Download Investment Update February 2011

Investment Update March 2011
Elstree Investment Management Limited (ABN 20 079 036 810)
AFS License number 225721
Level 15, 333 Collins Street Melbourne VIC 3000
Telephone: 61 3 8689 1348
www.eiml.com.au
Disclaimer
•
The information and opinions contained in this presentation have been obtained
from sources of Elstree Investment Management Limited (ABN 20 079 036 810)
believed to be reliable, but no representation or warranty, express or implied, is
made that such information is accurate or complete and it should not be relied upon
as such. Information and opinions contained in this presentation are published for
the assistance of recipients, but are not relied upon as authoritative and may be
subject to change without notice. Except to the extent that liability cannot be
excluded, Elstree Investment Management Limited does not accept liability for any
direct or consequential loss arising from any use of material contained in this
presentation.
Elstree Investment Management Limited
Executive summary
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•
•
•
•
•
•
Fund performance,
Benefits of investing in the Australian Enhanced Income Fund,
Global credit outlook,
Australian listed credit outlook,
Outlook for the Australian Enhanced Income Fund,
Fund metrics and investment strategy,
Appendix
Elstree Investment Management Limited
Australian Enhanced Income Fund performance summary
•
•
•
•
Fund has performed well post GFC.
*Net return for the 12 month period to end February 2011 was 12.60%
– This compares to the bank bill rate of return over the same period of 4.77%.
Fund well positioned to capture both capital growth and higher income opportunities
over the next 12 – 18 months.
Current net asset value (NAV) of a unit $6.937 (as at February 28, 2011);
– Total Fund return for CY 2011 expected to be c13.0% p.a.
– Income return c7.50% p.a.
* Return is net of fees and excludes the benefit of franking
Elstree Investment Management Limited
Portfolio performance
Period to end February 2011
Fund
Bank Bill
3 months
1.90%
1.25%
6 months
9.24%
2.48%
12 months
12.60%
4.77%
* Returns are net of fees and exclude the benefit of franking
Elstree Investment Management Limited
Benefits of investing in the Fund
•
•
•
•
•
•
Pooled exposure to at least 30 ASX listed corporate borrowers
– Risks reduced because of diversification.
Gain access to the portfolio construction expertise of managers with a combined
experience of over 75 years.
Stable income return of c7.5% per annum @ NAV of $6.94 with capital volatility of
around 5% per annum.
ASX listed.
Transparency;
– Monthly NAV reporting.
Enhanced liquidity provisioning;
– ASX (daily) and
– Quarterly off market at the Fund’s NAV.
Elstree Investment Management Limited
Global credit outlook
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•
•
•
The outlook for credit globally is positive.
Factors contributing to the positive outlook include;
– The zero interest rate and enhanced liquidity provisioning policies of the global
central banks in particular the US Federal Reserve,
– Significantly improved corporate metrics (i.e stronger corporate balance sheets
initiated by a combination of equity capital raisings and debt repayment).
As a consequence of improved corporate metrics and enhanced liquidity
provisioning global default rates have declined sharply.
– The decline in default rates has not been mirrored by credit spreads which are
lagging,
When investors accept that default rates are likely to remain low credit spreads will
contract generating capital growth in credit assets.
Elstree Investment Management Limited
Actual high yield defaults and lagging credit spreads
Default Rates and Credit Spreads
14
1200
12
10
8
600
6
400
4
200
2
-1
2
-1
0
Ja
n
1-
Ja
n
-0
8
1-
-0
6
Ja
n
1-
-0
4
Ja
n
1-
-0
2
Ja
n
1-
-0
0
Ja
n
1-
-9
8
Ja
n
1-
-9
6
Ja
n
1-
Ja
n
-9
4
1-
Ja
n
-9
2
High Yield Default Rate(lhs)
1-
-9
0
Ja
n
1-
-8
8
Ja
n
1-
-8
6
Ja
n
1-
-8
4
Ja
n
1-
Ja
n
-8
2
1-
-8
0
Ja
n
1-
-7
8
Ja
n
1-
-7
6
Ja
n
1-
Ja
n
1-
-7
4
Ja
n
1-
Ja
n
-7
2
0
1-
Ja
n
-7
0
0
1-
Default Rate (%)
800
Spread to swap (basis points)
1000
BB margin to swap (rhs)
Elstree Investment Management Limited
Moodys and Merrill Lynch
Australian listed credit outlook
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Underpinned by the same global influences as well as factors peculiar to Australia
the outlook for listed credit is positive.
Positive influences peculiar to Australia include;
1. Credit spreads are significantly wider in Australia listed credit than they are
elsewhere in the world (refer chart).
• This means that investors in Australian listed credit are getting paid more
to invest in listed credit than elsewhere in the world.
2. Declining return volatility is expected to encourage retail investors, who left
the market when volatility spiked during the GFC, to return to the sector (refer
chart).
• This will enhance liquidity which the sector has been devoid of
throughout much of the post GFC period.
3. Generally favourable economic conditions and
4. Possibility of higher short term interest rates initiated by the RBA (refer chart).
Elstree Investment Management Limited
De
c-0
5
Fe
b -0
6
Ap
r-0
6
Ju
n -0
6
Au
g -0
6
Oc
t-0
6
De
c-0
6
Fe
b -0
7
Ap
r-0
7
Ju
n -0
7
Au
g -0
7
Oc
t-0
7
De
c-0
7
Fe
b -0
8
Ap
r-0
8
Ju
n-0
8
Au
g-0
8
Oc
t-0
8
De
c-0
8
Fe
b-0
9
Ap
r-0
9
Ju
n-0
9
Au
g-0
9
Oc
t-0
9
De
c-0
9
Fe
b-1
0
Ap
r-1
0
Ju
n-1
0
Au
g-1
0
Oc
t-1
0
De
c-1
0
Margin to swap (basis points)
Margins are wider in Australian listed credit
BBB Comparison
1600
1400
1200
1000
800
600
400
200
0
US BBB
AUS BBB
Elstree Investment Management Limited
Source: Merrill Lynch and Elstree
29
/12
/20
06
28
/02
/20
07
29
/04
/20
07
29
/06
/20
07
29
/08
/20
07
29
/10
/20
07
29
/12
/20
07
29
/02
/20
08
29
/04
/20
08
29
/06
/20
08
29
/08
/20
08
29
/10
/20
08
29
/12
/20
08
28
/02
/20
09
29
/04
/20
09
29
/06
/20
09
29
/08
/20
09
29
/10
/20
09
29
/12
/20
09
28
/02
/20
10
29
/04
/20
10
29
/06
/20
10
29
/08
/20
10
29
/10
/20
10
29
/12
/20
10
Percent %
Volatility: Normalising
Volatility
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
Elstree Investment Management Limited
Data: Elstree February 2011
The outlook for the Australian Enhanced Income Fund
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•
We estimate that the Australian Enhanced Income Fund’s total return will be
approximately 13.0% per annum over the next 12 months and beyond.
Our estimates are based on an average credit term of the Fund, assumes no
defaults on coupon and principal payments and that discounts (i.e the difference
between a security’s current market price and the PAR value) are amortised evenly
over the expected term of each security.
– The Fund’s total return of 13.0% is comprised of;
• Quarterly cash distributions estimated to be 7.50% per annum
• Franking benefit of approximately 1% per annum to the cash return and
• Capital growth (amortisation of discount over the security’s life) estimated
to be 4.7%.
Elstree Investment Management Limited
Fund metrics and investment strategy
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•
The Fund’s portfolio is well positioned to maximise capital gain and income
opportunities over the next 12 – 18 months.
– Pro active portfolio management strategies to take advantage of capital gain
opportunities including;
• Continued overweight exposure to discounted non bank sector,
• Reduced exposure to bank sector which is fully priced as Basel 3
treatment of hybrid debt will necessitate a number of securities being
repurchased at PAR and
• Take advantage of improved liquidity conditions to more actively manage
the portfolio.
Income yield of underpinned by;
– Maturing coupons reinvested at higher absolute levels as a consequence of,
• Higher official interest rates initiated by the RBA.
– Exercise of step ups.
Elstree Investment Management Limited
Portfolio metric summary
Metric
Expected yield to maturity (YTM)
13.0%
Running yield
7.50%
Credit term (years)
4.38 years
Interest rate term (years)
0.27 years
Risk (Volatility of return – monthly annualised)
Elstree Investment Management Limited
4.0%
Appendix 1: Portfolio top 12 holdings (alphabetically)
Issuer
Security (ASX
Ticker)
AXA Subordinated Notes #
Southern Cross Airports SKIES
SAKHA
NAB Income Securities
NABHA
IAG Reset Exch Sec
IANG
Australand Assets
AAZPB
IAG Reset Prefs
IAGPA
Goodman PLUS
GMPPA
Multiplex Sites
MXUPA
ORICA SPS
ORIPB
GUNNS Forests
GNSPA
Paperlinx Step Up Prefs
PXUPA
Bendigo Bank Reset Pref
BENPA
# Unlisted
Elstree Investment Management Limited