Denning Pryce Global Income Fund September Quarterly 2017

Transcription

1 ABN AFSL Tel: Denning Pryce Global Income Fund September Quarterly 207 Market Overview Missile tests and an ongoing war of words between the U.S. and North Korea resulted in brief bubbles of volatility during the quarter. Yet - despite global concerns that these posturings could lead to outright conflict - volatility continued to fall across all major indexes. Investors remain in a positive mood, extending the rally in financial markets. The backdrop of potential tax cuts and tax reform in the U.S led the latest push higher. US bank stocks performed well over the quarter, as did their global peers. Citi (C), Morgan Stanley (MS) and BNP-Paribas (BNP) all traded higher by 8. Amongst the other global names, National Australia Bank (NAB), JP Morgan (JPM), Bank of America (BAC) and Westpac (WBC) all rallied strongly. Insurers were the laggard in the sector as the financial impact of the recent hurricane season in the US was calculated. The FAANG (Facebook (FB), AMAZON (AMZN), Apple (AAPL), Netflix (NFLX) and Google (GOOGL) stocks remain at the forefront of company news. The launch of Apple s latest iphone was met with a twin chorus of naysayers and champions - the stock price was the winner, finishing higher by 3. Facebook was up 3 even as an investigation was launched into Russia s alleged meddling in the US election. Amazon finished flat, Google bounced back from its recent slump to finish higher by 4.75 and Netflix traded higher by a staggering 2 for the quarter. In the last 2 months NFLX is up 84. (S&P500 - Volatility continues to trend lower Implied volatility in blue 0 and 30 realised market volatility in white and orange) With markets moving higher, US S&P500 short-term volatility (November) traded lower and now sits at 6.3. This implies that the market is expecting very small market moves (say, 0.38 a day). By contrast the December options market is pricing in higher expected levels of market movement (0.60 a day). We make two observations based on this information: firstly, as we move into mid- to late- October, post the upcoming US and European earnings season, we would expect to see a rapid decline in December option premiums (all else being equal). Secondly, the market is currently pricing in little probability of the share Page

2 market falling in the next few weeks. We see this as a well-priced opportunity to own shorter-dated put options, as protection over the portfolio, across the corporate earnings season and the current political climate. In coming days President Trump is due to announce who will act as Chair of the Federal Reserve from January 208. Whether Janet Yellen remains or, more likely, a replacement for Yellen is found, the decision could have wide-reaching effects on the economy, both domestic and global. In recent years the Fed have been very transparent with their direction and views questions may arise as to whether this will remain the case. Potentially, the Fed may become less forthcoming with market-sensitive information. Looking to the next few months we see the Fed decision as possibly being one of three major catalysts for an increase in volatility. Additionally, a return to an increasing interest rate cycle and the tapering of the Fed s balance sheet also line up as volatility-changing events. Market direction in the short term may be determined by the upcoming reporting season - Australian banks report half-yearly results and both European and U.S companies report quarterly earnings. Investors will look for further signs of strong earnings and revenue growth if we are to see continuing market momentum. Table : Fund Performance Summary (Full unit performance detail and methodology is set out at Table 3) As at 30 September 207 Month Years p.a. 5 Years p.a. Since Inception p.a. DP Global Income Fund (Institutional unit) Fund benchmark Inception date is 25th July 20. Past performance is not indicative of future performance MSCI World Accumulation Index in Local Currency / 50 Bloomberg AusBond Bank Bill Index Fund Commentary The portfolio finished the quarter holding 66 equity and options positions (across various international companies and indices). The fund finished the quarter on a positive tone as technology, industrial and financial names helped drive returns in September. The fund s focus now turns to the US and European quarterly earnings season which begins in mid-october. Financial names are the first to report. Fund risk allocation After a challenging start to the quarter September proved to be a good month for the fund. Returns for the quarter were split across the various diversified holdings in the portfolio. Financials names were strong performers with a positive September rounding out a good quarter. Trump tax reforms and an expected December US rate increase were the main driver of returns. The fund was active rolling several buy-write holdings to higher strikes in Citi, Bank of America and State Street (STT). Premiums remain attractive, sitting in the th percentile of the two year average. With earnings due in October we will be looking for further signs of earnings momentum to drive market returns into 208. Page 2

3 The fund also held long call positions in Wells Fargo, Morgan Stanley (MS) and ING Groep (INGA) which all benefited from the move higher in markets. All four names have traded well over the last few months and remain an important part of the portfolio. BNP-Paribas (BNP) remains in the portfolio in the form of a short cash-backed put. September was the fourth occasion that the fund has rolled our existing position out to a longer-dated higher strike. In the process the fund has taken in circa $7.00 for what has been a $4 movement higher in the stock. The trade has worked well and we continue to see solid premiums on offer in the options space. This coupled with good stock momentum ensures that it remains an attractive trade for the fund. Volatility positions in Home Depot (HD) and British Petroleum (BP/) added returns to the fund given strong performances from both names. HD seems set to benefit from the rebuild and recovery post successive storm events in the south of the US. BP was the obvious recipient of a strengthening oil price. The technology sector continued its recent strong performance with Apple (AAPL), Visa (V) and Facebook (FB) the best three technology performers in the fund. Visa s recent stellar performance has continued with the name rallying 35 since January. The fund has largely held the position in a long stock with long put combination which has taken advantage of the low premiums on offer to hold a protected equity position. Apple (AAPL) rallied into the launch of the latest iphone. The fund took advantage of a sell down in the stock in June to add a long $50 call which was funded by the sale of a $60 call. With the stock finishing at $60 at expiry it meant we maximized the upside performance on the trade and collected the premium from the $60 call we had sold. Facebook finished up 3 for the quarter and this despite an investigation being launched (in light of posts that were left on the social media website at the time of the US election). A new position was initiated in Schneider Electric (SU). The French industrial giant is a major player in the electrical power equipment industry. The stock has performed strongly in recent months, showing good momentum, and with option premiums sitting in the 30 th percentile of the two year average it was a solid buy write to add to the fund. Philips (PHIA) was the best performer of the fund s industrial holdings. A reversal in the recent strength of the Euro saw the European foreign currency earners showing a return to form. With the stock up 2.3 the fund rolled our existing $32 calls up to a $34 strike ensuring continued participation in the move higher. German manufacturing and engineering giant Siemens (SIE) was a detractor from the fund s returns over the quarter. It was the worst of the industrial names in the fund. The strong Euro was responsible for a shortterm drag on performance. The fund had some put protection from the most recent rally to $30, and this helped to protect somewhat as the stock fell. As mentioned, the fund regularly holds part of our exposure in long call positions. Other than WFC and ING we hold positions in Exxon (XOM) which has benefited from the recent increase in the oil price, International Business Machines (IBM), Australia s Newcrest Mining (NCM) and US listed Western Digital (WDC). The latter is a major provider of solutions for data collection, storage and protection. These positions take advantage of low premiums to add extra upside exposure to the portfolio (which offer better risk-adjusted returns for the fund). Index protection on both the S&P500 and the tech-heavy NASDAQ expired worthless during the quarter. This resulted in a cost to the fund. We will continue to add protection to the fund as and when we see opportunities, this being an important component of the funds structure. Page 3

4 Table 2: Leading exposures Fund Top Ten by Exposure Table 3: Investor Information 30 September 207 Institutional Wholesale Retail Total Net Asset Value 2 $48,759, $3,04, $43,28.40 $5,844,29.42 Net Returns for the month 3 & APIR Code DPR0002AU ZUR0592AU ZUR059AU NAV Price 5 $.0878 $.0529 $.0605 Redemption Price 6 $.0856 $.0508 $.0583 Distribution cents per unit $0.00 $0.006 $0.007 Notes:. Performance since inception is from 25 th July 20, and is measured to each full month end. Past Performance is not indicative of future performance. 2. The value of the Fund s assets less the liabilities of the Fund net of fees, costs and taxes. The NAV is the amount of the Fund NAV referable to the respective class. 3. Net returns are calculated using net asset value to net asset value, after fees and expenses and assuming reinvestment of income. 4. The buy/sell spread (currently / -0.20) is an estimate of the costs of buying or selling assets associated with an investment in, or withdrawal from, the Fund. This is not a fee paid to us and is reflected in the respective class unit price. 5. The respective NAV price is determined by calculating the NAV referable to the class divided by the number of units on issue in the relevant class. 6. The respective class redemption price is calculated by decreasing the relevant NAV price by the sell spread (currently 0.20). There are no related party status declarations to be made at this time. Unless otherwise stated, the source of all graphs and tables contained in this report is Denning Pryce. In addition, please note that the following information remains as set out in the PDS for the Fund dated 20 th May 205. Key service providers to the Fund The Fund s strategy The team of individuals who play a key role in the operation of the Fund Page 4

5 Additional Important Information Denning Pryce Pty Limited ACN AFSL (Denning Pryce) is the investment manager of the Denning Pryce Global Income Fund (ARSN ) (Fund). One Managed Investment Funds Limited (ABN ) (AFSL ) is the responsibility entity of the Fund (OMIFL). The information contained in this document was not prepared by OMIFL but was prepared by other parties. While OMIFL has no reason to believe that the information is inaccurate, the truth or accuracy of the information contained therein cannot be warranted or guaranteed. Anyone reading this report must obtain and rely upon their own independent advice and inquiries. Investors should consider the relevant Product Disclosure Statement (PDS) issued by OMIFL before making any decision regarding the Fund. The PDS contains important information about investing in the Fund and it is important investors obtain and read a copy of the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. You should also consult a licensed financial adviser before making an investment decision in relation to the Fund. A copy of the current PDS and continuous disclosures may be obtained from or Denning Pryce believes that the information contained in this document is accurate when issued. Denning Pryce does not warrant that such information or advice is accurate, reliable, complete or up-to-date, and to the fullest extent permitted by law, disclaims all liability of Denning Pryce and its associates. This document should be regarded as general information only rather than advice. In preparing this document, Denning Pryce did not take into account the investment objectives, financial situation and particular needs of any individual person. The information contained in this document must not be copied or disclosed in whole or in part without the prior written consent of Denning Pryce, and Denning Pryce accept no liability whatsoever for the actions of third parties in this respect. It is presented for informational purposes only and is not to be construed as a solicitation or an offer or recommendation to buy or sell any securities. Any opinions expressed in this document constitute Denning Pryce s judgement at the time of issue and may be subject to change without notice. Denning Pryce is not obliged to update the information. The information must not be used by recipients as a substitute for the exercise of their own judgment and investigation. Neither Denning Pryce nor any of their directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or part of, or any omission, inadequacy or inaccuracy in, this document. OMIFL and Denning Pryce do not guarantee the performance of the Fund or the repayment of any investor s capital. To the extent permitted by law, neither OMIFL nor Denning Pryce, including their directors, senior executives, employees, consultants, advisers, officers or authorized representatives, are liable for any loss or damage arising as a result of reliance placed on the contents of this document. Denning Pryce only provides services to wholesale clients, as defined in section 76G of the Corporations Act. Past performance is not indicative of future performance. Information in this document is current as at 30 September 207. Third party data is owned by the applicable third party identified and is provided for your internal use only. Such data may not be reproduced or re-disseminated and may not be used to create any financial instruments, products or indices. Such data is provided without any warranties of any kind. Neither the third party data owner nor any other party involved in the publication of this document can be held liable for any error. Page 5