Performance Summary
* All Platypus Performance data is provided on an after fees basis. Inception date – 1st January 1999.
Past Performance
September 2011
Month in Review
The Platypus portfolio declined by 9.3% in September, underperforming the benchmark S&P/ASX300 by a disappointing 3%. A portfolio positioned for the structural growth thematic of the emerging markets is always likely to suffer a large underperformance in months when extreme risk aversion takes hold and approximately 2.0% of this month’s relative underperformance can be attributed to macro jitters. Western Areas, Atlas Iron and PanAust were amongst the holdings that saw large share price falls as result of macro concerns. Not owning Westpac was another notable macro driven drag.
Despite the relatively resilient commodity prices until September, we had been pre-emptively reducing exposure to Materials and Energy since July this year while adding to lower beta sectors such as Financials and Telecommunications. In hindsight, although helpful this evasive action was not adequate to completely insulate the portfolio. The chart below shows our active weights through time.
In addition to the top down factors, specifically, underperformance was caused by two of our stocks that suffered bottom up issues this month. Cochlear issued a first ever product recall in its history, and the share price of Nexus Energy almost halved as its Managing Director suddenly resigned before delivering a much anticipated commercial outcome on a key asset.
Positive contributors to the month’s relative performance included defensive names in the portfolio such as Wesfarmers and Ramsay Healthcare. Cash added to the month’s alpha.
At sector level, Materials and an underweight position in Financials were the two largest alpha detractors. Apart from Cash, only Information Technology and Consumer Staples made small positive contributions to the month’s relative performance.
Turnover during September was relatively high at 15% as Cochlear and Nexus positions were sold for reasons mentioned above. We took a trade in Whitehaven Coal earlier in the month for its corporate appeal but we exited the position later in the month as timing of a potential transaction is likely to be more uncertain in the current macro environment. Selling out of Independence Group was driven by similar timing concerns on any potential M&A activity. New initiations in the month included National Australia Bank and Westpac as they head into an attractive dividend payment. Other additions to the portfolio this month included BT Investment Management as we underwrote the rights issue to fund the JO Hambro acquisition in the UK and Iluka that has leverage to the late cycle mineral sands pricing.
Remainder of the activity included adding to existing names such as Atlas Iron, PanAust, Dominos, MACA, Alacer, Aurora Oil & Gas to name a few. These were funded out of the likes of BHP Billiton, Rio Tinto, Commonwealth Bank, Oil Search, Wesfarmers and Regis Resources.
The cash weighting ended the month at 3%.
Sector in Review
September lived up to its feared reputation amongst equity investors around the world with S&P/ASX300 index returning -6.28% for the month. To be fair, the carnage was spread across most asset classes with even the much touted safe haven of gold proving fickle during the month as the metal lost 9.2% in USD terms. Interestingly, gold only lost 0.86% in AUD terms during September. Not something one would guess by looking at the performance of ASX listed gold stocks with Australia based operations!
As expected in a ‘risk off’ month, Materials (-12.9%) and Energy (-8.3%) were the two worst performing sectors followed by Industrials (-5.85%). Commodity prices were in free fall during the month as price of West Texas Intermediate fell 9.25% and copper lost a staggering 22.7% (both in USD). It is noteworthy that bulk commodities (such as coal and iron ore) that are relatively untouched by financial market participants have held up very well during this period of turmoil.
In absolute terms only Consumer Staples (+2.48%) and Telecommunication Services (+2.08%) produced positive returns.
Outlook
Risk assets are convulsing from panic that the 2008 crisis (aka GFC) will recur, the recession that would follow would most certainly be as deep as that in 2009 and that the world is running low on fiscal and monetary ammunition to respond.
There is no doubt that conditions in Europe are fragile and do pose a threat to the global financial system if not dealt with quickly and decisively. Longer term structural changes such as default/exit mechanism at one end of the spectrum or fiscal integration at the other end, will be needed for lasting stability. But these changes won’t occur overnight because of the procedural complexity involved and in the meantime authorities have to defend the weaker links in the financial system like the Greek sovereign debt, which poses a real contagion risk. Implementation of longer term changes will be impossible unless markets and sentiment can be stabilized in the short term, a reality that the authorities in Europe appear to have taken seriously in the recent weeks with noticeably reduced political bickering and brinkmanship in the press.
As we stand here today, a global recession is not a certainty. The pace of economic activity has slowed considerably from the start of this year. In emerging markets, this slowdown has been engineered through fiscal and monetary tightening and although natural disasters have played their part, moderating economic growth in the OECD has some structural drivers. The ‘two speed’ nature of the economic activity between the robust growth in emerging world and the more modest levels of economic activity in developed world will probably be a feature for the next decade, if not more. And yes, this will result in shorter economic cycles for some time and a lower level of growth in aggregate. But lower level of economic expansion is a far cry from a new, deep and prolonged recession which some observers see as a certainty.
Fiscal and monetary policy has certainly not run out of ammunition in the emerging world and will be used to defend growth if and when needed. However highly indebted sovereigns in the OECD and the significant monetary stimulus that was provided post the GFC may mean that more unconventional methods have to be used this time around. Understandably, there will be uncertainty on how effective these new actions will prove to be. There does appear to be room to improve the quality of the stimulus in the developed world, even if there are theoretical limits to the quantity – proposal to redirect government spending towards rebuilding of the productive asset base in the US is one such example of what could and should be done.
The overarching concern here is that the strong political leadership needed today has thus far been lacking – at least there has been none of the stature that can take the hard decisions to restore confidence in the short term and deal with the structural challenges facing several Western economies. Will the fear of losing their own jobs compel politicians to do what is needed in time? We think that it will but we recognize that in saying so we are placing a risky bet.
The Australian equity market has been hit hard during this extended bout of risk aversion with six consecutive down months since the March 2011 high. The 4,000 – 5,000 range on the S&P/ASX300 that we expected to hold, gave way as systemic concerns dominated once again. As we fight the urge to capitulate, we remind ourselves that the investor sentiment is extremely negative whether measured quantitatively via the spike in the VIX, the performance of the US dollar, the falling yield on the 10 Year US Treasury Bond, wholesale long liquidation in copper or anecdotally. Noise in the press and from that of day to day price action in the market is deafening. Selling has been indiscriminate (even gold was not spared), valuation support has meant little and almost every stock in the investible universe has been oversold. New definition of ‘long term’ in today’s volatile times appears to have been reduced to 24 hours. And yet it is exactly at times such as these where greatest opportunities in the markets have historically presented themselves. For those investors, who can hold their nerve and maintain investment discipline, highly profitable trades are there to be taken. Real potential exists for a strong rally in the markets as we enter the seasonally supportive fourth quarter of the 2011 calendar year with catalysts that include stability in Europe, further data flow confirming a slower but not collapsing global growth and end of tightening measures in emerging markets especially China – all of which would improve risk appetite that has all but vanished at present.
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.