Transcript DNR Market Update – March 2014

Investment review
February 2014
Market wrap
Monthly performance overview

The S&P/ASX200 Accumulation Index ended up 5% higher for the month.

News flow for month was dominated by companies reporting first half results.

Company results characterised by soft top line growth offset by cost out initiatives.
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Market review
 What we learnt during reporting season
− Focus on top line growth;
− Housing is improving;
− Cost cutting remains a focus;
− Resource companies improving;
− Still tough for mining services; and
− Banks delivering.
 Questions that remain
− Economy recovering but will job losses impact;
− Chinese growth rates; and
− QE unravelling.
3
Reporting season lessons
Focus on top line revenue growth
 Disproportionate response to a small basket of growth stocks.
 Market’s valuation of these stocks now appears to be dangerous.
 Remain disciplined on valuation and see the following opportunities:
− Cyclical, unknown or recovery phase revenue growth on low multiples;
− Greater focus on M&A and less dividend returns; and
− Companies delivering strong bottom line growth through restructuring.
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Reporting season lessons
Housing is improving
 Housing responding to lower interest rates.
 Apartment sales remain strong.
 Increasing amount of affordable house and land packages.
 Decade of undersupply, favourable approval process and RBA seeking to stimulate economy.
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Reporting season lessons
Financial services displaying strong recovery
 Companies exposed to improving equity market displaying strong results.
 Driven by level inflows, equity performance and low interest rates.
 Increase in M&A and IPO’s.
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Reporting season lessons
Cost cutting remains a strong focus
 Despite revenue focus, a number of companies have announced cost out programs.
 Market responded positively, however tended not to re-rate these stocks.
 We continue to see value in some of these companies.
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Reporting season lessons
Resource companies improving
 Market is focused on near term outlook of iron ore prices.
 Major resource companies are improving fundamentals by taking out costs, increasing cash
flow and reducing capex.
 Patient shareholders will be rewarded in longer term.
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Reporting season lessons
Mining services still tough
 Cost cutting programs make it difficult for mining services players.
 We saw downgrades even from leaders in this segment.
Banks deliver
 Strong results with bad debts lower than the market expected.
 While now sign of deterioration some caution is warranted as bad debts are well below long
term averages.
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Questions that remain
Economic recovery
 Better than expected recovery, positive retail figures, housing and positive equity markets.
 Will job losses impact recovery?
Chinese growth rate
 Nervous market regarding shadow banking outlook, expectation defaults will accelerate.
 Government support via a stimulus package will be a focus.
 Will resource companies outperform while these doubts persist?
QE unravelling
 We have positioned the portfolio on the side of QE unravelling, expecting a decrease in A$ and
bonds to ease.
 In past two months A$ and bond yields have stabilised.
 Can they hold their current levels in face of unravelling QE?
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Current portfolio positioning
 Companies which can control their profit and value accreting outcomes (NAB, ORG,
TWE, AZJ).
 Top line growth in housing, market exposure (LLC, HGG, MQG).
 Offshore plays (BXB, QBE).
 Resource stocks (BHP, RIO).
 Cautious on high PE growth stocks following a strong re-rating last year.
 Underweight the high yielding segment which can suffer as QE unravels.
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Performance
PERFORMANCE FOR PERIOD ENDED:
AUSTRALIAN EQUITIES - High Conviction
DIRECT AUSTRALIAN EQUITY PORTFOLIO
ASX S&P 200 ACCUMULATION INDEX
28/02/2014
PROPERTY
DIRECT LISTED PROPERTY TRUST PORTFOLIO
ASX S&P PROPERTY ACCUMULATION INDEX
1 MONTH
4.19%
4.97%
-0.78%
1 MONTH
4.10%
4.97%
-0.87%
1 MONTH
3.57%
4.91%
-1.34%
1 MONTH
4.37%
4.33%
6 MONTHS
11.25%
7.59%
3.7%
6 MONTHS
11.28%
7.59%
3.69%
6 MONTHS
11.54%
8.07%
3.48%
6 MONTHS
6.91%
4.26%
1 YEAR
16.71%
10.64%
6.1%
1 YEAR
16.20%
10.64%
5.56%
1 YEAR
19.63%
13.98%
5.65%
1 YEAR
5.59%
3.86%
2 YEARS
21.31%
17.22%
4.1%
2 YEARS
21.20%
17.22%
3.99%
2 YEARS
28.62%
25.27%
3.35%
2 YEARS
17.87%
17.71%
3 YEARS
12.18%
8.68%
3.5%
3 YEARS
12.37%
8.68%
3.69%
3 YEARS
17.5%
15.5%
2.09%
3 YEARS
11.45%
11.64%
5 YEARS
18.8%
15.08%
3.7%
5 YEARS
18.09%
15.1%
3.01%
5 YEARS
19.3%
18.8%
0.51%
5 YEARS
18.41%
15.9%
SINCE INC
13.7%
10.1%
3.6%
SINCE INC
10.11%
5.6%
4.51%
SINCE INC
6.2%
3.4%
2.81%
SINCE INC
8.25%
3.7%
FIXED INTEREST
0.04%
1 MONTH
2.65%
6 MONTHS
1.72%
1 YEAR
0.16%
2 YEARS
-0.19%
3 YEARS
2.52%
5 YEARS
4.5%
SINCE INC
0.70%
0.70%
0.51%
0.20%
1 MONTH
2.79%
2.30%
0.49%
3.35%
3.42%
2.84%
0.5%
6 MONTHS
12.59%
14.34%
-1.75%
5.94%
6.17%
4.96%
1.0%
1 YEAR
36.27%
40.38%
-4.10%
8.17%
8.56%
7.38%
0.8%
2 YEARS
26.70%
27.48%
-0.78%
7.77%
8.37%
7.65%
0.1%
3 YEARS
16.13%
14.88%
1.25%
11.23%
11.89%
7.38%
3.8%
5 YEARS
12.8%
12.3%
0.46%
6.58%
6.93%
6.5%
0.1%
SINCE INC
7.2%
4.9%
2.23%
AUSTRALIAN EQUITIES - Socially Responsible
DIRECT AUSTRALIAN EQUITY PORTFOLIO
ASX S&P 200 ACCUMULATION INDEX
AUSTRALIAN EQUITIES - Income
DIRECT AUSTRALIAN EQUITY PORTFOLIO
ASX S&P 200 INDUSTRIAL ACCUMULATION INDEX
DIRECT AUSTRALIAN FIXED INTEREST PORTFOLIO
FIXED INTEREST inc FRANKING
UBS CORPORATE BOND INDEX
INTERNATIONAL EQUITIES
INTERNATIONAL MANAGED FUNDS PORTFOLIO
MSCI EX AUST IN AUD
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Disclaimer
SOURCES
GoldmanSachs
Macquarie
Morgan Stanley
IRESS
Bloomberg
DISCLAIMER
This document has been prepared by Dalton Nicol Reid Pty Ltd, AFS Representative - 294844 of DNR AFSL
Pty Ltd ABN 39 118 946 400, AFSL 301658. It is general information only and is not intended to be a
recommendation to invest in any product or financial service mentioned above. Whilst Dalton Nicol Reid has
used its best endeavours to ensure the information within this document is accurate it cannot be relied upon
in any way and recipients must make their own enquiries concerning the accuracy of the information within.
The general information in this document has been prepared without reference to any recipients objectives,
financial situation or needs. Before making any financial investment decisions we recommend recipients
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