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Fact sheet
Equity Strategies
December 2016
BT Balanced Equity Income Fund

ARSN: 159 947 270
Fund objective
The Fund aims to provide:
 consistent monthly income plus franking credits;
 a total return (including franking credits and after fees, costs and
taxes) that exceeds the benchmark (40% S&P/ASX 200
Accumulation Index grossed up for franking credits and 60%
Bloomberg AusBond Bank Bill Index) over rolling 5-year periods;
and
 reduced exposure to the S&P/ASX 200 Index.
Investment process
The Fund’s portfolio is constructed using the following four key steps:
1. Investing in a selection of shares in the S&P/ASX 200 to
generate income from dividends. The portfolio will generally
include 20-60 companies, with a bias towards high dividend
yielding stocks with franking credits and a liquid options market
based on our positive, fundamental company research views.
BTIM’s fundamental company research focuses on four key
factors: valuation, financial risk, franchise and management
quality;
2.
3.
4.
Selling call options over the shares in the portfolio to generate
additional income from option premiums. The call options sold
will be fully backed by holding the shares in the portfolio and will
significantly reduce the Fund’s exposure to gains on its share
portfolio;
Buying put options over the S&P/ASX 200 index with the aim of
significantly reducing the Fund’s downside market exposure; and
Applying a hedging strategy to reduce the adverse impact of
extreme market movements caused by significant global events
that are expected to occur infrequently. The strategy uses
derivatives over international share indices and volatility indices
that generate profit when share markets experience large
negative movements. This is based on our fundamental view
that movements in share markets globally are closely correlated
when significant global events occur.
Fund details
#
Income target (excludes franking credits)
4.28%
Target average exposure to the ASX 2003
40%
Fund size (as at 31 December 2016)
$156 million
Minimum investment
$25,000
Distribution frequency
Monthly
Liquidity
Daily
Buy-sell spread4
0.50% (0.25%/0.25%)
APIR code
BTA0428AU
Inception Date
October 2012
Announced distributions (after-fees)
- January, February, March 2017
0.300 cents per unit
- April, May, June 2017
0.300 cents per unit
Next distribution announcement date:
- March 2017 (for July, August and September 2017)
Management cost5
Issuer fee6
Expense recoveries
#
1.39% p.a.
0.15% p.a.
Monthly distribution (as a percentage of NAV)
CPU-NAV Ratio (%)
1.0
Actual*
Declared**
0.8
0.6
0.4
0.2
0.0
Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul-16 Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun15
15
15
16
16
16
16
16
16
16
16
16
16
16
17
17
17
17
17
17
* Calculated as CPU divided by month-end NAV price
** Calculated using the announced CPU divided by a $1 unit price
Performance (after-fees)
Since
1 mth 3 mths 6 mths 1 Year 2 Years 3 Years
inception
(%)
(%)
(%) (% pa) (% pa) (% pa) (% pa)
Performance before franking credits
Total return
1.72
2.82
4.12
1.69
0.11
2.71
Estimated performance grossed up for franking credits
Total return1
1.73
3.18
4.86
3.05
1.45
1.54
6.70
5.04
4.89
Bmk return2
1.83
2.47
5.05
4.16
6.45
0.04
Distribution – Growth Split
-5.94
Growth return 1.36
1.72
1.53 -3.65
Distribution return (before franking credits)
5.33
5.98
0.36
1.10
2.59
Distribution return (grossed up for franking credits)
6.70
7.39
0.36
1.47
3.33
-6.31
-4.08
6.42
6.79
7.85
8.24
1
Performance (grossed up for franking credits) will tend to be understated relative to benchmark
returns. This is because the impact of franking credits are added to the benchmark on the
dividend ex-date whereas franking credits are included in the Fund’s performance only after the
relevant holding period rules are deemed to have been satisfied. This may be up to 45 days after
the dividend ex-date. Performance figures may, therefore, be subject to future upward revision
once the holding period has expired.
2
Benchmark is 40% ASX 200 Accumulation Index grossed up for franking credits / 60%
Bloomberg AusBond Bank Bill Index. This is the Fund’s benchmark as disclosed in the PDS.
Note that the primary objectives of the fund are the income and total return objectives. Due to the
nature of the investment strategies applied within the fund, the performance of the strategy
relative to the benchmark should only be considered over the longer term (3 to 5 years). Over
shorter time frames, the performance is likely to differ significantly from that of the benchmark.
Growth of $10,000 since inception (distributions reinvested)
12,000
Total Capital Value ($)
About the Fund
The BT Balanced Equity Income Fund (Fund) gives investors the
opportunity to earn a consistent monthly income while reducing their
exposure to movements in the Australian share market. The Fund
combines expert stock selection with an enhanced income strategy
to deliver a known (up to 6 months in advance), consistent monthly
income whilst significantly reducing the impact of share market
movements.
11,600
11,200
10,800
10,400
10,000
9,600
01-Nov-12
01-Jul-13
01-Mar-14
01-Nov-14
01-Jul-15
01-Mar-16
01-Nov-16
Top 10 stock exposure (as at 31 December 2016)
Commonwealth Bank of Australia Ltd
Westpac Banking Corporation
Telstra Corporation Limited
National Australia Bank Limited
CSL Limited
ANZ Banking Group Limited
Wesfarmers Limited
BHP Billiton Limited
Amcor Limited
Westfield Corporation AE
Risk statistics (Since inception)
Volatility
Maximum drawdown
Beta
5.6% p.a.
-10.1%
37%
The annualised rate of income is based on pre-announced distributions for the six months to 30 June 2017 and an application unit price of $0.8418 as at 14 December 2016.
The annualised rate of income based only on the pre-announced distributions of 0.300 cents per unit for the June 2017 quarter and the application unit price as at 14 December
2016 is 4.28% pa. As the rate of income depends on the unit price at the time of investment and the unit price will vary daily, this is not a guarantee and there is a risk that there
may be lower income after 30 June 2017. Similarly, performance may vary and the value of your investment will go up and down over time.
Investment team
The Fund combines the experience and skills of our successful
Australian equities fundamental research team with experienced
equity volatility and risk management experience gained in hedge
funds in Asia and the US.
The equity income team consists of two portfolio managers Jason
Petras and Darron Mitchell. Jason and Darron have combined
experience of 30 years in the investment management industry
with skills in equity derivative and quantitative hedge funds
gained in both Asia and the US.
The Fund sits within the Equities Boutique which is run by Crispin
Murray. The joint Portfolio Managers for the Fund utilise the
support and infrastructure of the Equities Boutique with 10 Equity
research analysts and other large cap Portfolio Managers.
In particular the equity income team use the expertise of the
Equities Boutique to assist with stock analysis.
Risks
An investment in the Fund involves risk, including:
 Market risk: The risk of fluctuation in the market price of the
Fund’s investments
 Security specific risk: The risk associated with losses by the
Fund from an individual investment
 Derivative and options risk: The risk that the Fund makes
substantial losses or has volatile returns through the use of
derivatives.
Please read the Fund’s Product Disclosure Statement (PDS) for
more information on these risks.
Market review & performance drivers
Continued momentum from prospective Trump ‘reflation’ policies
helped propel the S&P/ASX 200 Accumulation Index higher by a
solid 4.3% in December. This was alongside the second Fed rate
hike in as many years and the unveiling of a plan from the ECB to
extend its QE programme. There were fears coming into the month
that a ‘No’ vote in the Italian Referendum could sow the seeds for
investor fears about the stability of the Eurozone as a whole,
however the markets surpassed this hurdle with ease. These
factors all combined to create a Santa-rally finish in the last month
of the year.
In the US, as widely-expected the Fed ratcheted rates higher by
0.25%. The “gradual” hike trajectory verbiage was retained.
However, a shift higher in the Committee’s highly-scrutinised dot
plot suggested three hikes were now anticipated in 2017, versus
the previous two. Additionally, the growth outlook for the same
period was lifted from 2.0% to 2.1%. Data-wise, annualised third
quarter GDP growth was again revised higher to 3.5%. Leading
indicators were also solid; Manufacturing PMI ticked up by 0.1 to
54.2 – its highest since March 2015, while the University of
Michigan’s Consumer Confidence reading hit 98.2 (a level last
reached in 2004).
In Europe, fears over a fallout from the rejection of the highlypublicised Italian referendum seemingly evaporated. Meanwhile,
the ECB finally revealed its intentions for QE; asset purchases will
be extended to the end of 2017, but are set to be reduced from
80bn Euros to 60bn Euros from April.
At home, the RBA left rates unchanged at 1.50% - as expected.
Governor Lowe highlighted a soft patch for economic growth in his
Statement. Indeed third quarter GDP disappointed with a 0.5%
slide on the previous quarter and 1.8% increase over the previous
year – the slowest pace of growth since the GFC. Most major
leading indicators of economic growth also faltered, while labour
market data was a more of a mixed bag. Outside data prints, the
greater than forecast budget deficits in the annual MYEFO caused
Australia’s AAA credit rating to come under threat.
Sector-wise, all areas posted a positive performance with
Financials (+5.5%), REITs (+5.3%) and Energy (+6.1%) at the top
of the league tables. The OPEC deal to cut production that was
agreed after market on the last day of November meant the effects
of the 8.7% WTI rally were felt this month. At the other end of the
spectrum Healthcare (+0.9%) and Telcos (+0.5%) underperformed.
The former has been one of the few areas in the corporate sphere
facing a headwind from “Trumponomics”, which threatens the
repeal of supportive US policies for the sector, like Obamacare.
Telcos meanwhile have faced more domestically-orientated
challenges as the industry grapples with the NBN rollout.
The Balanced Fund returned 1.72% post fees for the month of
December, taking our total return for the final quarter of 2016 to
2.82%, which was a satisfying end to the year given the ASX
returned 5.1% over the same period. We were happy to be able to
return more than the targeted 40 delta with the market as this is
normally tough for an overwriting fund when the market rallies in
such a sustained manner. From the 9th November “Trump” low,
the ASX rallied 7.7% into the end of November, and then another
4.3% through December. These strong upwards movements are
one of the hardest environments to operate an overwriting fund in,
as our exposure to the market falls as the market rallies, meaning
it is a constant fight to stay exposed to the rally, whether by buying
back short calls at a loss, or buying more stock as the market
makes new highs. We had our best return of the year (+1.8%) last
month as we had chosen to maintain more upside exposure by not
re-writing expiring strikes as low as we normally do, forfeiting call
premium but maintaining upside.
We managed a 4.07% return in the Equity strategy, which was
slightly below the 4.3% return of the ASX200. We had swapped
out some of our stock for long index calls in November as we felt
the market was not correctly pricing the potential for increased
volatility moving into 2017. As such, we felt the low implied
volatility made buying calls the most appropriate way to structure
our exposure. On continued market strength, long calls are a cost
effective way to maintain upside exposure, and given the current
overbought nature of the ASX200 if the market had weakened we
would have only lost the premium paid for the long calls, instead of
the full downside of a stock selloff. This strategy was preferred to
us instead of just selling stock as it meant that we still maintained
upside with the long calls, but just not as much as being fully
invested in stock, which is why we didn’t achieve the full market
return in the Equity strategy.
In the Overwriting strategy we lost 1.17% due to the strength of the
rally. As we mentioned, although we managed to retain a lot of the
upside in November, as of the start of December the strikes on our
short calls were lower due to the market strength, and this did
curtail our ability to fully participate in the upside. In the Hedging
component of the book, we lost a combined 1.03% in the structural
and tactical hedge, as would be expected in a strong market move.
The financial sector added to its strong gains in November, tacking
on another 5.5%, which was also the average return for the four
major banks. As a result, ANZ (+7.1 %) and WBC (+4.3%) were
some of the largest attributors to the fund in December. ANZ was
the best performer of the majors, and also our largest stock
overweight. The regulatory backdrop for banks domestically has
eased significantly over the past few months, with indications that
Basel IV and APRA may not be quite as stringent on capital
controls as first thought. Alongside the positive movement in the
yield curve, and a Trump cabinet tasked with de-regulating the
overburdened financial sector, this has caused sentiment in the
financial sector to improve drastically. We do note however that the
banks are now all trading slightly above their 5 year average P/E
relative to the market, and after the extremely strong rally we are
beginning to feel a lot of the optimism could be priced in in the near
term.
Our strongest attributor for the month was IPL (+14.3%). The stock
has been under pressure for the past few months as the result of
low Urea and Ammonium pricing tarnishing the profitability
potential of their new Louisiana fertiliser plant. Early signs however
have suggested the DAP fertilizer price could be finding a bottom,
and with the potential for new pro-coal policies in the US, the
market has factored in the potential for improved earnings in their
explosives business.
In the past few months we positioned our portfolio to maintain
upside exposure to the mining sector, which has the ability for
substantial moves in both directions. We did this by having a
smaller stock position, but leaving it not overwritten, using index
short calls as a proxy instead. This has previously served us well
as the resources sector in Australia has continued to rally over the
past six months, as the Chinese government moved to rationalise
oversupply in some of its primary industries. This strength
continued in December, with Iron ore posting a 9.4% gain for the
month. BHP (+2.7%) is an obvious beneficiary of these moves.
However because the stock only gained 2.7%, if we had written
calls on the stock we would have gained both the premium on the
call, and the full stock upside. Writing index calls instead of single
stock calls provides lower premium, and lower overall returns in
situations where the stock gains are small and positive, which was
the case here. As a result BHP was our largest underperformer for
the month versus the model. We still feel we have pursued the
right strategy with the miners over the past year by using proxy
index calls for a portion of the miners as this has allowed us to
participate in the strong upside months we have seen this year.
BHP’s four largest positive moves in 2016 were +23%, +11%,
+10.6%, +5.8%. Selling calls on BHP in those months would have
removed the majority of the upside, which we managed to capture
by not having the stock overwritten. We are confident that these
cases more than make up for the months where the stock move
was small and we missed out on the premium.
default forecast for investors currently is that Trump will have no
issues pushing through fiscal reform, and cutting the tax rate.
Whilst these possibilities are certainly achievable, we are wary of
the potential for downside surprise if the outcomes don’t become
apparent immediately. Negative sentiment could also develop with
regards to the delicate Sino-American relationship, something that
will have ramifications for the Australian market, and arguably
dominate the movements in the local resource sector throughout
2017. Any signs of combative, protectionist rhetoric from the
Trump administration could be bad for Chinese growth prospects,
having a follow-through impact on the rest of the developing world,
and with it their demand for the base resources. A step up in the
dispute around the South-China Sea could also cause a risk-off
environment to ensue in the Asia-Pac region.
We note the structural cheapness of volatility at this stage, and will
continue to use long calls where possible to maintain upside to the
market whilst limiting downside. We have also positioned
ourselves with a larger portion of our portfolio hedged to downside
movement than would normally be the case. This will allow us to
benefit from any sustained rally should the global economy
continue to improve, but also protect us if some of the potential pitfalls eventuate along the way.
In summary, 2016 has been a tricky year to navigate, typified by
strong sell-offs followed by even stronger reversals. Despite this
we are happy with the way we have finished the year, with the
3.2% return in the final quarter. We hope to be able to continue this
good run into the New Year.
Our second largest underperformer for the month was Newcrest
(+3.6%). The stock exhibited very high volatility during the month,
at one point down 16%. We had entered the month with a small
overweight exposure in the stock, and alongside a strong fall in the
gold price the move was greater than our risk limits would allow,
causing us to sell the stock at a loss. Unfortunately we were
therefore unable to participate in the strong rally at the end of the
month.
Short dated implied volatility at the index level trended down to the
lowest level of the year in December, with one month volatility at
one point as low as 9.2% annualised. This was partly a seasonallyinduced effect (markets tend to have supressed volatility over the
Christmas period) but also due to the euphoria around Trumps
election driving markets higher, reducing investors desire to buy
insurance in the options market. We used this seasonal lull in
implied volatility as an opportunity to roll up our structural hedge
earlier than normal, in order to benefit from the relatively lower cost
of protection.
We are increasingly feeling that markets are pricing in the most
positive outcome possible for the next six months. We note that
economic indicators are showing improvement, but it seems the
3
The target average exposure over a full market cycle. Actual market exposure at any point in time may vary substantially from this depending on market circumstances.
The buy-sell spread represents transaction costs incurred whenever you invest or withdraw funds, and may vary from time to time without notice.
You should refer to the latest Product Disclosure Statement for full details of fees and other costs you may be charged.
6
This is the fee for managing the assets of the Fund and overseeing the operations of the Fund. The Issuer fee is paid from the assets of the Fund and is reflected in the unit price of your investment.
4
5
This fact sheet has been prepared by BT Investment Management (Fund Services) Limited (BTIM) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at the date
of this fact sheet. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.
BTIM is the responsible entity and issuer of units in the BT Balanced Equity Income Fund (Fund) ARSN: 159 947 270. A product disclosure statement (PDS) is available for the Fund and can be
obtained by calling 1800 813 886 or visiting www.btim.com.au. You should obtain and consider the PDS before deciding whether to acquire, continue to hold or dispose of units in the Fund. An
investment in the Fund is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.
This fact sheet is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without
taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to
their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.
The information in this fact sheet may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such
material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this fact sheet is complete and correct, to the maximum extent permitted
by law neither BTIM nor any company in the BTIM group accepts any responsibility or liability for the accuracy or completeness of this information.
Performance figures (before franking credits) are calculated in accordance with the Financial Services Council (FSC) standards. Total returns are calculated: to the last day of each month using exit
prices; taking into account management costs of the fund; assuming reinvestment of distributions (which may include net realised capital gains from the sale of assets of the fund). No reduction is
made to the unit price (or performance) to allow for tax you may pay as an investor, other than withholding tax on foreign income (if any). Performance figures (grossed up for franking credits) are
estimates and calculated by adding the impact of franking credits to fund returns before franking credits. Franking credit impacts are included in performance only after the relevant holding period rules
are deemed to have been satisfied, which may be up to 45 days after the dividend ex-date. Performance figures (grossed up for franking credits) shown may therefore be subject to future upward
revision once the holding period has expired.
If market movements, cash flows or changes in the nature of an investment (e.g. a change in credit rating) cause the Fund to exceed any of the investment ranges or limits specified, this will be
rectified by BTIM as soon as reasonably practicable after becoming aware of it. If BTIM does so, it will have no other obligations in relation to these circumstances. The procedures, investment ranges,
benchmarks and limits specified are accurate as at the date of this fact sheet and BTIM reserves the right to vary these from time to time.
Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) do not approve or endorse this material and disclaim all liability for any loss or damage of any kind arising out of the use of all or any
part of this material.
BT® is a registered trade mark of BT Financial Group Pty Ltd and is used under licence.