Transcription of Finance News Network Interview with Ausbil Dexia Limited CEO and Head of Equities, Paul XiradisClive Tompkins: Hello, Clive Tompkins reporting for the Finance News Network. Joining me from Fund Manager Ausbil Dexia for an update is CEO and Head of Equities, Paul Xiradis. Paul welcome back.
Paul Xiradis: Thanks very much for having me back.
Clive Tompkins: Since we spoke last year, markets here and overseas have improved considerably. Are we on a more sustainable footing and can investors look forward to a smoother progression over the next year?
Paul Xiradis: Look I think we’ve had - yeah you’re right, we’ve had a very good recovery from its low. I am of the view that equity markets globally are going through an up cycle, and I think that Australia will also enjoy the benefits of that as well. We had a pretty good year last year in the sense of the market grinding up, by about 22 per cent. It didn’t feel that way, but it certainly did grind up and I think that’s going to be very much more the same this year as well. There are some issues that the market is still focusing on, but I think overall it is right to be overweight equities, and equities is the place to be.
Clive Tompkins: Now to the local market, it’s been as high as 5200 and then back to 4600, quite a volatile ride. What is your outlook for the two biggest sectors, financials and resources?
Paul Xiradis: Look you’re right; the financials have been a key contributor to the performance over the past 12 months. In fact they’re one of the strongest performing sectors, particularly the banks. And that was despite a lot of commentators saying the banks weren’t the place to be. I think the real reason why banks performed well was that the yields globally were contracting at that time. And banks in Australia from a running yield perspective, as in their fully franked dividend, were very attractive.
That was one point. The other point is that earnings were pretty steady against a backdrop, where industrial earnings for the rest of the market were falling. And the other factor is I think that on a relative basis, that they still represent a pretty good value. Our view is that the banking sector still has those attributes. We think the yield is still attractive, we think earnings are going to be pretty solid and we still think that they represent pretty good value. So our outlook for the banks is positive, but certainly won’t deliver the same sort of returns they delivered last year.
Now resources are a different story, they have been sold down aggressively over the past two years, as in very aggressively. And part of the reason is that a lot of these mining companies have really not had anything to show for themselves after a massive boom, which is quite disappointing. So if you’re going to invest in resources, I think you’ve got to be very selective. We have been increasing our exposure in resources and I’ll tell you the reason why in a minute. But because there are some opportunities and the baby has been thrown out with the bath water.
So if you’re going to invest in equities, you need to be invested in the big guys. The guys that can contribute and grow their production, can reduce their costs and not be reliant on commodity prices. And there’s only two or three groups that we can identify and we have those in our portfolio. That’s BHP Billiton Limited
(ASX:BHP), Rio Tinto Limited
(ASX:RIO) and Fortescue Metals Group Limited
(ASX:FMG).
Clive Tompkins: Good thanks, now to your active equity fund. Which sectors are you overweight and underweight relative to your benchmark, and why?
Paul Xiradis: Our sectors that we do favour, we have been following a theme for a period of time which is that we want to be exposed to companies, which have foreign earnings streams. Particularly US earning streams, because we’re very encouraged about the economic backdrop in the US. We think there’s going to be multi years of growth in the US; so therefore, we want to get good exposure to that. And if that’s the case, we also do believe there’ll be some correction in the strength of the Australian dollar, versus the US which would be just an added benefit.
So we have been overweight a lot of companies which have earnings coming out of the US. You know News Corp
(ASX:NNC) which is now Fox, is one of our major exposures. We’re overweight Brambles Limited
(ASX:BXB), again that’s a group which is well exposed to the US improving economy, and we maintain that position. And they have announced a spin-out of one of their groups, which will be only beneficial we believe in the longer run, for the overall company.
We have been increasing our exposure towards insurance and that may seem a little bit odd, because insurance sectors had a pretty good run, but we’ve added a new stock and that’s QBE Insurance Group Limited
(ASX:QBE). QBE is one of those companies which we think, is very well exposed to the improving backdrop as we see in the US, in the sense of the rising yield curve moving up. QBE will be the beneficiary and also currency. It’s also been a stock which has been oversold I think for a number of different reasons, and I think the outlook looks quite promising from here.
Clive Tompkins: And on the flipside, where have you reduced holdings?
Paul Xiradis: We still like the banking sector but we have reduced our exposure slightly there, in order to fund other acquisitions that we do like. We’ve also reduced our exposure towards Telstra Corporation Limited
(ASX:TLS), that’s been a very strong position for us over the past two years - performed exceptionally well. We still think there’s further upside but on a relative basis, we decided to reduce our exposure there. Mining services is an area that we don’t have much exposure to, but we did have some exposure. So we reduced our exposure towards that end as well, because we think it’s going to be pretty tough for the next two or three years, for the mining services end of the market.
Clive Tompkins: OK thanks Paul. So how’s the Fund performed both in absolute terms and relative to your benchmark?
Paul Xiradis: Look in absolute terms, we had a very good year to the end of June. It returned almost 26 per cent, 25.7 in fact, which outperformed the benchmark by 380 points. So that’s a good year for us we believe. And I think the outlook for us over the next 12 months given our positioning, we should have an equally good year this year as well.
Clive Tompkins: Last question Paul. Where do you see the index and interest rates by the end of the year?
Paul Xiradis: Interest rates, we think that interest rates in normal terms and the cash rate will be lower. But there’s a prospect that the long bond rate may move up a bit higher, that’s in keeping with the global trend. So that’s a bit of a two prong answer there. So cash rates lower, but long bond rate a bit higher. We think that will translate into the equity market – that’s a good backdrop for the equity mark in our view, and we’ll see the equity market higher. We think it will take out its previous recent highs of 5200 and perhaps on a 12 months view, heading towards 5500.
Clive Tompkins: Paul Xiradis, thanks for the update.
Paul Xiradis: Not a problem, thank you.
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