Performance Summary
* All Platypus Performance data is provided on an after fees basis.
Past Performance
February 2010
Month in Review
The Platypus flagship portfolio gained 2.9% after fees in February, outperforming the benchmark ASX/S&P300 accumulation index by 0.9%. Positions in Financials and Materials sectors contributed to the outperformance whilst a nil weighting in Telecommunications was also helpful. Healthcare and cash detracted from relative performance during February. At the stock level, Medusa Mining, Ten Network and Seek were the best performing stocks in the Platypus portfolio. Not holding Telstra and National Australia Bank added to the month’s alpha. Positions in Toll Holdings, Chemgenex and Sonic Healthcare cost the portfolio performance, as did a nil position in CSL.
Turnover in February was around 5% of the portfolio, which is relatively low during a company reporting period. The cash weighting ended the month at just over 9%.
Sector in Review
February was a volatile month which saw the market caught between disconcerting macro developments and a reasonably solid Australian reporting season. The ASX/S&P 300 Index finished the month with a +2.05% total return.
Consumer Staples (+7.29%) stood out as the leader with strong performance from Wesfarmers and Woolworths after both posted good first half results for financial year 2010. Healthcare (+3.92%), Utilities (+2.87%) and Consumer Discretionary (+2.31%) were the other outperformers. The notable laggard was Telecom (-6.34%) with Telstra disappointing the market after reporting an absolute fall in revenues and guiding to a full year decline for the first time in its life as a listed company. Industrials (-0.20%) was the second worst performing sector in the month highlighting that the better than expected results during the reporting season were driven by the retailers, large banks and diversified resources companies. Energy (+0.43%) was uninspiring as the index heavies remain trapped in a news vacuum with the market awaiting final investment decision on Santos’ Gladstone LNG project and exploration results from Woodside.
Outlook
While the market tone improved markedly during February we remain of the view that 2010 will for the most part be a year of consolidation for the ASX/S&P 300 Index. This is despite the fact that the economic and earnings outlook is very positive for the Australian equity market. The combination of ongoing strength in emerging market economies and a self-sustaining recovery in Australia make it highly likely that the massive recovery in earnings that is expected over the next 18 months will be met, if not exceeded. However we believe that valuations will be constrained by persistent flare ups in offshore credit markets and ongoing concerns about the state of the US economy. We have little confidence that the US will be able to achieve much more than a technical bounce in economic activity this year. Two key areas of concern are sentiment and employment indicators, which remain at recessionary readings despite recovering from extreme levels a year ago. If the recent trend in these data persist it is impossible to believe the US can achieve a sustainable recovery, which will ultimately raise questions on the prospects for corporate earnings.
With regard to the reporting season that has just concluded the best results came from retailers (both discretionary a and staples) and major banks (ex-NAB), whilst upgrades in earnings for diversified resources companies continue to be driven by bulk commodities. We remain comfortable with our overweight positions in these sectors because their prospects continue to look promising. The strength in the domestic economy has been amply demonstrated in every macroeconomic metric but none more so than the two that drive discretionary spending – employment and house prices. Despite the stimulus inflated comps and a hawkish RBA, retailers with strong business models will leverage off a supportive economic environment and deliver good numbers. Australian banks are experiencing a recovery in their asset quality which will drive earnings in the next 12-18 months even if credit growth remains subdued and interest margins stay flat. Apart from NAB whose acquisitive strategy we struggle to understand, the three majors appear focused on their respective co ore businesses. Bulk commodities (coal and d iron ore) markets are tight and the risk to pricing remains towards the upside. We are happy to stay long these commodities, which forms the basis of our investment thesis in BHP and Rio Tinto.
We are somewhat concerned about industrial businesses that manufacture tradeable goods (e.g. steel, cement) in Australia. The stronger relative performance e of the Australian economy will keep the A$ bid and whilst the shipping freight markets remain weak due to an increased supply of vessels, there will be every incentive for users of domestically manufactured tradeable goods to encourage imports impairing the industry structure of the domestic manufacturers at least temporarily.
Overall larger companies reported better results than smaller companies (though there were individual disasters everywhere), and the aggregate earnings estimates were higher at the conclusion of the period. The key positive from our point of view is that earnings are now growing sequentially and there is low probability of a reversal.
Monthly Performance
*After fees.
Performance These figures represent past performance only. Past performance is no indication of future performance. Neither Platypus Asset Management Pty Limited, nor any of its representatives makes any representation as to the future performance or success of the fund. General Platypus Asset Management Pty Limited believes that the information contained in this document is accurate as at this time and date of issue. However, Platypus Asset Management Pty Limited provides no warranty of accuracy or reliability in relation to any information contained in this document and to the extent permitted by laws accepts no responsibility for any loss or damage whatsoever arising in any way for any representation, act or omission, whether expressed or implied (including responsibility to any person by reason of negligence) is accepted by Platypus Asset Management Pty Limited, officer, agent or employee of Platypus Asset Management Pty Limited.