- Market Wrap
- Growth Portfolio Returns
- Defensive Portfolio Returns
- Feature Article: SMSF Lending Under the Spotlight
- Feature article: The New World of the Old
During the month of October the market provided some much needed stability to investors. Ironically this was led by the lack of action by the federal reserve and the acknowledgement that the US economy was not ready for a rate rise. Bad news is good news!
In the lead up to this announcement the Australian market fell by over 18% in a period of 20 weeks. Obviously there were a lot of other factors at play here but the simple fact is that the market does not like uncertainty and its default reaction to this uncertainty is to sell and continue to be sold until fear is exhausted. With all of this to consider the market had a relatively strong result in October pushing higher by about 4% by the end of the month.
The worst performing stocks on our market were Woolworths which warned its first half profit could plunge by up to 35 per cent after first quarter. This is a big number and it was subsequently sold down to continue its slide to fresh 5 year lows. The Aldi effect is everywhere to be seen and we maintain our underweight sentiment in the consumer staples sector at the moment. Interestingly ALDI is about 5 times bigger than Wesfarmers and Woolworths put together but they are playing the small boutique card extremely well at the moment.
One of the standout performers for the month was Bellamys Australia. We have taken profits on this position during the month as it just ran too hard to quickly – we are keeping a keen eye on this and will look to add this again to our growth portfolio when the timing is right. In a similar story we saw Blackmores hit $200 a share last month as they reported a significant earnings upgrade and stated their intention to tap into the infant formula market. With the Chinese government relaxing their one child policy we believe these stocks stand to benefit greatly over the next 5 years. Watch this space.
Growth Portfolio
We opened and closed a number of positions over the month.
We took profits on our Short Dow position which acted as a great hedge against the portfolio but also made a small loss on our Aussie Dollar Short.
We closed out of our TPG Telecom long position at a 9% profit and also made a modest gain shorting Sonic Healthcare. Challenger Financial was also closed locking a profit of over 10% from an entry price of $7.65. Inclusions to the portfolio were ELD & A2M – both of which are showing small profits at this stage.
For the month the portfolio reported a modest gain of .85% which is more of a reflection of our high cash balance. Since inception the portfolio is now over 20% higher than the XJO index.
We maintain our exposure to the Chinese market through the AMP Capital Chines Fund. This position looks set for a move higher as the Chinese market starts to see the effects of 6 interest rates cut of the last financial year. Investors a benefiting from a lower level of interest payable on margin lending accounts and this could provide a catalyst for another push out of the current trading range.
Growth Portfolio Returns
Defensive Portfolio
Our defensive portfolio continues to have a low standard deviation in comparison to the wider markets. The strategy itself looks at removing volatility from the market by protecting the value of the stock.
A number of our investments are now providing yields of over 7% per annum before imputations credits are being considered. We have a number of positions expiring in December of this year and we will be looking to reinvest heavily into these high yielding stocks.
Defensive Portfolio Returns
Feature Article: SMSF Lending under spotlight
In the month of October we have seen the Australian government reject the proposal to ban borrowings for Self-managed Super Funds.
The inquiry followed more than a five-fold increase in the SMSF debt in preceding two years to $15.6 billion. Those opposing the ban have argued however that $15.6 billion is a small portion of the $562 billion SMSF sector and an even smaller component of the $2.02 trillion total superannuation assets in Australia. Furthermore, they have added that we have already seen some major changes implemented by many lenders around the criteria of SMSF lending. In July and August 2015 many lenders have capped their lending ratios at 70%, down from 80%. Furthermore, we have also witnessed many lender specific requirements that have been introduced: Minimum liquid requirements such as holding 10% of the loan value in cash or other liquid assets, minimum SMSF assets of $150,000 as well as SMSF needing to be established at least 12 months prior to the loan application.
Recent developments have resulted in some lenders such as NAB to exit from the market altogether, while some new entrants have entered the market. This is furthermore fuelling changes in the lending criteria as well as the pricing of the SMSF loans.
Due to a higher perceived risk, SMSF loans have always and will continue to attract higher rates of interest.
The table below summarises difference in interest rates between SMSFs, individual property investors and home occupiers.
Feature Article: The New World Of The Old
By Greg Peel
There is no need to explain the thematic – Australia’s population is getting older. The result is growing pressure on the healthcare industry and on accommodation for the aged. Whereas once Australia’s older citizens either elected to live out their lives at the family home, or were packed off to a nursing home when it all became too much, today sees a boom in the provision of alternatives.
Enter the retirement village, providing housing options, healthcare services, community services and social facilities for the elderly to the not-so-old. Such facilities become more attractive when retirees realise the value of the property they likely now own outright and can sell in today’s market.
There are three providers of residential aged care (RAC) listed on the Australian stock exchange – Estia Health (EHE), Japara Healthcare ((JHC)) and Regis Healthcare ((REG)). Over the course of 2015, major Australian stockbrokers have been recognising the growth opportunities for these companies in what previously had been a fractured private market, and commenced coverage accordingly. Having already initiated coverage on Estia, UBS has now added both Japara and Regis to its universe, joining Deutsche Bank and Macquarie as FNArena database brokers to cover all three, and Morgans and Morgan Stanley to cover one or two.
Critical to the aged care industry is government policy, which of course offers up the risk of changes to government regulations. However, government policy has become increasingly supportive of residential aged care given subsidising retiree accommodation provides a beneficial outcome as the government negotiates its way through the realities of the impact of an ageing population on the economy. While future governments may fiddle about at the edges, it is unlikely the principal of government support would be tampered with and it would not be politically popular.
Regulatory changes made around twelve months ago provide three payment options for those entering a facility.
One option is to pay a refundable accommodation deposit (RAD), which is an upfront lump sum payment to the facility. It acts like an interest-free loan to the facility, which will draw upon the lump sum to cover the daily cost of accommodation and refund the balance when the resident departs, one way or the other.
Another option is to pay a daily accommodation payment (DAP) which is basically the same as paying rent and is typically paid in one month instalments in advance.
The third option is to pay a RAD/DAP combination of one’s choosing. In all cases, the government will subsidise all or some of the cost of accommodation in whichever form, depending on means testing.
DAPs clearly provide residential operators with a cash flow stream. RADs also provide a cash flow stream on the basis of resident turnover. UBS believes the market has overestimated the financial risks associated with shifts in accommodation payment preferences towards DAPs and RAD pricing. Funding policy settings and resident turnover rates moderate the impact of these risks, UBS notes.
The timing of cash flows means there is greater accretive value available to operators through acquisition of existing facilities rather than greenfield development, although both provide accretion, the broker notes. Acquisition delivers a higher internal rate of return, although development delivers a higher return on invested capital.
Whichever the case, UBS believes all three listed RAC operators boast highly accretive growth strategies in place that will continue to play out over the longer term. The industry is highly fragmented, thus “longer term” may be in excess of fifteen years.
Among the three, UBS’ initial recommendations come down to valuation versus current stock price. Not everyone in the market is yet to stumble upon this new investment sector. Otherwise, the story is relatively homogenous among all three.
UBS retains a Buy rating on Estia and has initiated with a Buy on Japara and a Neutral rating on Regis due to a full stock price.
Four FNArena database brokers now cover Estia, for the equivalent of three Buys and a Hold. The consensus target is $7.55.
Five brokers cover Japara, for four Buys and one Hold. Consensus target is $3.23.
And four cover Regis, for one Buy and three Holds. Consensus target is $6.09.
For more information please don’t hesitate to contact our investment team on 1300 220 360.
VFS Group
