Ausbil optimistic on corporate activity

Funds Management

by Donna Sawyer

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Transcription of Finance News Network Interview with Ausbil Dexia Limited Director of Equities, John Grace

Donna Sawyer: Hello I’m Donna Sawyer from the Finance News Network and joining me from Fund Manager Ausbil, is Director of Equities, John Grace. John welcome back to FNN.

John Grace: Thanks Donna, nice to be here.

Donna Sawyer: The recent reporting season has been and gone with mixed results. How did Australian companies fair in your opinion overall?

John Grace: I think mixed is a very good description Donna. A lot of companies did quite well depending on what sectors they were in, particularly industrials. Other sectors didn’t go so well such as resources, but overall the market had another year of relatively flat earnings.

Donna Sawyer: How did midcap stocks compare to their smaller and larger peers?

John Grace: Overall the economy’s been fairly indifferent for companies. The larger cap stocks were very aggressive in cutting costs, you know, the low sales growth environment and therefore, beat expectations in general. Smaller cap stocks didn’t really have to cut costs as aggressively as the larger cap stocks. And were therefore, looking for more growth options and generally performed better in our view.

Donna Sawyer: The market has rallied quite strongly since we last spoke. That said we have seen it dip to 4,600 this year. Do you think the worst is behind us now, or is there still a degree of caution lingering?

John Grace: Yeah the market’s viewing things a little more optimistically at the moment, and that’s leading to some PE expansion. So we are waiting for the earnings to come through as economies recover, but things are still slightly cautious. But overall, on the improve.

Donna Sawyer: What’s your outlook for the market now that we have the certainty of a newly elected Federal Government?

John Grace: Matters picked up quite nicely since the Federal election, rising about four per cent since that date. Overall companies seem a little bit more positive with regards to CAPEX plans and expansion plans. You can see consumer confidence numbers starting to come through as well. So overall, we’re a little bit more optimistic on the outlook for the equity market.

Donna Sawyer: Now to your Australian Emerging Leaders Fund. Which sectors is the portfolio overweight in?

John Grace: Given a more optimistic view on markets, the portfolio is more cyclically positioned. So those stocks will benefit from improving economy such as retailing, such as media and consumer related services. In addition, as the market performs well, those sectors linked to the market such as banks and financials, we are also overweight in.

Donna Sawyer: OK, so which sectors are you underweight in?

John Grace: We’re underweight defensives as a result of our more optimistic view on the market. So underweight REITs, utilities, healthcare etc.

Donna Sawyer: In the Emerging Leaders universe, what have been the best performing sectors over the past six months, and how’s your portfolio weighted to capitalise on that?

John Grace: The last quarter seemed quite a big rebound in the resources sector, particularly small resources and sectors such as gold.
Portfolios not well positioned in the gold sector being a nil weight, but we have some really good selections in the smaller resources sector. The portfolio has done well there. In other sectors, such as media and retailing, also had a very good quarter and the portfolio’s overweight both of those sectors with some really high quality stocks, rallying well with the market.

Donna Sawyer: At a stock level, what were the largest contributors to your performance?

John Grace: Well with the market performing quite strongly, those stocks related to the market have done well. Stocks such as Henderson Group (ASX:HGG) have been performing exceptionally well. And in the banks, our big position in the Bank of Queensland (ASX:BOQ) has also been a big contributor to our performance.

In the media sector, our overweight position in Seven West Media (ASX:SWM) has also been performing quite well. Our position in Fairfax (ASX:FXJ) has been a little bit disappointing, but we’re expecting bigger things from that in the next quarter or two. And in the retailing space, JB Hi-Fi (ASX:JBH) and David Jones (ASX:DJS) have done exceptionally well for us, in terms of relative performance.

Donna Sawyer: So what were the biggest detractors over that period?

John Grace: We’ve had two stocks that have been frustrating us a little. The first one is Bluescope Steel (ASX:BSL), which did not have a great result at the August reporting period. But the stock is well positioned for the next 12 months as global growth picks up; and particularly well positioned in the housing cycle, which is showing some good improvement. The second one is McMillan Shakespeare (ASX:MMS) which suffered a drop coming up to the election, with potential changes to the fringe benefits tax. The stock has subsequently had a bounce as the election result came out.

Donna Sawyer: How has the Fund performed relatively to your benchmark over the past year?

John Grace: The Fund’s had a cracking 12 months, up over 30 per cent relative to the benchmark of just over 15 per cent.

Donna Sawyer: What key changes have you made to your portfolio?

John Grace: With the market starting to improve, our confidence is starting to rise with regards to the outlook, as mentioned earlier. We’ve added to some more cyclical positions in the retailing, such as Harvey Norman (ASX:HVN) which will benefit from a better retailing environment, but also a housing environment. Likewise our confidence is rising in Bank of Queensland as new management starts to take control there. And we’ve added to that position, such as it is now, the biggest stock in our portfolio.

Donna Sawyer: What are the risks you’re considering right now?

John Grace: Global risks are always present. What we really want is the domestic economy to get some confidence and start picking up, because we really need earnings to start following through as the market has expanded, i.e. PEs have expanded. So we really need the earnings to follow through, particularly in those cyclical sectors.

Donna Sawyer: Finally John. What is your outlook regarding corporate activity over the next 12 months?

John Grace: I’m pretty bullish on corporate activity over the next 12 months. Balance sheet is in great shape, interest rates are at record lows and management is starting to look at some growth optionality. So do expect some takeovers to start coming through. In addition IPOs are starting to hit the market as well, as investors are a little bit more bullish. So we can see a few more of those over the next three to six months in particular.

Donna Sawyer: John Grace thanks for the update.

John Grace: Thanks Donna.