Denning Pryce Tailored Income Fund October 2016

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1 Denning Pryce Pty Ltd ABN AFSL Tel: Denning Pryce Tailored Income Fund October 2016 Market Overview Corporate earnings season and the pending US federal election combined to keep a check on the major US markets throughout October. With a late poll showing Trump strength markets began to pull back, leading to a rapid increase in volatility. The S&P500 was the biggest loser, falling 1.94 and the NASDAQ was down Several blue chip names reported in-line or slightly better than expected results, but nervousness and a slightly tempered outlook for upcoming quarters saw profit-taking across all sectors. Johnson and Johnson (JNJ), Amazon (AMZN), McDonalds (MCD), and AT&T (T), were some of the major losers and their recent weakness continues. For AT&T it was the announcement of an $86bln takeover bid for Time Warner that led to a further sell-off in the stock price. The bid caught the market unaware. With US antitrust approval required it could be a long drawn out transaction. The healthcare space has been a major drag on global markets with the sector experiencing a torrid couple of months. U.S. biotech and global pharmaceutical stocks have been under pressure with US names like Pfizer (PFE) and Gilead (GILD) trading lower. The negative sentiment continued across the globe. In Australia, Sonic Healthcare (SHL) and Ramsay Healthcare (RHC) had a difficult October. In Europe, Roche (ROG) and Novartis (NOVN) also traded down. Away from the US, markets performed relatively well. The FTSE 100 continued its recent strong run - finishing higher by 0.9. Germany s DAX also traded well, higher by European names typically reported well with 3 rd quarter trading updates painting a positive picture despite what continues to be a difficult economic backdrop in the region. Financial and mining stocks continued their recent strong performance. Financial names have been very strong globally, as a rate increase in the US could take place in December. Subject to avoiding a possible market meltdown after the November election, Janet Yellen has flagged that the US economy is healthy and can handle a 25bp increase. She has a desire to increase rates over the longer term - but at a low and steady pace. Materials names were strong. The sector continues to defy those naysayers who remain convinced of the demise of the Chinese economy and therefore a weaker resource sector. Chinese data continues to impress and spot commodity prices have remained well supported. Australia struggled for much of the month, finishing lower by 2.15, as REIT s and Utilities got caught up in the yield sell-off. There were some very large moves in what was a crowded space with most of the big names all down by 8 or more. Countering some of this poor index performance was the continuing dominance of the resource sector: Orica (ORI) was up 7, Fortescue metals up 11 and South 32 up another 6.5. ANZ, NAB and WBC all trade ex-dividend in early to mid-november. Whilst reporting in the three major s (ex-cba) has been of reasonable quality the Australian banking sector has largely tracked sideways in recent months. Heading into November global markets remain somewhat range-bound and as such it was perhaps surprising to see the Nikkei close up The reality is that Japanese stocks have traded very well Page 1

2 this month due to a fall in the Japanese currency, down 5 versus the US dollar. The Yen has acted as a safety haven in recent months with foreign money flowing in, driving the currency higher by 18 vis a vis the US dollar. The strong Yen has kept a lid on Japanese stock returns, as many of these businesses are exporters or take a large part of their earnings from offshore. With a weakening currency company returns can improve. Volatility, as mentioned, trended higher as the US election draws closer. Recent volatility cycles have seen a rapid escalation in volatility and an even swifter deceleration. Our funds are cautiously placed taking the opportunity to write optionality into sharply increased volatility where positioning allows. Table 1: Fund Performance Summary (Full unit performance detail and methodology is set out at Table 3) As at 31 October 2016 DP Tailored Income Fund (Institutional Class) 1 Month FYTD Since Inception p.a Benchmark ASX 100 Acc Inception date is 22 nd June Past performance is not indicative of future performance S&P/ASX 100 Accumulation Index and 50 Bloomberg AusBond Bank Bill Index. Fund commentary The Fund traded well as the market fell away throughout October. We have maintained the bulk of our holdings from the previous period with 75 holdings across shares, long and short options, and cash. The underlying fund exposure finished the quarter at 61 relative to a mainstream share fund. The Fund added both Index puts and single stock puts through the early part of October. Volatility remained subdued and after a relatively strong start to tax year 2017 it was a timely moment to add some short exposure, using options, to our position. This ensured that our exposure fell rapidly as the market pulled back later in the month. We remain diversified across all company sectors. BHP was a solid performer for the fund, trading higher again during the month. The banks also put in some good numbers during their earnings releases which kept their stock prices in positive territory as the market fell away. Banks and Financials With the earnings season unfolding all the major banks put in a sound return. As we look toward the ex-dividend period we will evaluate our position - looking at the potential for rotation out of the sector as the stocks trade ex-dividend. We have written calls in both ANZ and WBC which have helped to provide some solid returns from the premium collected. The insurers continued their recent poor performance with AMP in particular having a dreadful month after it was sold down post a write down of assets in their wealth protection division. It was a blow for investors and resulted in a 13 sell-down in late October. This was the single biggest drag on the Page 2

3 fund in what was otherwise a solid period. IAG and QBE also put in poor performances in a down market. Consumer Staples Wesfarmers (WES) performed strongly for the fund. The stock ran hard into its quarterly sales numbers in late October. After a move to $45.30 we elected to sell the stock in all the domestic funds and position ourselves in long calls. We also bought puts to protect against an adverse sales report. With the stock reporting on the eve of the October options expiry we outlaid a modest premium on a strike price put option. With the stock collapsing post-reporting there eventuated a good win for the fund. Wesfarmers is a quality stock but like many stocks in the market at present any adverse report is treated brutally. We have increased our exposure to the stock again at $40. Woolworths (WOW) also traded well in a down market and a long position in the name added to the funds returns. WOW has had a torrid couple of years of late. With the company rationalising their business and cost base, returns have steadied in the short term. The stock has reasonable momentum and has been our preferred exposure in this recovery period. Materials and Resources The materials and resources sector continues to do well for the fund with BHP, RIO and S32 continuing their strong rebound from the February lows. S32 looks to be consolidating around the $2.50 level and we have written calls at that strike. Having rolled up our long call positions we are now well positioned for further upside but have also realised some of the gains made as the stock traded higher. Volatility The Fund continued to add volatility positions during the quarter. Our short directional positons in the S&P/ASX200 worked well as the market continued its pull back in late October. As with the previous period we have again closed some of these long puts, increasing our exposure to the market after the fall. This highlights the ability to manage the downside in a portfolio using options as a tool. The flexibility allows the fund to achieve the desired outcome of improving performance in a falling market without having to necessarily make major structural changes. Table 2: Leading exposures Fund Top Ten by Exposure BHP CBA WBC ANZ TLS NAB CSL MQG WOW NCM Page 3

4 Table 3 - Investor Information As at 31 October 2016 Institutional Class Wholesale Class Retail Class Total Net Asset Value 2 $3,907, $508, $9, $4,425, Net Returns for the month 3 & APIR Code DPR0003AU DPR0004AU DPR0005AU NAV Price 5 $ $ $ Redemption Price 6 $ $ $ Distribution cents per unit n/a n/a n/a Notes: 1. Performance since inception is from 22 nd June 2015, 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 Class 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 Class 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 Class 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 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 Additional Important Information Denning Pryce Pty Limited ACN AFSL (Denning Pryce) is the investment manager of the Denning Pryce Tailored 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 Page 4

5 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 accept 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 761G of the Corporations Act. Past performance is not indicative of future performance. Information in this document is current as at 31 October 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