Legg Mason Martin Currie Value Equity Trust Quarterly Report June 2015
Trust Data as at 30 June 2015 Performance (%) 3 mths 1 yr pa 3 yrs pa 5 yrs pa Trust (net) -7.65 5.95 17.43 9.10 Trust (gross) -7.44 6.88 18.46 10.05 Benchmark -6.55 5.68 15.06 9.69 Quarterly stock attribution Top 5 contributors % Top 5 detractors % AGL Energy 0.4 BlueScope Steel Limited -0.4 Harvey Norman 0.4 Macquarie Group Limited n/h -0.3 JB Hi-Fi 0.4 SEEK Limited -0.3 UGL Limited 0.3 Pacific Brands Limited -0.3 Qantas Airways Limited 0.3 IOOF Holdings Ltd. -0.2 (u/w) underweight holding (n/h) not held Top 5 active stock positions Largest overweights % Largest underweights % Insurance Australia Group 4.6 Telstra Corporation -5.4 ASX Limited 4.3 Commonwealth Bank of Australia -4.9 Lend Lease 4.2 National Australia Bank -4.8 AGL Energy 3.9 Wesfarmers -3.2 JB Hi-Fi 3.4 CSL Limited -2.9 Sector weightings (%) Sector Account Weight Active Weight Consumer Discretionary 13.5 9.4 Consumer Staples 5.2-1.4 Energy 1.1-4.0 Financials 41.0-6.6 Health Care 0.0-6.0 Industrials 11.2 4.1 Information Technology 0.0-0.7 Materials 22.9 8.1 Telecommunication Services 0.0-6.0 Utilities 4.7 2.7
Sharemarket review Trust performance The Australian sharemarket, as measured by the S&P/ASX 300 Accumulation Index, sold off heavily in the final month of the 2015 financial year, falling 5.3% in June. Despite this, the Australian market delivered a positive return of 5.7% for the 12 months to 30 June. Major equity markets globally generated negative returns in June, affected by the failure of the Greek government and its creditors to reach an agreement over extending its bailout package in exchange for reforms of the economy. The other significant global news impacting markets was the plunge in the Chinese sharemarket which saw the Shanghai A-shares market fall 22% from its peak mid month. As expected, the Reserve Bank of Australia (RBA) cut the official cash rate by 0.25% to a new record low of 2% in early May. Initially this did little to support equity markets as investors saw this as likely to be the last rate cut in the current cycle. However, downgrades to the outlook for growth and inflation, and the wording of the subsequent monetary policy statement, suggests the RBA continues to hold an easing bias. Economic data released during the quarter, however, was generally positive. Real GDP grew 0.9% quarter on quarter compared with a consensus expectation of 0.7%. Employment figures were also much stronger, with 42,000 new jobs created, which brought the unemployment rate down to 6% versus an expected 6.2%. The strength of the residential housing market continues, with house values up 9% across the country and the Sydney market leading the way up 15% year on year. The RBA kept the official cash rate on hold at 2% but remains open to the possibility of further policy easing measures. The release of the Australian Federal Government s budget for 2015/16 in May provided a further boost to consumer confidence. The budget included tax cuts for small businesses, designed to encourage investment growth, as well as measures to help the unemployed. Overall, the budget has been received positively the Westpac-Melbourne Institute Consumer Sentiment Index jumped 6.4%, recording its first positive reading since February The Trust fell 7.4% in the second quarter, underperforming the S&P/ASX 200 Accumulation Index, which declined 6.5%. Despite a disappointing quarter, the Trust was up 6.9% for the 12 months to 30 June, outperforming the benchmark by 1.2%. During the early part of the quarter, the Trust s preference for domesticcycle stocks helped performance particularly in response to what was considered a consumer friendly federal budget in May. Much of the outperformance was given back in June as global macro concerns impacted confidence and cyclical stocks were sold off. At the stock level, strong contributions to relative performance came from AGL Energy, Harvey Norman and JB Hi-Fi, while positions in BlueScope Steel, SEEK, and Pacific Brands detracted value. AGL Energy held its annual investor day during the month, where it stated that it expects net profit after tax to be at the top end of prior guidance on better performance, following its acquisition of Macquarie Generation in September last year. The company s costout program was also a key positive, as was its outline for increasing returns to shareholders. Home and office retailer Harvey Norman bucked the trend of other consumer discretionary stocks, outperforming in quarter two. The company s cost base is relatively fixed due to its franchise model. As such, the company is benefiting from its leverage to the booming housing market. Electronics retailer JB Hi-Fi performed strongly in May, benefiting from the boost to consumer sentiment following the latest interest rate cut and a more consumer friendly federal budget. The company also provided a trading update for the quarter which showed strong growth in comparable sales. Management reaffirmed previous sales and net profit-after-tax guidance. On the other side, Australian steel maker BlueScope was sold down across the quarter as the outlook for steel prices worsened. This was due to an excess in global steel-making capacity and a slowdown in Chinese demand hammering steel prices. BlueScope remains exposed to the improving home-construction market in Australia and we remain positive on its earnings potential through the business cycle.
Performance (cont.) Outlook Online education and employment services provider SEEK was weaker in quarter two after downgrading its guidance for the 2015 financial year relative to market expectations. This was primarily due to a step-up in operating costs and weaker-than-expected performance from SEEK s learning division. Apparel and homeware supplier Pacific Brands was sold down heavily during the quarter as the market anticipated the falling Australian dollar would have a negative impact on earnings. Shortly after the end of the period, the company surprised the market announcing an upgrade to fullyear profit guidance which saw the share price regain its quarter two losses. We are still positive on the outlook for Australian equities for the year. While the market is moving closer to fair value on traditional value metrics such as price-to-earnings (p/e) ratio, it still looks extremely cheap versus bonds and cash yields. The Trust reflects our positive view on many names in the consumer discretionary sector. We expect stocks in this sector to benefit from a lower Australian dollar and lower interest rates. We are also becoming more positive on valuations in the resources space, based on sustainable commodity prices. We believe further stimulus measures by the Chinese government are likely given weak economic data, and this is not currently priced into valuations of resource Activity Within the Trust the major changes for the quarter were the addition of a new position in dairy co -operative Fonterra and selling out of gaming machine manufacturer Aristocrat Leisure as it reached our valuation target. We initially purchased Aristocrat in 2011 at $2.40 and sold out at $8.50. We trimmed positions in investors Henderson Group, Harvey Norman, AGL Energy and airline Qantas after strong recent performance. We added to consumer staples name Woolworths and mining company Alumina and took advantage of weakness in rail freight company Aurizon, SEEK and Fairfax Media. The Trust also participated in the GUD Holdings placement of 10.6 million shares related to the acquisition of auto lighting products supplier Brown & Watson and we increased the Trust s holding in base metal and coal miners South32, a recent spin off company from BHP Billiton.
Investment strategy recap Trust objective 3.5% pa above benchmark over three years before fees. Benchmark S&P/ASX 200 Accumulation Index Trust inception date November 2006 Key features Maximise long term return A fundamental valuation approach, owning stocks trading at deepest discount to assessed value in order to maximise returns over the long term. No herding High conviction portfolio of approximately 35 stocks with risk assessed on a fundamental quality basis. Designed to take advantage of behavioural bias in market participants and stand against the investment crowd. Reece Birtles Chief Investment Officer Martin Currie Australia The Value Trust is designed to maximise expected returns for longer term investors with a high conviction portfolio of approximately 35 stocks. The Trust relies on insights of Legg Mason s eightperson analyst team and portfolio manager skill. Contact Insights Captures fundamental and quantitative insights of Legg Mason s investment team (larger and more experienced team than industry average - based on research house reporting). The company valuation signal used in the process has a performance track record over 18 years Investor benefits Competitive fees (0.999%), ample capacity to grow funds under management, suits multi-managers or blending with growth/core styles. Legg Mason Asset Management Australia Limited (ABN 76 004 835 849 AFSL 240827) (Legg Mason) is part of the Legg Mason, Inc. group. Legg Mason Australia is the responsible entity of the Legg Mason Martin Currie Value Equity Trust (ARSN 122 100 207). Martin Currie Australia is a division within Legg Mason Asset Management Australia Limited. A Product Disclosure Statement is available for the Legg Mason Australian Value Equity Trust and can be obtained by contacting Legg Mason Asset Management Australia Limited on 1800 679 541. Investors should obtain professional advice and read the Product Disclosure Statements before making any investment decisions. This product has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Legg Mason Australia does not guarantee any rate of return or the return of capital invested. Investments are subject to risks, including, but not limited to, possible delays in payments and loss of income or capital invested. Please obtain a copy of the product disclosure statement before making any decision to invest. Any opinions in this document are subject to change without notice and do not constitute investment advice or recommendation. The Lonsec Rating (assigned October 2014) presented in this document is published by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421445. The Rating is a class service (as defined in the Financial Advisers Act 2008 (NZ)) or is limited to General Advice (as defined in the Corporations Act 2001 (Cth)) and based solely on consideration of the investment merits of the financial product(s). In New Zealand it must only be provided to wholesale clients (as defined in the Financial Advisers Act 2008 (NZ)). Past performance information is for illustrative purposes only and is not indicative of future performance. It is not a recommendation to purchase, sell or hold Legg Mason Asset Management Australia Limited product(s), and you should seek independent financial advice before investing in this product(s). The Rating is subject to change without notice and Lonsec assumes no obligation to update the relevant document(s) following publication. Lonsec receives a fee from the Fund Manager for researching the product(s) using comprehensive and objective criteria. For further information regarding Lonsec s Ratings methodology, please refer to our website at: http://www.beyond.lonsec.com.au/intelligence/lonsec-ratings.