TRANSCRIPTION OF FINANCE NEWS NETWORK INTERVIEW WITH AUSBIL DEXIA LIMITED (S&P/ASX) FUND MANAGER, JOHN GRACEClive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me from fund manager, Ausbil Dexia for an update is fund manager, John Grace.
John welcome back. Reporting season’s over for another six months, what’s your assessment of the results?
John Grace: Yeah thanks Clive, another interesting reporting season that’s quite mixed all across the industries. For example, those stocks tied into commodity producing - iron ore, coal, copper in particular, all did particularly well with firm commodity prices, as well as those stocks tied into the commodity prices i.e. the mining contractors, the drillers, the explosive companies, the supply of companies to the mining industry, all had particularly strong results.
Conversely the industrial sector which is tied into the domestic economy did struggle a little bit with the economy struggling with higher interest rates and a very sluggish consumer who’s going through a high savings rate. The financials also had a reasonable result as credit growth starts to slowly pick up from a very low base.
Clive Tompkins: Now John the impact of the floods and Cyclone Yasi is yet to be felt by corporate Australia, where do you go as a fund manager for safety?
John Grace: Yeah safety is not really the angle that we would look for in a natural disaster like this because the event has happened. So what you now look for is the opportunity for restocking, for rebuilding, for reinsurance and therefore the opportunities are quite wide across the whole market.
As an example Boral has done quite well knowing that volumes for most of their products will start to lift as the economy starts to recover and rebuild, as people look to refurbish their houses. TVs, white goods, electrical, lounge suites etc., dining tables, and companies such as Harvey Norman, David Jones, Myer those suppliers will benefit.
Conversely the banks and the insurance companies have seen the worst of it and they’ll pay out the claims. And then they’ll start to benefit as more and more people reinsure their houses and go through flood insurance etc.
Clive Tompkins: John turning to your flagship fund, the Active Equity Fund, are you still overweight materials and underweight the banks?
John Grace: Yes we still have a positive view on the resource space, so we’re overweight the big diversified miners and to a lesser extent, the leveraged miners. We do see those companies benefitting from a very strong commodity price outlook as well as very strong balance sheets, which they can then reinvest in their own business in terms of CAPEX and redevelopment. But also reward shareholders with high dividends, stock buy-backs in the case of BHP, which announced an off-market buy-back and also benefits longer term to shareholders with reinvesting into their businesses, and capitalise on those higher commodity prices.
Turning to the banking sector, we have come from an underweight position and we’ve now neutralised that through the purchase of the banking sector across the fund. The key reasons are an improved earnings outlook from a benign bad debt environment as well as an improving credit growth environment, which should ultimately lead to the improving outlook for the banks’ earnings. And in valuation terms they do look quite attractive at these levels.
Clive Tompkins: Okay John, so what are some of your bigger positions in the fund?
John Grace: Some of the bigger positions include the big diversified miners BHP Billiton and Rio Tinto where we have strong overweight positions. In the banking sector we do favour ANZ Bank, given a strong management team and a very strong outlook into the growth in the Asian market, which is below 20% of earnings at the moment but looking forward, will grow very strongly from that position.
One of the big positions in the fund continues to be Amcor. They’ve made a very strong acquisition in the Alcan Assets through 2008/2009, one of the very few companies to raise capital for acquisitive purposes and they’re starting to see the benefit from that acquisition. Increased synergies, increased diversification of earnings and that result that just came through in February showing a very good delivery of earnings growth relative to expectations, and we’re seeing upgrades coming for Amcor.
One of the other key positions in our portfolio is Seven Group Holdings. Business is performing well particularly after that acquisition of WesTrac last year. Now they’re optimising their media assets by doing a sale of the media assets to West Australian News and taking stock in lieu of that position. And therefore, that business is now more simplified for Seven Group Holdings and we should see some strong earnings upgrades.
Clive Tompkins: John, large cap stocks have been struggling in recent months; do you expect this to change?
John Grace: Yeah it’s been an interesting dynamic in the market where the large caps have really struggled through macro issues. However, what that has resulted in is quite a cheap market in that the underlying earnings remain reasonably strong and these stocks should benefit going forward.
Clive Tompkins: John, last question. What’s it going to take the market to get over the 5000 point level and stay there?
John Grace: With macro conditions gradually improving from an economic sense, we do expect the Australian market to rally and re-rate from these levels and therefore, easily achieve the 5000 index level over the course of this calendar year.
Clive Tompkins: John Grace thanks as always for the update.
John Grace: Thank you Clive.
ENDS
