Download Shaw SMA - Large Cap Portfolio

Shaw SMA - Large Cap Portfolio
Shaw and Partners Research
Monthly Review – February 2017
Top 5 Holdings
ASX Code
BHP
NAB
CBA
WBC
LLC
Security
BHP Billiton Limited
National Aust. Bank
Commonwealth Bank.
Westpac Banking Corp
Lendlease Group
Allocation
7.97%
7.96%
7.02%
6.57%
4.97%
34.49%
Returns
Return
Total Portfolio Return
ASX 100 Accum Index
Difference
1 Month
1.59%
2.28%
-0.69%
3 Month Inception
6.26%
11.50%
6.16%
10.64%
0.10%
0.86%
Performers (1 month Total Return)
15.00%
Investment Objectives
The objective of the Shaw Australian Equities Large Cap Portfolio is to provide regular
income, capital appreciation and outperformance of the S&P/ASX 100 Accumulation Index
over the medium term (3 years) through investment in large shares listed in Australia.
Investment Strategy
Shaw’s Investment Process combines quantitative and qualitative criteria and analysis to
identify stocks likely to produce above average earnings growth with positive valuation
characteristics.
The portfolio construction is based on macro-economic and thematic views of Shaw’s
Research in order to best meet the risk and return objectives of the investment strategy.
Continual assessment and risk management of bottom-up and top-down parameters is a
core component of the Model. Changes to the portfolio will be made as deemed
appropriate by the investment team in order for the portfolio to have a high probability of
meeting its objectives.
10.00%
The Investment Process takes into consideration the yield and capital growth objectives of
the portfolio and ensures that both are managed simultaneously to ensure that the
portfolio is not overly skewed to any style or thematic that would increase the risk of the
portfolio failing to meet its objectives.
5.00%
0.00%
PPT
QAN
NST
LLC
REA
Detractors (1 month Total Return)
Portfolio Highlights

The total return of the portfolio for the month to 28 February 2017 was +1.59%. This
was below the ASX100 Accumulation Index which returned +2.28% for the same
period.

Top Performers during the month were Perpetual Ltd (PPT) +10.6%, Qantas (OAN)
+10.0% and Northern Star +9.7%.

Detractors during the month were Clydesdale (CYB) -10.2%, Iluka (ILU) -10.1% and
Origin Energy (ORG) -7.5%.

During the month, there was 0.5% of income with Amcor (AMC), CBA, Challenger
(CGF), Rio Tinto (RIO) and Suncorp (SUN) trading ex-dividend.

Following a change of coverage responsibilities, we drop a number of stocks we no
longer cover from the portfolio, resulting in higher than usual turnover. Amcor (AMC),
Origin Energy (ORG) and Qantas (QAN) are exited, as they are no longer covered by
Shaw and Partners. We also trim Lendlease (LLC) after stellar performance has
brought the expected return down - in favour of Vicinity Centres (VCX) in the REIT
space. We also drop Henderson Global Investors (HGG) due to a difficult outlook and
poor performance at bride-to-be Janus Capital Group Inc. We add Oil Search (OSH) as
our preferred Energy exposure, Bank of Queensland (BOQ) following our upgrade to
BUY and spread the love amongst the big miners, BHP Billiton (BHP) and Rio Tinto
(RIO) and the ultimate rising interest rate hedge, QBE.

It’s hard to get too excited by the expected return on Australian Equities (~6% on
consensus numbers), but we think our Model Portfolio can improve on that. We
remain neutral to underweight Australian shares in a balanced portfolio setting and
think that investors should adopt a cautious, defensive stance. We make a number of
changes to our Model Portfolio this month, but stick with the reflationary trade.
0.00%
-5.00%
-10.00%
-15.00%
CYB
ILU
Market Weights
GICS Sector
Financials
Materials
REITs
Consumer Discretionary
Energy
Consumer Staples
Industrials
Telecommunication Services
Health Care
Information Technology
Utilities
Cash
ORG
BHP
Sector
47.1%
21.2%
10.2%
5.1%
4.4%
3.1%
2.6%
1.9%
0.0%
0.0%
0.0%
4.6%
100.0%
RIO
Relative
39.2%
15.7%
7.9%
4.1%
4.3%
6.9%
6.5%
4.3%
7.3%
0.9%
2.9%
0.0%
100.0%
SMA Reports | Shaw and Partners Research
+61 2 9238 1299
[email protected]
Shaw and Partners
SMA Report – Large Cap – 06/03/2017 – Pg. 1
Market Overview
The Australian Share Market (ASX 100 Accumulation Index) rose by 2.28%, in February.
Despite a speed wobble in the resources sector in the past month which saw our Model
Portfolio give up a little ground, we remain in excess of the market over the quarter and
since inception with our reflationary trade positioning – adding to stocks we think we do
well as monetary policy normalises and inflationary pressures build. Valuations remain full
and it is difficult to find things to buy.
Macro-events, such as President Trump’s State of the Union address, China PMI data and
the Federal Reserve’s March interest rate decision will most likely set the tone for markets
for the next six months. We think the risks remain skewed to having inflationary pressures
build as the US labour market continues to tighten, China and Japan remain in stimulus
and Europe continues its painstakingly slow recovery.
Traditional Price to Earnings ratios continue to flash warning signs as the trailing PE ratio
(using more actual, rather than forward earnings) is approaching a level two standard
deviations above the historical average.
Reporting season has been “good, not great”, with 2017 earnings growth being revised up
slightly, but the outlook for 2018 and 2019 earnings growth remains subdued. Since the
end of January, 2017E EPS has been cut -0.17%, 2018E by -0.12% and 2019E by -0.95%.
The Top 100 stocks were expected to generate adjusted profits for the 2017 year of $92.3
billion, as at the end of 2016. Today that number is $94.2 billion, a difference of 1.98%. Of
this $1.8 billion difference, BHP alone comprised $943m, or 51.6%. The Big 4 banks
comprised another $400m, or 21.9%, leaving the remaining 95 stocks to comprise only
$485m.
In fact if we look at the so-called Bulk Commodity stocks in the Top 100, notably BHP,
FMG, RIO and S32 – they have provided the largest proportion of revised earnings
estimates.
Valuations remain elevated across the market. The trailing PE (using the past twelve
months of earnings) is up around 18 times. This looks better on a forward basis at 15.5
times, but this is still a historically high level. High PE markets are vulnerable to shocks.
Most leading indicators point to a continued acceleration of economic growth into 2017,
albeit from a lower base in 2016. Growth in the last half of 2016 disappointed which gives
us some nervousness around the impending reporting season. We note consensus
estimates point to 12% EPS growth in 2017, but only 3.2% in 2018.
Reporting season should be “good, not great” as many companies struggle to grow the top
line and with the consumer still on strike. Companies which have been able to pull costs
out or have a focus on merger and acquisition activity will probably do well.
Shaw and Partners
SMA Report – Large Cap – 06/03/2017 – Pg. 2
Contacts Page
Equities
Head of Equities
Mike Ryan
+612 9238 1527
[email protected]
Martin Crabb
Melody Matthews
David Spotswood
Annabel Riggs
Martin Crabb
Elliot Smith
Danny Younis
Matthew Johnston
Darren Vincent
Matthew Johnston
Peter O'Connor
Stuart Baker
Peter Zuk
Andrew Moller
+612 9238 1352
+612 9238 1299
+613 9268 1115
+613 9268 1147
+612 9238 1352
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+612 9238 1292
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+613 9268 1148
+612 9238 1211
+612 9238 1256
[email protected]
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Cameron Duncan
Steve Anagnos
+612 9238 1544
+612 9238 1513
[email protected]
[email protected]
David Erskine
Phillip Janis
Rob Pizzichetta
Roger Gamble
GamblePizzichetta
Sam Kanaan
+613 9268 1061
+612 9238 1503
+613 9268 1174
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Research
Head of Research
Executive Assistant
Banks, Insurance, Telecoms
Diversified Financials, Strategy
Technology & Online, Contractors, Retailers
Life Sciences, Travel
Metals & Mining
Oil & Gas
Real Estate
Small Caps
Income Strategies
Institutional Sales
Scott Coventry
+612 9238 1275
+612 9238 1363
[email protected]
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John Bowie Wilson
Grace Belsito
+612 9238 1253
+612 9238 1226
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[email protected]
Geoff Carrick
Damian Rigney
David Kells
Edward Loneragan
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+612 9238 1339
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Equity Capital Markets
Corporate Finance
Head of Corporate Finance
Sydney | Head Office
Level 15, 60 Castlereagh Street
Sydney NSW 2000
Telephone: +61 2 9238 1238
Fax: +61 2 9232 1296
Toll Free: 1800 636 625
Shaw and Partners
Melbourne
Level 20, 90 Collins Street
Melbourne VIC 3000
Telephone: +61 3 9268 1000
Fax: +61 3 9650 2277
Toll Free: 1800 150 009
Brisbane
Level 28, 111 Eagle Street
Brisbane QLD 4000
Telephone: +61 7 3036 2500
Fax: +61 7 3036 2599
Toll Free: 1800 463 972
[email protected]
[email protected]
Perth
Level 14, 197 St Georges Terrace
Perth WA 6000
Telephone: +61 8 6188 7643
Fax: +61 8 6188 7607
Toll Free: 1800 636 625
Adelaide
Level 21, 25 Grenfell Street
Adelaide SA 5000
Telephone: +61 8 7109 6000
Fax: +61 2 9232 1296
Toll Free: 1800 636 625
SMA Report – Large Cap – 06/03/2017 – Pg. 3
Rating Classification
Buy
Expected to outperform the overall market
Hold
Expected to perform in line with the overall market
Sell
Expected to underperform the overall market
Not Rated
Shaw has issued a factual note on the company but does not have a recommendation
Risk Rating
High
Higher risk than the overall market – investors should be aware this stock may be speculative
Medium
Risk broadly in line with the overall market
Low
Lower risk than the overall market
RISK STATEMENT: Where a company is designated as ‘High’ risk, this means that the analyst has determined that the risk profile for this company is
significantly higher than for the market as a whole, and so may not suit all investors. Clients should make an assessment as to whether this stock
and its potential price volatility is compatible with their financial objectives. Clients should discuss this stock with their Shaw adviser before making
any investment decision.
Disclaimer
Shaw and Partners Limited ABN 24 003 221 583 (“Shaw”) is a Participant of ASX Limited, Chi-X Australia Pty Limited and holder of Australian
Financial Services Licence number 236048.
ANALYST CERTIFICATION: The Research Analyst who prepared this report hereby certifies that the views expressed in this document accurately
reflect the analyst's personal views about the Company and its financial products. The Research Analyst has not been, is not, and will not be
receiving direct or indirect compensation for expressing the specific recommendations or views in this report.
DISCLAIMER: This report is published by Shaw to its clients by way of general, as opposed to personal, advice. This means it has been prepared for
multiple distribution without consideration of your investment objectives, financial situation and needs (“personal circumstances”). Accordingly,
the advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as
investment advice. You must assess whether or not the advice is appropriate for your personal circumstances before making any investment
decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of your Shaw
client adviser. This report is provided to you on the condition that it not be copied, either in whole or in part, distributed to or disclosed to any
other person. If you are not the intended recipient, you should destroy the report and advise Shaw that you have done so. This report is published
by Shaw in good faith based on the facts known to it at the time of its preparation and does not purport to contain all relevant information with
respect to the financial products to which it relates. Although the report is based on information obtained from sources believed to be reliable,
Shaw does not make any representation or warranty that it is accurate, complete or up to date and Shaw accepts no obligation to correct or update
the information or opinions in it. If you rely on this report, you do so at your own risk. Any projections are estimates only and may not be realised
in the future. Except to the extent that liability under any law cannot be excluded, Shaw disclaims liability for all loss or damage arising as a result of
any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report
notwithstanding any error or omission including negligence. This publication has been prepared in accordance with Shaw’s Research Policy. A copy
of the Policy can be found at www.shawandpartners.com.au.
DISCLOSURE: Shaw will charge commission in relation to client transactions in financial products and Shaw client advisers will receive a share of
that commission. Shaw, its authorised representatives, its associates and their respective officers and employees may have earned previously, or
may in the future earn fees and commission from dealing in the Company's financial products.
Sydney | Head Office
Level 15, 60 Castlereagh Street
Sydney NSW 2000
Telephone: +61 2 9238 1238
Fax: +61 2 9232 1296
Toll Free: 1800 636 625
Shaw and Partners
Melbourne
Level 20, 90 Collins Street
Melbourne VIC 3000
Telephone: +61 3 9268 1000
Fax: +61 3 9650 2277
Toll Free: 1800 150 009
Brisbane
Level 28, 111 Eagle Street
Brisbane QLD 4000
Telephone: +61 7 3036 2500
Fax: +61 7 3036 2599
Toll Free: 1800 463 972
Perth
Level 14, 197 St Georges Terrace
Perth WA 6000
Telephone: +61 8 6188 7643
Fax: +61 8 6188 7607
Toll Free: 1800 636 625
Adelaide
Level 21, 25 Grenfell Street
Adelaide SA 5000
Telephone: +61 8 7109 6000
Fax: +61 2 9232 1296
Toll Free: 1800 636 625
SMA Report – Large Cap – 06/03/2017 – Pg. 4