revenue to $1.3bn; yet with success comes greater expectations. The market was disappointed by the result as management highlighted tighter margins due to an increase in marketing and advertising spend. The group also faces a double hit in their all-important Chinese market with several announcements that the Chinese plan to take control of their own milk powder sector and the move away from daigou shoppers to a more consistent business model. The company now trades on a multiple of 35 times earnings and a market cap of $10bn with little more than an excellent brand to support this.

Alumina Ltd (AWC): Another lesson in why it’s important not to follow the crowd when it comes to the most popular investment ideas is Alumina. The mining and aluminium smelting company had been touted by many of the most popular investment newsletters as a great dividend payer and must have stock. After being the highest dividend payer in 2018 yield hungry investors flocked to the commodity stock under the pretension it’s dividend was secure. Yet their FY19 results made for difficutl reading, with revenue down 12% and profit down 26% as aluminium prices continued to slump which resulted in a 49% cut in the interim dividend. The stock is now trading at close to three year lows.

Speedcast International (SDA): After ending the financial year at around $3.50 SDA has hit all-time lows of just $0.76 cents. The company, is a leading satellite communications service business, offering connections to remote areas and maritime vessels had been lumped in with the Australian technology sector and benefitted via a substantially higher valuation. The company has seen a double hit after warning of a substantial writedown of recent acquisitions in July and then delivering a 33% drop in net profit for the financial year. The roll up and consolidation strategy does not appear to be working to the disappointment of key shareholders Australian Super, UBS, Lazard and Norges Bank.

Around the markets

Facebook shrugged off its record setting privacy fine to deliver revenue growth of 28% to $16.9bn for the quarter and a profit of $2.6bn

In this section we look to provide an update on newsworthy events that have occurred with investments that don’t necessarily meet our requirements today, but which we believe should be of interest to investors and readers.

Reporting season predictions: The reporting season begins in August with the majority of companies reporting full year earnings. As usual, the predictions are coming in thick and fast, so we have summarised some of the initial views:

  • Marcus Padley expects any businesses associated with the iron ore, oil and gold sectors will be standouts. Followed by businesses with substantial offshore operations, particularly those exposed to the USD. Whilst highly leveraged infrastructure plays will have benefitted from every lower interest rates. On the negative side he suggests investors avoid anything exposed to the struggling Australian consumer, but particularly discretionary spending, housing, car sales and coal.


  • Macquarie’s research team share similar views with positive outlooks for Fortescue, on the back of Vale continued troubles in Brazil, and Charter Hall property group. They see value in mining services business Worley Parson and dairy producer A2M but believe the CBA, South 32 and Cochlear are set to disappoint.


  • Morgan’s broking shares the view that A2M will continue its stellar run, with Medibank Private, mortgage broker Australian Financial Group, AP Eagers and Megaport all to outperform. There is a decidedly smaller company focus. They believe Bellamy’s, Next DC, Flight Centre, Coca Cola,, AGL Energy and Woodside are poised to disappoint.


Speedcast International (SDA): The company that specialises in offering satellite communications to various industries around the world delivered another shock downgrade, with earnings likely to fall between $140-150m from previous expectations of $160-$170m. The reaction was substantial, as can be expected from a high growth, smaller company play trading on an inflated multiple.

Facebook: Facebook shrugged off its record setting privacy fine to deliver revenue growth of 28% to $16.9bn for the quarter and a profit of $2.6bn. This included a $2bn impairment for the $5bn fine but importantly the company is growing at twice the rate of the internet advertising market. The company reported that 1.59bn accounts used Facebook daily, up 8% on last quarter, suggesting the platform isn’t dead yet.

Hub 24 (HUB): Hub 24 suffered after a research report released by a Macquarie Bank analyst suggesting the company was paying negative returns on it’s cash accounts. Further, they believe that falling interest rates and competition are cutting the margin that these platforms make on their bank accounts. The company responded with a public announcement to the contrary, noting that applying platform fees solely to a cash balance is not intuitive nor an appropriate assessment and confirming that most investors keep the balance of their cash accounts low preferring to use one of the many term deposits or fixed income funds available on their platform.

Netflix (NFLX): The disruption darling delivered one of the weaker announcements of the US reporting season with global user growth of 2.7m well below the 5.0m previously forecast. The last time Netflix added this few subscribers in a quarter was back in 2016. The company lost some 130k subscribers in the US and as has always been the case there is no cost to change, so this worrying trend resulted in a double figure drop in the share price. Revenue was still up 26% year over year to $4.92bn but the company remains cash flow negative as it seeks to monetise its huge subscriber base and invests in expensive content.

Microsoft (MSFT): Microsoft was the highlight of what has been an otherwise downbeat earnings season announcing better than forecast revenue and profit results for the quarter. The highlight was the Azure cloud business, sales for which rose 39% from a year earlier to $11bn at the same time the profit margin increased to 65%. The online version of Office, titled Office 365, saw sales increase 31%. All this was enough to see the stock move past it’s all-time high.

Around the markets…

In this section we look to provide an update on newsworthy events that have occurred with investments that don’t necessarily meet our requirements today, but which we believe should be of interest to investors and readers.

Macquarie Group (MQG): Unexpectedly announced it would be moving into the mobile telecommunications game. The company has established a business called Nu Mobile, that focused on offering mobile plans that come with used handsets. The move appears to be focused on cost conscious consumers who may not necessarily be able to afford the huge price increase on the latest iPhones and increases competition in an already cut throat market. The service will be delivered on TLS’s network and interestingly Macquarie already owns some 1m handsets which is leases to other providers; so another string to the bow of this diversified investment bank. The move is not expected to be material to profits, and broker remained concerned about valuation, with 3 buys but 4 holds.

Wesfarmers Ltd (WES): After attempting a hostile acquisition of rare earths miner Lynas Corp and being rebuffed, WES continued it’s hunt for an entry in the battery and energy storage market, offering a $776m takeover offer for Kidman Resources. Kidman owns a number of lithium projects in Australia, with WA’s Earl Grey one of the biggest in the world, and has a joint venture agreement with SQM the largest lithium producer in the world. Management appear to be pivoting to what they know best in the world of commodities and attempting to get into the battery boom after a recent lull in takeover activity. Whilst the brokers are positive on the diversification strategy, they have concerns about Bunnings withstanding a housing slowdown and the consensus is a hold, with 5 brokers, and 2 suggesting a sell.

Technology One Ltd (TNE): The small cap manager darling Technology One, which offers custom enterprise software to businesses, suffered after an unexpected downgrade. That downgrade was to earnings growth of ‘just’ 45% for the year, however, greater concerns came from the lower than expected profit result, some 10% off expectations. The market is becoming difficult for companies priced like TNE, which still trades on a 42x P/E earnings ratio, but remains supported by small cap specialists like Pinnacle and Hyperion. The brokers have turned negative with 2 sells and 2 holds.

Fiat Chrysler and Renault: The two global automotive giants announced they were in discussions for a merger of their businesses, which triggered a rally in European markets. The combined entity would own Ford, Fiat, Renault, Citroen, Alfa Romeo and Jeep among other brands. Interestingly, once combined that behemoth would be worth only the same as Tesla despite making thousands more cars each year.

AP Eagers Ltd (APE): Appears to be finalising its takeover of AHG or Automotive Holdings Group after lifting their all share offer to around $2.3bn. The company will become a huge player in Australia and NZ with 229 new car dealerships and 12% market share. The board of AHG has recommended the offer.

Westpac Banking Group (WBC): Westpac reported a somewhat messy result with margins declining and earnings falling by 1.5%. Whilst mortgage re-pricing, or higher interest rates charged to customers, helped to support the bottom line it wasn’t enough to offset $1.1bn in remediation costs. The poor performance of WBC has been put down to its higher than market share of the interest only section of the market, which is seen as being higher risk. WBC of course benefitted more than its competitors from the property boom, and is no doubt more exposed today as a result. The dividend was maintained, however, the pay out ratio is looking stretched particularly in light of a full year fall in earnings. The brokers are mixed with 2 buys, 3 holds and 3 sells.

Adelaide Brighton Ltd (ABC): ABC announced an earnings downgrade that we had previously flagged on the back of their large exposure to the residential housing sector. That being said, the share price bounced back quickly following the Federal Election on the hope that the market will stage a recovery under Morrison’s status quo approach. Management announced a 10-15% fall in 2019 earnings due to the downturn in NSW and Victoria where it has its largest exposures. Earnings growth has likely been put on hold given the more competitive environment, however, the appointment of Raymond Barro, as Chairman may see speculation of corporate activity increasing. The brokers are wary with 4 holds, 2 sells and 1 buy.

Blue Sky Alternative Investments Ltd (BLA): BlueSky finally capitulated in May going into receivership, after the operating business breached covenants on the $50m convertible notes (or loan) provided by Oaktree Capital in 2018. Oaktree is the world greatest distressed debt investors, so the decision was likely based around taking control of the company to extract the best assets and performance fees from the underlying investments. Alternatively, Oaktree may see this as an opportunity to enter the Australian market at a very low price, given the reach that BlueSky has in the SMSF and institutional space. It’s a disappointing result given the majority of Blue Sky’s underlying funds including private equity, water and venture capital are actually performing ahead of expectations. Importantly for investors, each of the underlying funds is operated as a stand-alone entity and will not be impacted by this change. The Private Equity and Venture Capital divisions are independent subsidiaries with their own financial service licenses, earnings and employees.

Market Update

“A pessimist sees the difficulty in every opportunity, an optimist sees the opportunity in every difficulty.”

Winston Churchill

We thought this quote was appropriate  given  the   position of both geopolitics and globalasset markets, but also when applied to the proposed changes to Australia’s taxation system. There is well-founded concern about the implications of the proposed removal  of franking credit refunds, yet rather than dwelling on the problem, we have been and continue to pursue opportunities both in Australia and around the world. This quote also delves into the heart of our investment approach, in that with volatility comes opportunity, but generally most  people  are too pessimistic or uncomfortable to make what will become the most profitable investment decisions. There is every reason to believe that an inevitable crash will occur at some time in the future, yet this pessimistic view results in inaction or a poorly constructed investment strategy.We thought this quote was appropriate  given  the   position of both geopolitics and global

Franking Credits & Investing for Income

As you would expect, many of our discussions with clients have been focused on concerns surrounding the proposed Labor Party policy to cut the refund of franking credits, which will apply to anyone not receiving an Age Pension. As a first step, it’s important to stress that there is a low probability that markets or individual shares will fall substantially following a Labor party victory. This is due to a number of reasons including:

  • The substantial portion of major Australian shares owned by foreign institutions that already have no use for franking credits;
  • The majority of Australia’s largest investors, particularly institutions and pension funds will still receive the full benefit of the franking credits as a deduction against their income tax, meaning it is unlikely their portfolios will change;
  • The increased involvement of pension funds in what has been the DIY investor dominated preference share sector, with Uni Super’s $200m bid for the latest NAB preference share a perfect example;
  • It is likely to be the major listed investment companies (LICs), which pay investors consistent fully franked dividends by virtue of paying tax at the company rate that feel the brunt of any volatility as opposed to managed funds, which are structured as unit trusts and simply pass the associated income onto the
  • The fact that the Labor Party first must win the Federal Election with a sufficient majority and secondly, require the support of the Senate to pass the proposed legislation.

There is no doubt the implications for those receiving franking credit refunds will be substantial, yet we believe the legislation is unlikely to be approved in its current form with a cap on refunds the more likely result.

The proposed change and concern around income levels has lead us to important discussions around the income needs of investors and the ability to produce the required income in an ultra-low interest rate environment.

Whilst the proposed change will have a substantial impact for some, there is no simple solution to replacing this lost income should the legislation pass. For instance, consider the dividend currently offered from Westpac Banking Corporation shares (WBC), which is around 7.2% before franking credits are applied and 10.3% after. There are very few assets around the world that offer yields of 7.2%, let alone 10.3% without requiring the investor to take on a substantial amount of risk. Potential examples include mezzanine construction debt, unsecured personal loans, highly leveraged property or even Turkish (14%) and Russian (8%) Government bonds. Investments of this risk level are simply not suited those in or saving for their retirement in most cases.

So with an increasing income required to be drawn from superannuation, but lower interest rates, less franking credits and slower economic growth, the question of sustainability has come to a head. Investors can simply not expect to achieve an income of 6, 7 or 9% without either taking an extreme level of risk or giving up either the potential for capital growth, or capital in its own right.

We have always believed that the more appropriate strategy in this environment is for investors to seek total returns, from both growth and income, rather than focusing solely on income. The Australian market will eventually mirror the US, where more businesses reinvest their profits, or undertake share buybacks, and dividend pay-out ratios are closer to 30-40% rather than the 70- 80% they are today. We have already seen the implications of companies paying out the majority of their profits in dividends, becoming akin to a bond or term deposit, whereby their share prices simply stagnate.

At this point it is important for those investing through superannuation to keep in mind that the entire system was set up to ensure that your superannuation balance is withdrawn overtime so that it eventually becomes taxable. It was not intended as an estate planning tool, hence why the minimum pension payments increase regularly as you age from 4% to 5% at 65 and reaching a maximum of 14% in your 90’s. That does mean you should not seek to maximise your balance through sound investing and strategic advice.

Investment Committee Minutes

The Australian reporting season was quite poor, with increasing input and compliance costs crimping profit growth which fell 5.5% for the 136 companies that reported. Yet even as the Australian economy continued to weaken, with GDP growth of just 0.2% and retail sales of just 0.1%, the ASX staged a remarkable recovery, finishing up 10.89% for the quarter. This suggests that investors are willing to pay more for less earnings than were available before reporting season. Every sector in the ASX 200 delivered a positive return with Consumer Staples (5.15%) and Healthcare (6.28%) the weakest. The theme of the season was the increase in ‘capital management’ by boards who announced a substantial amount of special dividends, off-market buy backs and returns of capital to investors. This was particularly so in the mining sector, who after investing at poorly at the top of the market have elected to return capital rather than reinvest in their businesses.

The rally was  spurred  on  by  a  rebound in global risk taking as the US Federal Reserve indicated  it  was  putting   rates on hold, the  Bank  of  Japan  continued its market intervention, the European Central Bank re-commenced its lending program and economists began to predict rate cuts in Australia. The best performing market around the world was the Shanghai Composite (20.09%) after being sold off heavily in the December quarter. Around the world markets are being driven primarily by monetary and fiscal policy decisions, with the latter becoming increasingly important amid a slowdown in global trade. Both the US and China have announced or passed substantial tax reform packages, with various members of the EU and even Australia to follow. The Australian economy remains as reliant as ever on the Chinese to take our exports, with the current 34% under threat following recent bans on coal imports at a number of Chinese ports. It was the Chinese who helped our economy survive the Global Financial Crisis, by spurring the mining boom, they then assisted in the transition to our residential construction boom, but are there any booms left for Australia? The latest GDP figures suggest the growth sector of the economy in 2019 and looking forward will be Government spending, as fiscal policy comes to the fore at a time when the RBA is too worried about stoking house price growth through an interest rate cut.

Looking forward, forecasts for global growth continue to be cut as an overleveraged developed work copes with the threat of an overleveraged or less tan confident consumer and an ageing population. The emerging economies continue to support global trade figures, particularly India and China, but will this be enough? We don’t subscribe to the ‘late cycle’ theory nor the importance of a ‘per capita recession’ in Australia as these are simply economic terms based on backward looking information. At this point, we expect the global economy to keep tracking along at slower than historic levels, but with a great deal of transition and volatility. This was exhibited during reporting season where some 40 companies saw their share price move in excess of 10% when they reported and at least 10 moving by more than 20%. Companies are continuing to adjust to this outlook, with a combination of historically low interest rates, weak productivity gains, ageing demographic and slower economic growth contributing to weak income growth across the world.

We continue to stress the benefit that you have as a self-directed investor, being the ability to control the investment of your capital. You do not need to rush into making decisions, nor do you need to be fully exposed to sharemarkets at all times or forced to invest new contributions into expensive assets as soon as they are received (as is the case with many popular industry funds). You can own any asset you like or hold cash and wait for markets to fall before deploying it

After the worst quarter for markets in close to decade, almost every major  market  recovered strongly in the first quarter of 2019; in fact the S&P 500 posted its strongest quarter since 2009. The ASX 200 rallied 10.9%, supported by the mining (17.8%), technology (20.7%) and communications (16.9%), all of which had fallen heavily in the previous quarter. We also saw a rally in bond proxies including utilities (11.6%), property (14.7%) and industrials (11.7%). Following the trade truce in February, the Shanghai Composite (20.1%), S&P 500 (13.6%), Nasdaq (16.5%) Nikkei (5.9%) and European CAC 40  (13.1%) all delivered similarly solid returns. The performance was supported  by  an about face in central  bank  policy  around  the world, however, the threat of slower growth saw some weakness in  the  final  week of March. The Model Portfolio had delivered an extremely strong quarter, with just three investments delivering a negative return, that being AMP Ltd (-12.03%), Orora Ltd (-2.61%) and the Winton Global Alpha Fund (0.03%). Looking more closely, the Value Bucket (+7.62%) was the standout with its combination of resources, including Santos Ltd (26.90%) and smaller companies, Pengana Emerging Companies Fund (10.08%), benefitting most from the return of the risk on trade around the world. The contrarian Orbis Fund (+7.43%), which seeks highly undervalued companies around the world benefitted from well-timed investments in beaten down sectors, including Facebook and healthcare companies.

The Thematic Bucket  also  performed  well   (+6.22%), with all investments delivering a positive return, but driven by the Asian consumer focused  Platinum  International  Brands Fund (15.14%) as the Chinese Government announced sweeping fiscal and monetary policy. Ramsay Healthcare  (12.96%) reported more strongly than expected, confirming our view that recent weakness was cyclical not structural, whilst the theme focused Munro Fund (6.46%) saw its newest holding, Worldpay, receive a substantial takeover offer. The Income Bucket (+7.11%) benefitted  from  the   perceived   weakness of the Royal  Commission’s  final  report, with investors flocking to the major banks following the removal of uncertainty, ANZ (6.42%) and NAB (4.99%) were the major beneficiaries. Telstra (20.52%) rallied after TPG’s announcement that it would be cancelling the rollout of its  5G  network.  The standout, however, was the franking credit focused Plato Fund (16.27%), which benefitted from record levels of  ordinary  and special dividends announced during reporting season. As expected, the Targeted Return Bucket (2.22%) delivered a positive return, but below that of the higher volatility Buckets, with growth-focused Pinebridge (6.98%) the strongest, supported by an improving Invesco Global Targeted Returns Fund (2.87%). Overall, the Model Portfolio benefitted from the Investment Committee’s preference to invest into what many experts believe to be boring, old fashioned businesses, but which we view as being profitable and exposed to the right sectors of the economy to generate returns in what appear to  be more difficult conditions ahead.

HOT MARKETS – Are always the same!

Hot markets always end the same way …..

How to make sure it doesn’t happen to you

The last few weeks have exposed the glaring problem with momentum and more importantly when self-directed investors succumb to the fear of missing out. There are an increasing number of horror stories from the ASX after a volatile month, but it is those most loved and talked about companies of early 2018 that have been hit hardest. A few particular lowlights are as follows:

  • Technology darling, Afterpay (APT), has fallen 44% from its 2018 high;
  • Amazon competitor, (KGN), has fallen 72% from its high;
  • Sukin Skincare owned, BWX, is down 66% after rebuffing a management buyout;
  • Low-cost jewellery retailer, Lovisa, is down 40% from its 2018 high;
  • Long-short listed investment company, L1 Capital, is down over 30% after floating in

Even though almost every investment book, successful investor and in fact most financial advisers stress the importance of not chasing the hottest stocks or investments, it seems that most people are still prone to doing so. We experience this daily in our own lives as the majority of interest raised from our articles is around the smaller, speculative companies we have covered in the past.

The existence of a bubble in high growth technology companies was obvious, the market was being driven by investors whose sole purpose was to invest in shares that have already gone up. The sealer for us was when we reviewed the recent flow of investment into Australia’s best performing shares. The evidence was clear, retail investors with a fear or missing out, identified by the fact that they generally trade with Commsec or other online brokers, began outnumbering the institutions in the scale of their buying earlier this year. In fact, the majority of institutions and insiders were actually selling down their holdings of Afterpay and Kogan some time ago.

In sharemarkets, but particularly in the ASX where DIY investors dominant in a way not replicating overseas, there is dumb money and there is smart money. Unfortunately, the former tends to be in the hands of those who need it most and who rely on their

investments to fund their lifestyle. It isn’t just in chasing the hottest stocks that DIY investors are prone to lose capital, there are many ways that parts of the financial sector are actually out to get your capital. In the following sectors we look at a few ways to avoid the mistakes that occur in hot markets and provide a sure-fire strategy that will keep you on the right path.

Look out for vested interests

Even though the finance industry is one of the most heavily regulated in the world, it remains rife with vested interests, hidden commissions and strategies aimed at extracting your capital with little concern for how it performs once it invested.

One such example is the proliferation of listed investment companies of LIC’s that have been flooding the sharemarket in recent years. We speak to DIY investors and SMSF trustees regularly and they al seemingly prefer the use of an LIC over an identical managed fund. But why have they become so popular and why are so many being issued today?

Well, the structure of an LIC is a closed end fund, which means there are no redemptions or applications from the underlying assets. On the other hand a managed fund is structured as a unit trust, with units redeemed and issued on a daily basis. Why does this matter? Being a closed end fund means the investment manager will always have the same amount of capital to invest, and more importantly to charge fees on.

Take for instance L1 Capital and its highly touted but poorly performing long-short fund. The associated brokers managed to raise $1.2bn for this LIC, on which they will now receive a management fee of some 1.35%, that’s $16m per year regardless of performance. There is little wonder that the managers elected to return capital to investors in their managed funds.

An additional issue connected with the proliferation of LIC’s is the way in which they are sold to investors. In general, any stockbroker, financial adviser or planner that is recommending you invest in one of these IPO’s or LIC issues, is receiving a commission of between 1% and 2% of the capital you invest. There is little wonder that the list of brokers associated with most IPO’s these days include up to 12 ‘co-managers’ or ‘joint- lead managers’; in the early 2000’s it was only one.

Well-timed product launches

We are amazed on a weekly basis by how quickly the ETF and LIC providers are able to get a product to market when a particular sector or group of companies is popular. In the last few months we have seen ‘disruption’ funds, lithium battery funds, cyber security and before that the famous BEAR fund, that bet on markets falling.

ETF’s and LIC’s used to be highly diversified investments, offering a solid option for less involved investors to gain a general exposure to the benefits of the sharemarket. Unfortunately, they are becoming increasingly specific, more volatile and higher risk. They tend to come to market at the most opportune moment but then consistently outperform, in our view they are not specialists but opportunists, driven by sound marketing but poor investment nous.

In our experience, the issue with these products isn’t their approach, but the patience and process that investors take in buying them; which in most cases is none. Most people are simply attracted to the most popular options, or those supported by well-known names in the investment industry, but give little consideration as to how they form part of a broader portfolio.

Cherry picking fund managers

The most successful long-term investors have several traits in common, but one of the most important has been their willingness to partner with specialist managers around the world. Some of the highest performing funds, including the likes of Australian Super, the Future Fund and Yale Endowment, invest the majority of their capital directly with fund managers. Yet for some reason, the DIY investors of Australia show little interest in following this proven approach.

Many investors we meet are willing to copy the most popular investments that fund managers present on, but not willing to invest in their funds. Why is this? The amount of portfolios we see that contain the best 5-10 picks of the most popular fund managers is simply concerning. The underlying funds that these picks form part of usually include some 30-50 individual holdings with a success rate of 60% each year at the higher end of expectations. Attempting to cherry pick those ideas that you agree with is dangerous, particularly when markets turn. The reasons that most managers are successful is because most specialise in a specific area or sector of their market.

On a separate but related topic, we have been seeing an increasing number of well-known Australian fund managers either expanding into overseas shares or beginning to short companies in their funds. Investing globally requires extensive networks, greater research support and connections, which most domestic specialists simply do not have; it pays to stick with those who have been there for many years before.

Taking advice from journalists

The presence of high profile journalists on our TV screens, in the newspapers and at the hundreds of conferences held each year gives the perception that they know what they are talking about. Yet a quick look back on their previous predictions suggests they would be lucky to know more than most DIY investors. Investors need to be wary that these people are paid to have an opinion on a daily basis, every day they need to say something different. They aren’t paid to make you money, they are paid to sell newsletters and their own products.

One perfect example was the growth in issuance of high dividend, high yield and other similar funds focused on the ASX. This sector is seemingly one that every commentator believes they can deliver returns from, yet performance has shown they cannot, with the majority underperforming the index whilst charging substantially higher fees. Vanguard was one of the few that issued a high yield strategy many years ago, yet they have been joined by an extensive list of ETF providers and experts, like the Dividend Harvester or Australian Income Fund.

When it comes to any type of investment, we suggest investors seek to partner with the best in each sector. These people don’t run newsletters, they run their own funds and invest their own capital.

As the market continues to run hot, the number of higher risk opportunities expands along with it. At the end of this cycle it has been the likes of fractional property investing, corporate bonds and even direct loans to property developers that have gained the most attention. Each of these investments have many benefits that they can offer investors as part of a truly diversified portfolio, yet the risks are too often hidden by those recommending them. As a general rule, if you are being sold something that is being advertised based on it’s yield or performance over the last 12 months, its probably not sustainable.

Anchoring your purchases

One final issue that increasingly impacts on DIY investors ability to make decisions in volatile sharemarkets is the anchoring of the purchase price of their investments. CSL’s recent performance is a perfect example. CSL has fallen from a high of $230 to $180 today; if you owned 1,000 shares you would have lost $50,000 in capital in just a few weeks. Yet most DIY investors will not even consider this as a ‘loss of capital’, they have anchored their investment to the original purchase price of say $30, meaning they are still well ahead of where they started. This is one reason why many investors showed no willingness to sell Rio Tinto at $150 in 2007 nor remorse after it inevitably halved in value.

So, what’s the solution?

It’s actually quite simple and what we at Wattle Partners do on a daily basis. The majority of DIY investors and their portfolios have little to no framework for their investment decisions. They simply add the most popular stocks in what is best described as a hodgepodge of ideas that becomes their portfolio. There is no decision tree, nor investment policy or rules around where they should be investing and when investments should be sold.

We are strong advocates of the need for a tailored and comprehensive Investment Policy being used for the investment of any amount of capital. We are one of the few in our industry actually delivering on it. Many of the investments outlined in this article may in fact be fine, as part of a broader portfolio, however, this is not how they are generally being used. There is an increasing trends of marketing groups going direct to the DIY investor and consumer, resulting in decisions with no consideration to their role within portfolios.

Private Market – Market Place

Primary Markets

More and more self-directed investors are learning an age old secret held tightly by large funds, family offices and industry superannuation’s funds.. ‘Illiquid return premium is real” You see it is commonly known in these circles that a return of approximately 400bps is on offer for holding investments that are not liquid versus the liquid equivalent. Eg. Private Equity verus Public Equity.

Wattle Partners for a long time has had this view and in fact that is what drives the return of the majority of the industry superannuation funds in Australia, upto 40% of the investment they market are illiquid and are the beneficiary of this so-called illiquid return premium.

Most SMSF’s hold only liquid investments, that is investments they can sell or redeem tomorrow, and hardly hold any investments that are not liquid, and as such are not the beneficiary of the illiquid return premium. In many cases it is not just asset allocation that drives returns it is also what type of investments are held.

One of the reasons why SMSF’s don’t hold illiquid investment, and I say one as there is many reasons to why self-directed investors don’t invest in illiquid investments, is deal flow. Eg. The ability to know about specific capital raises, private trusts, syndicates or new companies. If you are not well connected you would never see a lot of these offerings, in fact most are marketed straight to the investors that are away of the illiquid return premium; Family Offices, Institutions, wealthy individuals.

However, more recently there has been a global movement towards offering these type of investments to self directed investors, by creating a market place or a platform.

One such domestic platform that we believe has an excellent offering is Primary Markets. Primary Markets, as the name suggest, creates a market place for illiquid investments. Allowing investors to get access to illiquid opportunities, either for trading of existing illiquid investments, new capital raisings of either start up, expansions capital or IPO’s etc. The team at Primary Markets is headed by Nick Capp

that has a long history in Corporate Australia, with the current chairman being Brett Spork who was the former ceo of E-Trade and a director of Macquarie Bank. The head of Managing Director of Advisory at Primary Markets at James Green, ex head of Paterson Securities. This is a very experienced and knowledgeable team that has been doing similar things in a larger format for most of their career.

The platform has over $1.5billion of private companies on it and has raised or traded over $35million.

We recommend that all Self Directed Investors become a member, Membership is free at Some of the opportunities available on Primary Markets:

Secondary Trading

Multiple parcels of existing shares available for wholesale/sophisticated/accredited investors.


AIRR is a member- based buying and marketing group that supplies its rural and peri- urban customers with a range of rural merchandise and animal feeds. These customers comprise members, who account for approximately 70% of sales, and wholesale customers. AIRR is not a franchise group. It is a buying group that offers its members buying power and the ability to compete by passing on the benefits of volume purchasing and a way    of increasing a members’ product range without the need to invest in inventory. With a network of eight warehouses nationally and stocking approximately 6,000 Stock Keeping Units (SKUs), AIRR is a one stop distributor. AIRR also has its own brands; Apparent (crop protection), and Independents Own [iO] (animal health, general merchandise and feed).

Key points

A long track record of profitable growth — AIRR has continued its long track record of profitable growth with a 12.6% increase in NPAT in FY18. This was the fifth consecutive year of profitable growth for the company following a dip in profitability in 2013 which was the only year of negative growth for the company in almost a decade due to a dry summer. CAGR in EPS from 2010-2018 was 20% while 2010-2018 DPS CAGR was 16%.

FY18 result demonstrated strong costs containment – AIRR reported FY18 revenue growth of 2% and EBITDA growth of 12.2% to $21.4m. The EBITDA margin expanded to 6.0% in FY18 from 5.4% the year before and has grown three-fold in the past nine years. Employment costs were 7% lower year on year due to the payment of a long-term incentive to management in the prior year.

Management budgeting for strong growth in FY19 – Management is forecasting revenue growth of 3.7% in FY19 and EBITDA growth of 12.8%, demonstrating the benefit of the company’s operating leverage and its diversification strategy.

Diversification strategy – AIRR has diversified its product offering by introducing its own branded products (Apparent and Independents Own [iO]) and since inception has introduced an additional member category and brand “Tuckers Pet and Produce” to service the pet and hobby farm market. Products are sourced directly from Chinese and local manufacturers, held in AIRR warehouses and supplied to members at competitive prices.

Acquisitions – AIRR has acquired, post balance date, Hunter River Company Pty Ltd, which is forecasted by the company’s independent valuer, CoggerGurry, to contribute $1.0m to EBITDA in FY19.

AIRR has superior ROCE —AIRR recorded a Return on Capital Employed (ROCE) in FY18 of 34%, an increase of 300 basis points over FY17 and compared with the median 12% ROCE of its peer group, Ruralco, Nufarm, Ridley Corp and Elders. AIRR’s ROCE has consistently outperformed its peers since 2012.

Valuation —AIRR’s Board has historically commissioned an independent valuation each year to fix the price for share transfers undertaken in the next 12 months. The most recent valuation was undertaken by CoggerGurry, the Group’s independent auditors, at 30 June 2018. The future maintainable earnings method was used and resulted in a valuation of $7.89 per share. In our view, the valuation parameters were conservative, discounting the peer group by 20% and applying a minority interest discount of 10%. We have also utilised a compco valuation, but include NZ company, PGG Wrightson, and US group Nutrien, which owns Landmark, a direct competitor to AIRR. If we apply the current peer EV/ EBITDA multiple of 9.99x and the same discount rates as used by CoggerGurry, we arrive at a compco valuation of $9.85 a share. This implies a price to earnings ratio of 10.3x, well below the 15x long term PE of the Australian share market. Under the PrimaryMarkets trading platform, the shares now trade at prices determined by buyer and seller demand and the last traded price was $7.89 per share, putting the company on a PE ratio of 8.2x and at a substantial discount to the broader listed market and its listed peers.


Tyro is a provider of payments and banking infrastructure and services to Australia’s small to medium enterprises (SMEs). In FY18, the company processed $13.4bn in transaction volumes, a year on year increase of 26% and an acceleration of the 23% growth rate delivered in the prior year. The Compound Annual Growth Rate from FY12 to FY18 in transaction volumes has been ~29%. Our analysis demonstrates that there is support for valuing Tyro above the last traded price of $1.10 a share and the 6-month VWAP to August 31 of $1.078 per share.

Key points

Tyro reports strong FY18 revenue and customer growth — Tyro has reported FY18 revenue growth of 23% to $148.3M, driven by a 26% increase in transaction volumes and 27% lift in merchants over the prior corresponding period. Tyro added close to 5,000 new merchants to its payments business in FY18, taking the total number of merchants using the EFTPOS/payments platform to more than 23,000. Transaction volumes increased by more than 30% in 2H18 over the prior period. Tyro now commands an estimated 7% share of its target market of transacting small-to-medium enterprises in Australia.

Demonstrating the benefit of leverage — Tyro’s nascent merchant cash advance, unsecured loan product delivered $25.2m in loan originations in FY18, an increase of 127% and demonstrating the opportunity for Tyro to leverage its merchant relationships into ancillary products. This product has only been offered, so far, to ~4,000 of Tyro’s 23,000+ merchants. Similarly, activations of the Tyro Bank Account – a fee free and interest paying business transaction deposit account – grew 262% to 1,285 in FY18, versus 355 in FY17.

New Initiatives — Tyro has announced a series of “firsts” in recent months, becoming the first bank to launch “least cost routing”, and the first Australian bank to forge a seamless, all in one EFTPOS solution with Alipay for Tyro’s merchants. It has also secured exclusive rights with six of Australia’s leading hospitality Point of Sale (POS) providers to connect to the Tyro Platform designed to streamline connectivity to third party apps.

Successful leadership transitions — Long-standing NED Rob Ferguson stepped down from the board in July 2018, having completed a nine-month stint from June 2017 as acting Managing Director and acting CEO before handing the reins to new CEO Robbie Cooke in March 2018. Rob has been succeeded by NED David Fite who brings several years’ banking experience including senior and group executive roles at Westpac and Japan’s Shinsei Bank.

Reverse DCF demonstrates last traded share price of $1.10 is assuming conservative growth — We have conducted a reverse DCF to determine what is implied in the last traded price of $1.10. We have applied a WACC of 11.0%, Beta of 1.25 and terminal growth rate of 2.2%. Tyro’s last traded price of $1.10/share implies market share of 13.2% in 2028 and a compound growth rate in revenues of 12.5%, a conservative growth rate, in our view.

Compco valuation at a premium to last traded price — Our analysis has derived multiples from comparative companies in Australia and the US in the payments processing market. Including Australian peers, the compco valuation is $1.76/share, excluding the Australian peers, tis rises to $2.08/share, reflecting the relative size and maturity of the peer group.

Capital Raises

Growth equity opportunities for wholesale/sophisticated/accredited investors.


Since launching in December 2014, Juggle St has created a neighbourhood marketplace providing a real-time job platform to help working families manage their busy lives. The marketplace already has over 52,000 registered users across Australia and New Zealand. The Company is revenue generating and on track to be cashflow positive in early 2019.

More information

In Australia, women’s workforce participation is 59.4%. One of the most difficult parental challenges is finding and sourcing reliable, trusted help in an efficient and speedy way. There are 2.1m working mums in Australia, this is Juggle Street’s target customer (aka Kelly). On average Kelly lives on Juggle Street for 15 years.

Kelly is responsible for the majority, if not all of the childcare decisions in her household. Juggle Street was created to solve Kelly’s multiple pain points. Juggle Street is NOT just a babysitting app, it’s an on-demand job platform built for many family jobs, including before and after school care, nannying, Au Pair, home tutoring, and in-home age care to name a few.

Unique real-time supply & demand guarantees fair market pricing:

  • Parents set the price they are willing to pay for each job
  • Helpers decide if the job is “worth it” and apply or decline
  • Hourly rates posted and accepted average between A$10-A$30 p/h
  • Helpers get paid cash by the family at the end of each job

Juggle Street’s disruptive business model has created an affordable, scalable marketplace built on its world leading technology platform. Juggle Street is unlocking an entirely new market of people who offer Local Services like babysitters, nannies, Au Pairs and home tutors but have never before advertised online. Juggle Street has a unique supply and demand pricing mechanism with a leading-edge scalable tech platform. In July Juggle Street expanded its childcare offering to include Au Pairs and launched into the burgeoning Home Tutoring market. Juggle Street will launch in New Zealand in August, with the UK targeted as the next geographic expansion.


  • Childminding
  • Home Tutoring
  • In-home age care (launching 2019)

Revenue Model:

  • Families – Juggle Street is free for parents to join and connect with trusted helpers in their neighbourhood. To transact with helpers, families have the option to pay for each job they post or subscribe to a
  • Helpers – Juggle Street is free to join and use for helpers (potential future revenue stream).

Investment proposal

Series A raising A$1.25m:

• Amount raised: A$905,000

• Amount available: A$345,000

• Pre-money valuation: A$5.0M

• Share price: A$0.26 each

• Post-money equity position –

– A$1.25 mil = 20.29% equity

– 18.47% fully diluted

• Total raised since July 2014 $2.4m

Board of directors

The Company recently added Hugh Bickerstaff and Marina Go to its board. Hugh Bickerstaff, chief investment officer at Investible, has joined as non-executive director, while Marina Go, chair of NRL club Wests Tigers and non-executive director of organisations including Energy Australia, has come on as a non-executive director and Chair.


TSM (or The Service Manager) has extensive experience in delivering leading-edge software solutions in the field service management industry. With a team of 15 and an active customer base of 400 companies, the Company is well-established and poised for significant growth. TSM recently launched ServiceVu, its next-generation pure cloud product infused with the DNA of our legacy product developed over 25 years.

The Field Service Management Software market is poised for significant growth over the next 5 years:

  • Field Service companies (e.g. HVAC, Electrical, Plumbing) have traditionally been tech averse with a low-level use of vertical specific job management software adoption (<25%)
  • Large Australian market with 80k companies worth over $50B annually
  • Increased competition, consolidation and cost pressure driving need to streamline and

optimise businesses

There is a significant unmet need in the market for a solution which is flexible and has specific workflows and features for market verticals:

  • Alignment to business workflows most important factor on software selection from market


  • Ability to implement business rules, validation, automation, report customisation and integration with other systems are critical to a company’s efficiency and effectiveness
  • Competitor’s products are inflexible and cannot cater for vertical nuances (e.g. HVAC services (installation vs maintenance) and customer base (residential vs commercial) vary dramatically).TSM is seeking A$3M in growth capex (pre-money valuation of A$7M) to accelerate development and marketing of ServiceVu over the next 18 months providing additional cutting-edge functionality, enabling international expansion and establishing TSM as a leader in Field Service software across multiple market verticals.

Use of funds

• Accelerate development of service management platform (~A$1M)

– Further development of ServiceVu including an HVAC specific variant, through the hiring of an additional 2 full time developers

– Engagement of UI experts to aid in software look and feel and creation of self-help training courseware and documentation to facilitate deployment (immediate)

– Hiring of support and training staff member

•  Establish brand/product awareness and promote trial of software (~A$2M)

– Increase brand awareness through marketing initiatives (SEO, social medial, advertising, conferences, website, collateral)

– Extension of existing dedicated sales team and sales channels in Australasia

– Hiring of dedicated sales team and development of sales channels in US

With ServiceVu (leveraging Microsoft’s .NET framework and hosted in Azure), TSM will rapidly scale and take advantage of the latest software trends such as AI, IoT and Augmented Reality to provide world beating software capable of handling the most demanding Field Service challenge.