Performance Summary
* All Platypus Performance data is provided on an after fees basis.
Past Performance
January 2010
Month in Review
The Platypus portfolio fell by 7.05% in January, underperforming the benchmark ASX/S&P300 accumulation index by 0.88%. Consumer Discretionary, Financials and Health Care were the worst performing sectors during the month. The only major contributors to performance were Cash and Information Technology. The best performing stocks in the portfolio were Computershare, CBA and Toll Holdings. Having a nil position in QBE added to performance. The three worst performers were the same as in December, David Jones, JB Hi-Fi, and Medusa Mining.
We exited ARB Corporation and Kathmandu during the month and no new positions were initiated. Gains were monetized in David Jones, JB Hi-Fi, Seek, Wesfarmers, Whitehaven Coal, Resmed, SAI Global and Sirtex. We also cut the ASX position following the uncertainty created by the so called ‘Volcker Rule’, in the US seeking to limit proprietary trading activities of banks. Computershare and Commonwealth Bank put through profit upgrades following which we added to positions. In addition we also topped up on Biota, Platinum Asset Management and Woolworths during the month.
Sector in Review
In stark contrast to last month January started well; the ASX/S&P 300 index was up just under 2% after seven trading days. Unfortunately fears of policy tightening in China and restrictions on Wall St firms in the US saw investors take a ‘shoot first’ approach triggering a sell off that saw the month down 6.17%. All ten GICS sectors declined in January with Energy (-9.83%), Materials (-8.99%) and Consumer Staples (-8.39%) leading the decline. The only sector to show any resilience was Information Technology (-1.10%) due to a profit upgrade from Computershare.
Outlook
We remain of the view that 2010 will be the year for stock pickers. Early indications in terms of news flow and the ensuing price action are supportive of this hypothesis. In January, Worley Parsons, Neptune Marine Services and Nomad Building Solutions underperformed the market by several hundred basis points after pushing through profit downgrades whilst Computershare and Commonwealth Bank both outperformed strongly after upgrading guidance. In the near term, equity capital markets globally seem to be at the mercy of policy direction and event risk - regulation in the US and potential for Greece’s default. Our thoughts on these issues are set out below:
Monetary policy is starting to tighten around the world but actions of policy markers, thus far, seems to be consistent with the underlying strength in the respective economies and risk of a policy mistake still appear low, albeit rising. Europe and Japan seem to be furthest from any monetary and fiscal tightening reflecting weak fundamentals. In the US the first interest rate hike is still some months away and potentially not before 2011 but the Federal Reserve has already announced withdrawal of the extraordinary liquidity that it pumped into the banking system in late 2008. Chinese authorities have commenced withdrawing the massive stimulus they provided during the GFC in a series of administrative moves. We remain sanguine about these initiatives in China when considered in the context of the strong performance of their economy and how well targeted the tightening has been both in terms of sectors and geographies that are at the risk of overheating.
In Australia however the risk of a policy mistake is the most pronounced. The Reserve Bank has a only a very blunt monetary tool at its disposal in form of the cash rate which can cause a significant collateral damage if used to deflate asset price bubbles such as the one that the Reserve seems to be concerned with in the residential real estate market. Retailers have reported a challenging environment in Australia where the third successive rate hike in December 2009 bit hard, impacting trade at a time when they were cycling the tough comps boosted by stimulatory cash handouts in 2008. Fortunately for retailers and the overall economy the RBA has paused, a stance we hope endures for several months to allow the recovery to become more self-sustaining.
Investors clearly did not take President Obama’s plan to limit risk-taking by commercial banks well. However, when markets have performed as strongly as they did in 2009 it is natural for investors to take ‘shoot first and ask questions later’ approach. But it is also important to keep one’s perspective on what it is that is being proposed. At the heart of the policy is the objective to ensure that no one institution becomes so big that its failure could bring the financial system down as it almost did in 2008 i.e. eliminate the ‘too big to fail’ risk. Surely this objective must be applauded and supported. That brings us to the second question, how is this goal to be achieved. The details available thus far indicate that the so called ‘Volcker Rules’ will seek to limit proprietary trading and investments in hedge funds/private equity businesses by commercial banks. To us, this seems to be Mark II of Glass Steagall Act which was controversially repealed in 1999. Enacted in 1930s, the Glass Steagall Act kept a clear demarcation between commercial banks and investment banks. From the potentially calamitous events of 2008, it appears that this act should never have been repealed and bringing it back in some shape or form should secure the financial system further to the benefit of all participants. Beyond the initial knee jerk reaction we don’t think that the Volcker Rules will spell doom for markets unless politics gets in the way of the sensible policy objective they seek to achieve. The risk of populism hijacking the policy agenda is, unfortunately, non-trivial.
Finally Greece has managed to get itself back in the headlines thanks to their woeful fiscal position. Despite the fact that they seem to have found the political will to try to bring their fiscal situation under control and that the EU would backstop them regardless, this issue will simmer in the background for a while and will continue to affect markets. Other financial abscess such as commercial property in the US and most of Eastern Europe are likely to flare up as well this year but will not drag the financial into the abyss; too much capital has been sunk saving the system and more will be provided if required.
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.