Investment StrategiesRegional Equity Strategies
The Group’s Australian Equities boutique is one of the most experienced Australian equities teams in the market.
We manage a large range of active strategies across the Australian share market. These include the flagship Core Australian Share and Focus (concentrated) strategies as well as specific strategies that focus on mid-caps, smaller companies and micro-caps. We also manage other specialised investments such as Long Short, Listed Property and Ethical and Sustainable strategies.
We have one of the largest and most stable investment teams in the country, with 20 investment staff with an average of 19 years’ industry experience.
Our investment approach is driven by fundamental research at the stock level. We believe markets are largely efficient at pricing known information into share prices. The opportunity for investors comes from anticipating change, either in earnings or the quality of those earnings. By utilising our team’s industry knowledge, experience and contacts we are able to gain insights into companies that enable us to identify such opportunities.
This approach, if applied consistently and rigorously, provides superior long term performance for investors, as evidenced by our strong long term track record.
After three strong calendar years of performance across most of our flagship strategies, 2016 was more challenging with the majority of our portfolios underperforming their benchmarks for the 12 months to the end of September.
If we had to isolate one dominant thematic that has driven markets over the last five years and again in 2016, it would be falling bond yields and their impact on those parts of the equity market positively correlated to that theme. For the first seven months of the year, we saw significant outperformance of asset based yield stocks such as REITs, utilities and infrastructure. Low yields imply low growth and therefore we have also seen the premium paid for growth reach new peaks in terms of relative valuation. So-called growth stocks, particularly in such industries as Healthcare and Technology, have seen significant multiple expansion. In many instances, while valuation multiples have expanded beyond what we would deem reasonable, the earnings growth necessary to support that expansion has actually slowed. As fundamental investors, we have not embraced these themes in our portfolios. Our conviction to avoid these stocks was reinforced by our view that we are far nearer the end than the beginning of the multi-year yield thematic.
The August reporting season was the first sign the theme was running out of steam as we saw a significant reversal and rotation out of 2016’s winners. As is often the case with stocks on high valuation multiples, modest disappointment in earnings growth at results time equates to more extreme share price corrections. We certainly saw evidence of this in August. The beneficiaries of this rotation were some of the companies in the market to which we had been adding positions throughout the year. Investors had previously been ignoring these stocks, which exacerbated their weak relative performance at the time. It tended to be these previously unloved stocks that managed to demonstrate an ability to react proactively to the challenges they face that came out of reporting season well.
This period of underperformance has been characterised more by a relative de-rating of the valuations of our core positions, rather than earnings disappointment. The net effect has been a de-rating of the portfolio, driving it to an extreme valuation point which suggests strong re-rating potential versus the market. As a result we have a greater conviction in our key investments, having rigorously retested our investment theses. Indeed our strong performance since the August reporting season indicates this is now occurring.
One area that characterises our approach has been the banking sector. This sector has battled against a number of headwinds. We believe there is a sound basis to argue that underperformance in the banking sector is overdone. The banks are trading at a discount to industrial peers not seen in 25 years. The well-publicised regulatory burden on banks may not be as punitive as some assume given it is increasingly appearing to be counter-productive, forcing banks to retreat from lending, thereby exacerbating the weak recovery. The banks themselves are also showing early signs of recognising the need to adapt strategies, easing back from aggressive chasing of new customers and focusing more on cost control.
The other major plank of the Australian market, the resource sector, has seen profits rebound strongly with the Chinese government continuing to shore up growth by stimulating property markets and raising infrastructure investment bolstering the demand for commodities. This saw some of the smaller and more leveraged names, the viability of which had previously been questioned, rally significantly, a key driver of the small cap market this year. Given our preference for less geared stocks and preference for companies lower on the cost curve, this rally in small resources had a negative impact on our small caps fund’s relative performance. Near-term the sector will be supported by the positive earnings effect of higher commodity prices. However, to sustain prices longer term requires ongoing stimulus, which is likely to be constrained by the high level of debt in the Chinese economy and the government’s desire to undertake reforms to reduce excess capacity in heavy industries and shift emphasis to more consumer led growth.
From a business perspective, we continue to invest in new products and to further develop our Separately Managed Accounts (SMA) proposition, which is an emerging growth area. This builds upon our nine-year track record of building models for Managed Accounts. We have recently launched several specialised SMA models that are now available and approved for use on BT Panorama, the BT Financial Group platform. On the institutional side, we have grown our client base and pleasingly clients have continued to support us with inflows over the year. In the adviser channel, total flows remain solid, with clients showing a preference for the concentrated strategy (BT Focus Fund) and mid cap strategy which is reflective of the overall market trend.
We remain committed to, and focused on, our main priorities, which are to generate good investment returns for our clients and to provide excellent service to those who trust us with their money to manage.
|FUND NAME||Benchmark||1 year %||3 years % pa||5 years % pa|
|BT Wholesale Core Australian Share Fund||A||8.15||5.99||11.70|
|BT Wholesale Focus Australian Share Fund||A||10.19||7.89||12.80|
|BT Wholesale Imputation Fund||A||7.67||4.93||10.51|
|BT Wholesale Ethical Share Fund||A||8.25||6.52||11.62|
|BT Wholesale Australian Long Short Fund||B||10.65||6.49||12.77|
|BT Wholesale MidCap Fund||C||24.53||16.19||18.09|
|BT Wholesale Smaller Companies Fund||D||20.51||11.42||15.11|
|BT Wholesale MicroCap Opportunities Fund||D||37.89||27.24||29.71|
|BT Wholesale Property Investment Fund||E||20.92||17.88||19.88|
|BT Defensive Equity Income Fund 1||F||1.89||1.05||N/A|
|BT Defensive Equity Income Fund 2||G||2.95||2.24||N/A|
|BT Balanced Equity Income Fund 1||H||3.45||1.72||N/A|
|BT Balanced Equity Income Fund 2||I||4.81||3.13||N/A|
|BENCHMARK||Benchmark||1 year %||3 year % pa||5 years % pa|
|A: S&P/ASX 300 Accumulation Index||13.50||6.03||11.02|
|B: S&P/ASX 200 Accumulation Index||13.17||5.99||11.19|
|C: S&P/ASX 150 ex 50 Accumulation Index||27.71||13.44||12.83|
|D: S&P/ASX Small Ordinaries Accumulation Index||29.16||7.07||5.27|
|E: S&P/ASX 300 A-REIT Accumulation Index||20.88||17.68||19.58|
|F: 30% ASX 200 Accumulation Index /
70% Bloomberg AusBond Bank Bill Index3
|G: 30% ASX 200 Accumulation Index4 /
70% Bloomberg AusBond Bank Bill Index
|H: 40% ASX 200 Accumulation Index /
60% Bloomberg AusBond Bank Bill Index
|I: 40% ASX 200 Accumulation Index4 /
60% Bloomberg AusBond Bank Bill Index
2 Grossed up for franking credits
3 Note Bloomberg AusBond Bank Bill Index is not the official benchmark
4 Index return is grossed up for franking