Ellerston Australian Market Neutral Fund PERFORMANCE REPORT March 2015 Fund performance^ (Net) Net Jan Feb Mar 2015 -0.15% 1.09% 1.41% 2014 2.50% 0.33% 0.93% April May June July Aug Sept Oct Nov Dec YTD 2.36% -0.47% 2.31% 2013 3.60% 1.24% 2.42% 3.16% -0.82% 1.53% -0.95% 16.82% 0.48% 1.12% 1.74% 1.38% 2.87% -0.34% 2.54% 10.18% ^ The net return figure is calculated after fees & expenses. The gross return is calculated before fees & expenses. Past performance is not a reliable indication of future performance. The benchmark is the RBA Cash Rate. The Fund commenced on 3 June 2013. Return Net BM Alpha Gross Portfolio Metrics 1 Month 1.41% 0.20% 1.21% 1.84% Positive months 3 Months 2.36% 0.57% 1.78% 3.13% No. Relative Value positions FYTD 9.21% 1.83% 7.37% 12.07% No. Special Situations 1 Year 15.20% 2.46% 12.74% 19.80% Net equity exposure 17.9% Since inception^ 31.74% 4.64% 27.11% 42.24% Gross Portfolio Exposure 81.0% Since inception^ p.a 16.23% 2.50% 13.72% 21.19% Beta Adjusted 9.9% Correlation coefficient (vs ASX 200 Accum) -0.37 77% 32 7 Net Sharpe Ratio ( RFR = RBA Cash) Performance The Fund had a profitable month, generating a net return of +1.4% relative to the benchmark return of +0.2%. The quarterly performance also exceeded the benchmark, with the Fund returning +2.4% (net) relative to the benchmark’s +0.6%. Relative Value produced a gross return of +1.4% during the month and +3.3% (gross) for the quarter. Special Situations contributed a gross return of +0.4% in March, however detracted 0.2% over the quarter. Net equity exposure was +17.9% at month-end and +9.9% on a beta-adjusted basis, with the beta closing slightly above the since-inception average of +6.5%. The gross exposure remained steady during the quarter, closing the month at 81.0% Our long position in Yowie Group (+8.2%) added to performance in March, following an update on sales and distribution. The Yowie confectionary product is now available in over 5,000 retail outlets in the US with potential rollout to an additional 19,000 stores. Sales have exceeded expectations and trial results in additional retail networks continue to look promising. Ellerston Capital Limited ABN 34 110 397 674 AFSL 283 000 Level 11 179 Elizabeth Street Sydney NSW 2000 Tel: 02 9021 7797 Fax: 02 9261 0528 [email protected] www.ellerstoncapital.com APIR Code: ECL0013AU 3.1 A Building Materials pair comprising a long position in GWA Group (+3.6%) hedged with a short in CSR (-6.5%), contributed most to Relative Value during March. Following a review of their aluminium price forecasts, several analysts cut their CSR recommendation leading to a fall in the share price. A pair within the Utilities sector that featured a long in Spark Infrastructure Group (-4.9%) and a short position in Ausnet Services (-0.3%) also contributed during the month. The Ausnet share price exhibited escalated volatility during the month, with the pair initiated when Ausnet reached record levels and unwound just prior to the intra-month low (-5.8%). A sell down in APN News & Media (+3.1%) by two major shareholders provided the opportunity to establish a long position in APN, hedged with a short in Fairfax Media (-0.5%). The APN trade was transacted at $0.88, which represented a 6.4% discount to the previous close. The pair added to the performance of the Fund, as the market digested the implications of New Corp’s (5.6%) involvement in the block trade in which they increased their stake in APN to 14.99% (subject to regulatory approval). A long position in GDI Property Group (+0.5%) hedged with a short in Stockland (-4.1%), together with the contracted News Corp spread (-5.6%), contributed positively in the month. On the downside, pairs containing Charter Hall Group (+2.0%) hedged with Charter Hall Retail (-5.9%), Scentre Group (-3.1%), and GPT Group (-2.8%) detracted modestly from performance. Despite these detractors, pairs within the REIT sector were the primary net contributor to performance in the period. Touchcorp (+10.7%) listed in late March, with the share price performance adding value to Special Situations. Orion Health Group (-7.2%) was the primary detractor, with management expecting the 3Q cash flow slowdown to continue in the fourth quarter. Activity Relative Value – Gross Contribution +1.4% As previously mentioned, we participated in the APN News & Media (+3.1%) sell down during the month, in which two major shareholders sold their respective interests. The sale of approximately 30.8% of APN’s issued capital involved Independent News & Media (held 18.6%) and Baycliffe (held 12.2%) selling their shares in APN at $0.88 per share via a block trade. Media giant News Corp (-5.6%), participated in the transaction, purchasing 10% of APN to bolster their existing 4.99% stake (subject to regulatory approval). News Corp is attracted to APN’s high quality portfolio of Australian and New Zealand assets. With over 60% of APN’s proportionate earnings now in growth media (up from 44% 12 months ago), we believe the company is well positioned in the media space. Long positions were established in Investa Office Fund (-3.0%) and Arena REIT (+0.3%) in late February, with both hedged against short positions in Stockland (-4.1%) and Mirvac Group (-3.4%). We profitably unwound the four pairs in early March, as the long positions tracked horizontally while the short positions fell sharply for a +0.2% collective contribution. We took advantage of share price weakness in Goodman Group (+1.8%) to establish a long position, and hedged the exposure with a short position in Charter Hall Group (+2.0%) and Scentre Group (-3.1%). We unwound the two pairs after the spreads converged for a +0.1% collective contribution to the Fund. In late March, we once again benefited from retreating REIT levels, initiating a long position in Abacus Property Group (-4.8%) and hedging it with GPT Group (-2.8%). The paired position was unwound for a modest contribution subsequent to the fall in the share price of GPT. Special Situations – Gross Contribution +0.4% We established a long position in electronic transaction company Touchcorp (+10.7%) which listed late in the month. Touchcorp provides the infrastructure that facilitates transactions of non-physical products such as mobile phone recharges and toll road passes. The company has been operating for over 15 years and has a client base that includes some of the largest Australian telecommunications companies as well as convenience stores, toll road operators and Medicare. Whilst the headline multiple of 20x 2015 earnings looks high, we think that the expected growth in earnings more than justifies the price and anticipate that the share price will track higher following the listing. Following Court approval of the Scheme of Arrangement and subsequent delisting, our holding in Chandler Macleod (+1.3%) was removed from the portfolio. Sector Banks Long Equity 0.0% Short Equity 0.0% Net Equity 0.0% Div Financials 1.7% 0.0% 1.7% Insurance 0.0% 0.0% 0.0% REITs 20.2% -12.5% 7.7% Financials 21.9% -12.5% 9.4% Builders 2.8% -2.4% 0.4% Consumer Disc 0.0% 0.0% 0.0% Consumer Staples 4.2% 0.0% 4.2% Gaming 0.0% 0.0% 0.0% General Industrials 0.0% 0.0% 0.0% Health Care 2.8% 0.0% 2.8% Infrastructure 0.5% -0.5% 0.0% Media 10.9% -10.7% 0.2% Telcos 3.0% -3.0% 0.0% Utilities 0.7% -0.7% 0.0% Industrials 24.9% -17.3% 7.6% Energy 2.3% 0.0% 2.3% Gold 0.0% 0.0% 0.0% Resources 2.3% 0.0% 2.3% Hedge 0.0% -1.4% -1.4% Index 0.0% -1.4% -1.4% Total 49.1% -31.2% 17.9% Market Commentary After coming close to breaching the 6,000 point barrier several times during March, the local S&P/ASX 200 finished largely unchanged (-0.06%) by month end, printing its strongest quarter (+10.3%) in 24 years to end at 5,891. Global markets sold off initially as speculation around an imminent rate hike in the US mounted. Subsequent more dovish-than-expected commentary in the Fed’s March statement alluded to a delay in the much-anticipated rate hikes, which ignited a relief rally midway through the month and caused global indices to reclaim some lost ground. Despite this, the MSCI World index (-1.6%), the S&P500 (-1.6%) and the FTSE 100 (-2.5%) all ended lower. Europe, as measured by the Euro Stoxx 50, outperformed (+2.7%), led by Germany’s DAX up 5.0%, with QE purchases kicking off from the outset, as did Japan with the Nikkei 225 posting a 2.2% gain. Chinese shares were the clear outlier during the month, with the Shanghai 300 rallying 13.4%. At a sector level, Materials (-4.5%) lagged, whilst Banks (+2.5%), IT (+2.6%) and Healthcare (+2.1%) outperformed. Excess supply in commodities markets overshadowed a cyclical bounce in China. Even with the Chinese equity market rising strongly on the back of continued policy easing, ongoing supply concerns weighed on the iron ore price, with the spot market falling another 12% and ASX Resources (-6.0%). FY16 consensus earnings for the Miners were cut by circa 11% during the month, despite having already been revised down by over 35% during calendar 2014. The resource sector now trades in line with the broader market at 15.8x 2016 PER. Having stabilised for a month or so, renewed A$ weakness to fresh 6 year lows (now approaching 76 cents vs. the USD) again supported the offshore earners (+3.6%) which have delivered strong returns (+17% CYTD). Stocks in Australia with >50% of revenue from US/Europe now trade at an average forward PER of 22x. The best performers in this category for the month included Aristocrat (+13.3%), ResMed (+13.0%) and Ansell (+10.0%). Conversely, the worst $A sensitive performers included Alumina (-12.7%), BlueScope (-12.7%) and TWE (-4.6%). This month WBC, CBA, ANZ and NAB added the most points to the ASX200 index, while BHP and Woolworths were the biggest detractors. Domestically, the RBA left rates unchanged at 2.25% in early March, commenting that domestic growth was continuing at a “below-trend” pace. In China, PBOC governor Zhou Xiaochuan stated that growth had slowed “a bit too much” and that policy makers had scope to respond with interest rates and other quantitative measures following a below-trend February growth print of 6.3% y/y. Long-term bond yields fell in both the US and Australia, with the yield differential continuing to narrow to 35bps, the lowest gap in 15 years. Relative Value Gross Contribution +1.4% Positive Special Situations Gross Contribution +0.4% Positive CSR - GWA GROUP 0.12% YOWIE GROUP 0.49% AUSNET SERVICES - SPARK INFRASTRUCTURE 0.11% TOUCHCORP 0.19% APN NEWS & MEDIA - FAIRFAX MEDIA 0.11% CHANDLER MACLEOD GROUP 0.05% GDI PROPERTY GROUP - STOCKLAND 0.10% NEWS CORP - NEWS CORP NEW 0.09% Negative Negative CHARTER HALL GROUP - CHARTER HALL RETAIL REIT -0.07% ORION HEALTH GROUP -0.23% CHARTER HALL GROUP - SCENTRE GROUP -0.03% S&P/ASX 200 INDEX -0.04% SINGAP0RE TELECOMM - TELSTRA CORP -0.03% PAPERLINX -0.02% CHARTER HALL GROUP - GPT GROUP -0.01% CALTEX AUSTRALIA -0.01% ADELAIDE BRIGHTON - GWA GROUP -0.01% Distribution of Strategy Returns (Net) Key Information 14 Fund Inception Date: 3 June 2013 Frequency 12 Liquidity: Daily Management Fee: 1.20% 10 Performance Fee: 20% of outperformance Buy/Sell Spread: 0.25% 8 Application price: $1.1274 6 Redemption price: $1.1218 Fund AUM: $61.36M 4 Core Concentrated Team AUM: $2,907M Firm AUM: $4,096M 2 % return for the month 4 to 5 3 to 4 2 to 3 1 to 2 0 to 1 ‐2 to ‐1 ‐1 to 0 0 Key Service Providers Registry: Link Market Services Limited Auditor: Ernst & Young Prime Broker & Derivative Counterparty: Morgan Stanley Intl & Co PLC Administrator: BNP Paribas Securities Services TOP RELATIVE VALUE POSITIONS TWENTY-FIRST CENTURY - TWENTY-FIRST CENTURY FEDERATION CENTRES - NOVION PROPERTY GROUP NEWS CORP - NEWS CORP SINGAP0RE TELECOMM - TELSTRA CORP CHARTER HALL GROUP - CHARTER HALL RETAIL REIT BORAL - GWA GROUP GDI PROPERTY GROUP - GOODMAN GROUP GDI PROPERTY GROUP - MIRVAC GROUP ASTRO JAPAN PROPERTY GROUP - HOTEL PROPERTY INVESTMENTS CHARTER HALL GROUP - GPT GROUP TOP SPECIAL SITUATION POSITIONS YOWIE GROUP ORION HEALTH GROUP CALTEX AUSTRALIA TOUCHCORP S&P/ASX 200 INDEX SUNCORP FLOATING RATE NOTES NUFARM FINANCE Material Matters During the month there were no material changes to the Fund in terms of its risk profile, investment strategy or changes to investment staff which would impact this strategy. There have been no changes to the key service providers described above. Further Information Retail investors ECS Investment Partners NSW/QLD/ACT Adam Coughlan 0418 653 560 [email protected] VIC/TAS/SA/WA Andrew Seddon 0417 249 577 [email protected] DISCLAIMER This newsletter has been prepared by Ellerston Capital Limited ABN 34 110 397 674 AFSL 283 000, the responsible entity of the Ellerston Australian Market Neutral Fund ARSN 168 025 670 (Fund) without taking account of the objectives, financial situation or needs of investors. Before making an investment decision about the Fund persons should obtain advice from an appropriate financial adviser and consider their own individual circumstances and obtain a copy of the Product Disclosure Statement dated 31 March 2014 for the Fund which can be obtained by contacting [email protected] Actual performance for your account will be provided in your monthly account statement which may vary from that set out in this newsletter and will vary for investments made in different classes, or at different times throughout the year. This material has been prepared based on information believed to be accurate at the time of publication. Assumptions may have been made which may prove not to be accurate. Ellerston Capital undertakes no responsibility to correct any such inaccuracy. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information. To the full extent permitted by law, none of Ellerston Capital Limited, or any member of the Ellerston Capital Limited Group of companies makes any warranty as to the accuracy or completeness of the information in this newsletter and disclaims all liability that may arise due to any information contained in this newsletter being inaccurate, unreliable or incomplete. Past performance is not indicative of future performance.
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