fitzpatricks mda specific portfolios · mda specific portfolios monthly report, october 2017...

TOP 10 POSITIONS

Westpac Banking Corporation

Australia and New Zealand Banking Group Limited

CSL Limited

Macquarie Atlas Roads Group

Commonwealth Bank of Australia

Transurban Group

ResMed Inc.

Magellan Financial Group Limited

Lovisa Holdings Limited

Challenger Limited

FITZPATRICKS MDA SPECIFIC PORTFOLIOS

Monthly Report, October 2017

www.fitz.com.au 1Monthly Report | Fitzpatricks MDA

Source: Fitzpatricks, Iress. Performance from 30 September 2002 to 31 October 2017. Performance is net of investment management fees, does not deduct portfolio administration fees and assumes reinvestment of all distributions. Past performance is not a reliable indicator of future performance.

AUSTRALIAN EQUITIES – DIRECT • The Australian equity market rallied significantly in October, a result of a supportive

global economic backdrop coupled with news flow from the ongoing company Annual General Meeting (AGM) season on the domestic front.

• The AGM season provides a key update on the health of domestic companies and although this was quite varied at the individual company level, at the aggregate level this suggested a ‘no better or no worse’ outcome from company outlooks than was communicated in the August reporting season.

• The MDA Direct Australian Equities Portfolio outperformed the rapidly rising market posting a result of 4.2%. This reflected strong stock selection across a range of Portfolio names, but just as importantly, the Portfolio avoided a range of poorer performing companies.

• Mid-sized and smaller companies again performed very strongly, a continuation from September with the S&P/ASX Small Ordinaries Accumulation Index up by 6.0%. The Portfolios’ selective investments in this segment of the market were well rewarded. Jewellery retailer Lovisa (LOV) returned 13.2%, aged care operator Japara Healthcare (JHC) was up by 12.9% and remote communications company Speedcast International (SDA) and education company Navitas (NVT) returned 4.5% and 5.3% respectively.

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Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

MDA Direct Australian Equities Portfolio

S&P/ASX 200 Accumulation Index

FITZPATRICKS MDA SPECIFIC PORTFOLIOS MONTHLY REPORT


Performance Volatility Inception

1 Month 3 Months 6 Months 1 Year 2 Years p.a.

3 Years p.a.

5 Years p.a.

Since Inception

Since Inception Date

MDA Australian Equities (Managed Funds) Portfolio 4.3% 6.2% 4.5% 11.1% 6.9% 7.9% 11.2% 8.7% 10.4% 30/09/10

S&P/ASX 200 Accumulation Index 4.0% 4.7% 2.0% 16.1% 11.0% 6.9% 10.3% 8.4% 11.5% 30/09/10

PERFORMANCE

AUSTRALIAN EQUITIES – DIRECT (cont.)

• The broad-based gains across the Australian equity market ensured that returns from our allocated managers all performed solidly in October.

• The Bennelong ex-20 Australian Equities Fund delivered a very strong return of 5.9% for the month reflecting strong stock selection within the Portfolio. Key contributors included beverage company Treasury Wine Estates (TWE), hotel operator the Mantra Group (MTR), cosmetics company BWX LTD (BWX) and gaming company Aristocrat Leisure (ALL).


AUSTRALIAN EQUITIES – MANAGED FUNDS

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Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

MDA Managed Funds Australian Equities Portfolio

S&P/ASX 200 Accumulation Index

• The Atrium Equity Opportunities Fund outperformed the market posting a result of 4.3% reflecting strong stock selection across a range of Portfolio investments, but just as importantly avoiding a range of poorer performing companies.

• As mentioned in our previous reports, quality companies that the Portfolio holds were (in our view) erroneously marked down for investing in future growth initiatives at the expense of short term profits. Pleasingly, as analysts have taken time to assess the merits of these investments, share prices have begun to reflect this. Companies such as Challenger Financial (CGF) appreciated 6.8% in October as result. We expect further recognition of the likely economic merit of investments will be an ongoing feature of our Portfolio returns in coming quarters as the AGM season progresses and companies provide updates.

• The SGH ICE Fund delivered a 4.1% outcome for the month with key performance contributions coming from A2 Milk (A2M), the Mantra Group (MTR) and Praemium Ltd (PPS). The Portfolio remain well diversified across sectors and company sizes, with earnings growth well in excess of the current market index.

PERFORMANCE



3 Years p.a.

5 Years p.a.

Since Inception


MDA Australian Equities (Direct) Portfolio 4.2% 5.2% 1.3% 14.5% 6.4% 8.4% 12.5% 11.2% 12.4% 30/09/02

S&P/ASX 200 Accumulation Index 4.0% 4.7% 2.0% 16.1% 11.0% 6.9% 10.3% 9.3% 12.8% 30/09/02



• Other companies that contributed positively to Portfolio performance during the month included our recent investment in building product James Hardie (JHX), medical devices and health services company Resmed (RMD), infrastructure company Macquarie Atlas Roads (MQA) and diversified financials Challenger Financial (CGF) and Macquarie Group (MQG).


INTERNATIONAL EQUITIES


• International equity markets produced generally positive local currency results that were once again boosted in Australian dollar terms by a fall in the value of the Australian dollar. The ‘risk on’ environment in October translated to a broad based positive performance across global equity markets.


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Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

MDA International Equities PortfolioMSCI World ex Australia (Net in AUD)MSCI World ex Australia (Net Local)



3 Years p.a.

5 Years p.a.

Since Inception


MDA International Equities Portfolio 4.1% 8.4% 8.0% 21.2% 8.1% 15.4% 16.9% 8.3% 9.9% 30/09/02

MSCI World ex Australia, (Net in AUD) 4.3% 8.7% 7.0% 22.0% 7.4% 13.4% 18.8% 6.6% 11.4% 30/09/02

MSCI World ex Australia (Net Local) 2.5% 5.1% 8.4% 21.9% 11.3% 9.5% 13.5% 8.6% 13.1% 30/09/02

PERFORMANCE


• Somewhat contrary to what would normally be expected, the Australian dollar fell by a sizeable -2.3% during October despite being regarded as a risk currency, reflecting what we see as fundamental overvaluation of the AUD relative to the US dollar. This is important for our Portfolio returns which are beneficiaries of a fall in the Australian dollar as we currently hold our international shares on an unhedged basis. We continue to expect this position to be a meaningful contributor to Portfolio returns over the medium to longer term.

• Our investment in the Magellan Global Equities Mandate performed strongly (5.0%) with strong contributions from the Funds’ exposure to a range of US based technology, internet and eCommerce companies including investments in Google (Alphabet), Apple, eBay and Facebook.

• The Antipodes Global Fund - Long Only Fund produced a solid 3.3% return with key contributions from exposures across global software, insurance and internet sectors. The Fund continues to be actively managed and well diversified across multiple geographies and sectors.

• Northcape Global Emerging Markets Fund also had a very strong October, with positive results emerging from its exposure to Asia. Key positive contributors were Korean auto parts company Mando Corporation and Indian telecoms company Bharti Airtel.



• Our Systematic Macro managers enjoyed dual tailwinds of stronger global equity markets and a weaker US dollar during October.

• All of our managers that employ algorithmic trading strategies to global equity, bond and foreign exchange markets also posted positive returns for the month.

• During October we added trend following manager One River to our exposures by adjusting the weights to Winton and the Crown Core Diversified Trend strategies as we continue to search for the most efficient exposure in this



3 Years p.a.

5 Years p.a.

Since Inception


MDA Alternatives Portfolio 1.4% 2.8% 2.8% 2.4% -0.2% 3.4% 4.7% 4.7% 3.7% 30/09/10

RBA Cash Rate 0.1% 0.4% 0.7% 1.5% 1.7% 1.8% 2.2% 2.8% 0.3% 30/09/10


PERFORMANCE

LIQUID ALTERNATIVES

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Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17

MDA Alternatives PortfoliosRBA Cash Rate


sector. The One River Systematic Diversified Strategy combines systematic strategies (Trend, Volatility, Carry, and Equity Factors) into a balanced diversified portfolio to gain exposures to major return drivers across asset classes.

• Our Australian based managers continued their recent run of good performance, with Bennelong Long Short Equity Mandate the strongest, up by 5.4% as AGM updates favoured the long positions of the Fund.



• The Rates & Credit (Fixed Income) Portfolio continued to track solidly with underlying exposures all contributing strongly in October. The Portfolio is currently managed via investment exposures through the Atrium Enhanced Fixed Income Fund (AEFI), which returned 0.4% during the month.

• Holdings allocated to the Kapstream Absolute Return Income Fund returned an encouraging 0.5% for the month, led by the strong performance in credit markets and a well-implemented currency exposure to Asian currencies and



3 Years p.a.

5 Years p.a.

Since Inception


Atrium Enhanced Fixed Income Fund 0.4% 0.8% 1.6% 3.0% 3.3% 3.2% 0.5% 01/09/15

Bloomberg AusBond Composite Bond Index - All Maturities (TR) 1.1% 0.8% 1.3% 1.6% 2.8% 3.9% 4.1% 2.9% 3.8% 01/09/15

RBA Cash Rate 0.1% 0.4% 0.7% 1.5% 1.7% 1.8% 2.2% 1.7% 0.7% 01/09/15


PERFORMANCE

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Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17

Atrium Enhanced Fixed Income Fund

RBA Cash Rate

Bloomberg AusBond Composite Bond Index -All Maturities (TR)

RATES & CREDIT (FIXED INCOME)


particularly the Indian Rupee. During the month, the Fund also committed to a new small exposure backed by receivables from the Australian Taxation Office, at a yield of slightly below 10%.

• Exposures to the Daintree Core Income Trust recorded another very positive month (0.4%) mainly due to credit market movements, with the investment likely to grow in the coming months.

• The Smarter Money Active Cash Fund (SMAC) returned 0.3% in October, slightly ahead of the Australian FRN Index and the Fund finished the month with a materially higher exposure to cash. The manager holds a long-standing view that senior unsecured debt is attractively priced, and retains the largest portion of its exposure here.

• The JP Morgan Global Strategic Bond Fund (GSBF) saw a slowing of performance in October, returning 0.2% for the month. The Fund remains significantly exposed to US dollar investment grade and high yield credit, which were again strong performers in October, contributing positively to the return.


MARKET COMMENTARY

October saw yet another strong month for risk markets. Globally, the US market gained with the S&P 500 up by 2.3% (local currency), the S&P/ASX 200 was stronger by 4.0% and Europe was also higher although lagging the other markets, rising 2.0%. Credit markets were very firm, and bond yields were generally lower outside of the US market. The Australian dollar fell 2.3% against the US dollar, which was generally stronger for the month, and volatility rose a little although remains well below its typical levels.

Major equity markets rose during the month, following leads from the US market (the S&P 500 up by 2.3% in October and 23.6% over 12 months). The S&P 500 rose with a continued strong contribution from the Information Technology sector (7.8%), which saw a strong set of earnings across stocks which have been leading much of the recent market move. Apple and Amazon saw very strong quarterly earnings and continued to rally, which flowed on to the broader Technology components sector.

Despite having much lower weightings to Information Technology than the US, the S&P/ASX 200 rallied 4.0% with Technology also leading (up 8.7%), and all sectors in the broader market gaining. One notable fact in the local market was the strong outperformance of small caps (6.0%) against the broader index (4.0%), this is another indication of a risk-on sentiment in markets, but also reflects some positive underlying earnings trends.

European equities lagged slightly (the broad market returned 2.0%), partly reflecting concerns around Catalonia, and also some caution into the meeting of the European Central Bank (ECB). Emerging market equities were also firm, rising 3.5% in local currency terms, with Korea being the standout as the KOSPI rose 5.4% while tensions

cooled ever so slightly on the Korean Peninsula.

Credit markets tightened further in October, continuing to benefit from low bond yields, low market volatility and strong equities. The standouts for the month were Australian Investment Grade and European Cross-Over (issuers on the cusp of Investment Grade). Another highlight was the fact that excess returns from US Investment Grade were the same as for US High Yield (both returned 0.5%), something slightly unusual in a strong risk-on market, and reflecting the longer spread duration of the US Investment Grade Market.

In the Australian Investment Grade market, spreads tightened 7.3 basis points (bps) for the month in October in credit default swaps. In the broader corporate bond market, the spread was in by 6bps, although interestingly well over 5% of the spread tightening was contributed by 2 issuers from the US, Verizon and Wells Fargo, both of whom issued at attractive levels in Australian dollars during the month.

In European Cross-Over markets, the 3-month extension of the ECB’s buying program on 26 October seemed to give further support to the local credit markets, despite the announced reduction in overall quantitative easing buying from next January.

The US bond market was slightly weaker for the month with yields rising, while Australia saw a contra-move where 3 and 10 year bond yields fell a significant 17 bps. German bund yields were also slightly lower. Macro-economic data in Australia has been on the tepid side for some time, and the trend has continued over recent months. Very weak August retail sales numbers and soft inflation for Q2 has seen yields decline, as market participants again start to question the Reserve Bank’s ability to hike rates from record low levels.

Guy Debelle, Deputy Governor of the RBA, made a speech late in the month implying that there may be measures other than the unemployment rate which may indicate more underlying slack in the labour markets (and hence why wage pressures are not building), and a focus on near term downside risks to inflation as the basket gets reweighted in coming weeks.

In the US, yields rose slightly, more at the front end of the curve, as markets weighed up the likely replacement of Janet Yellen as Chairman of the Federal Reserve (Fed) in February 2018. As the announcement approached, markets became more confident with the appointment of Jerome Powell who represents a broad continuation of the policies under Janet Yellen. The market still expects the Fed to hike in December, although has priced in less than the Fed is indicating as the likely path over 2018. Importantly, the ECB made changes to its buying program from the start of 2018, however, the ECB’s balance sheet will continue to grow, only at a slower pace (as opposed the Fed’s balance sheet which commenced a very gradual decline in October). The extension of the buying by the ECB, albeit at a slower monthly pace, was seen by some as a dovish sign, and yields declined post the event.

The Australian dollar continued to decline against the US dollar over October (falling 2.3% to 0.77), reflecting mainly the continued outperformance of the Australian bond market for the month (i.e. any yield support from Australian Government bonds declining against the US market). The US dollar was approximately 1.6% higher against a basket of its trading partners, with the Japanese Yen and Euro being the main contributors.



PORTFOLIO TARGET ALLOCATIONS

Target Weights

AS AT 31 OCTOBER 2017

MDA Australian Equities (Direct)

MDA Australian Equities

(Managed Funds)

MDA International

Equities

Liquid Alternatives

Rates & Credit (Fixed Income)

TOTAL 100.0% 100.0% 100.0% 100.0% 100.0%

CASH 2.0% 2.0% 2.0% 2.0% 2.0%

RATES AND CREDIT 0.0% 0.0% 0.0% 0.0% 98.0%

Global Fixed Income 0.0% 0.0% 0.0% 0.0% 98.0%

Atrium Enhanced Fixed Income Fund 0.0% 0.0% 0.0% 0.0% 98.0%

EQUITIES 98.0% 98.0% 98.0% 0.0% 0.0%

Australian Equities 98.0% 98.0% 0.0% 0.0% 0.0%

Atrium Equity Opportunities Fund 0.0% 46.6% 0.0% 0.0% 0.0%

SGH ICE Fund 0.0% 41.7% 0.0% 0.0% 0.0%

Bennelong ex-20 Australian Equity Fund 0.0% 9.8% 0.0% 0.0% 0.0%

International Equities 0.0% 0.0% 98.0% 0.0% 0.0%

Magellan Global Equities Mandate 0.0% 0.0% 53.9% 0.0% 0.0%

Northcape Capital Global Emerging Markets Fund 0.0% 0.0% 1.0% 0.0% 0.0%

Antipodes Global Fund - Long Only 0.0% 0.0% 43.1% 0.0% 0.0%

LIQUID ALTERNATIVES AND PRIVATE MARKETS 0.0% 0.0% 0.0% 98.0% 0.0%

Atrium Alternatives Fund 0.0% 0.0% 0.0% 98.0% 0.0%

Alphadyne Segregated Portfolio * 0.0% 0.0% 0.0% 2.8% 0.0%

Zebedee Segregated Portfolio * 0.0% 0.0% 0.0% 11.8% 0.0%

Latigo Segregated Portfolio * 0.0% 0.0% 0.0% 4.9% 0.0%

Core Diversified Trend Segregated Portfolio * 0.0% 0.0% 0.0% 3.5% 0.0%

Bennelong Long Short Equity Mandate 0.0% 0.0% 0.0% 3.9% 0.0%

Antipodes Global Fund 0.0% 0.0% 0.0% 4.9% 0.0%

P/E Global FX Apha Fund 0.0% 0.0% 0.0% 4.9% 0.0%

GMO Global Systematic Macro Fund 0.0% 0.0% 0.0% 9.8% 0.0%

Regal Tasman Market Neutral Fund 0.0% 0.0% 0.0% 10.8% 0.0%

Henderson Alphagen Long Short Agriculture Fund 0.0% 0.0% 0.0% 1.5% 0.0%

Henderson Alphagen Relative Value Agriculture Fund 0.0% 0.0% 0.0% 1.5% 0.0%

One River Systematic Trend 0.0% 0.0% 0.0% 2.9% 0.0%

Man Alternative Risk Premia 0.0% 0.0% 0.0% 14.7% 0.0%

Core Commercial Property Assets 0.0% 0.0% 0.0% 1.2% 0.0%

Value Add Property Assets 0.0% 0.0% 0.0% 0.5% 0.0%

Opportunistic Equity Assets 0.0% 0.0% 0.0% 1.9% 0.0%

Private Debt 0.0% 0.0% 0.0% 5.4% 0.0%

Smarter Money Active Cash 0.0% 0.0% 0.0% 3.9% 0.0%

Liquidity 0.0% 0.0% 0.0% 7.2% 0.0%


Source: Atrium and External Investment Manager / Administrator websites or reports. Target weights as at 31 October 2017. Holdings within the Atrium Alternatives Fund are given on a look through basis, individual clients will not hold these funds directly. Investments denoted by * are in managed accounts accessed via the Crown Atrium Segregated Portfolio. The Magellan Global Equities Mandate is a separately managed portfolio managed by Magellan Asset Management Limited in a manner consistent with the Magellan Global Fund. The Bennelong Long Short Equity Mandate is a separately managed portfolio managed by Bennelong Long Short Equity Management Pty Ltd in a manner consistent with the Bennelong Long Short Equity Fund.

Important InformationThe information in this document (Information) is provided by Fitzpatricks Private Wealth Pty Ltd (ABN 33 093 667 595, AFSL 247 429) (Fitzpatricks), and where relevant, its related bodies corporate. Unless otherwise stated, the Information is of a general nature only and does not take into account the objectives, financial situation or needs of any person. Before acting on the Information, investors should consider its appropriateness having regard to their own objectives, financial situation and needs and obtain professional advice. No liability is accepted for any loss or damage as a result of any reliance on the Information. Past performance is not a reliable indicator of future performance. Future performance and return of capital is not guaranteed.

Performance figures relate to the model portfolios offered by Fitzpatricks, with investment management implemented by underlying investment managers selected by Fitzpatricks. The details of each model portfolio may change and you should keep this fluidity in mind when considering figures. Actual performance will differ among clients depending on the timing of their investment, the ability of an investor to nominate stocks they do or do not wish to hold and the level of variation from the models. Figures are post portfolio management fees and expenses and assume reinvestment of distributions. They do not take into account inflation or tax or adviser fees.

For more information please contact your Adviser or Fitzpatricks Private Wealth:

SYDNEYLevel 5, Challis House 4 Martin PlaceSydney NSW 2000 PHONE 02 9248 8000

GPO Box 1193 Sydney NSW 2001

BRISBANE37a Kennigo Street Spring Hill QLD 4000

PHONE 07 3105 6500

EMAIL [email protected]


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