market and portfolio update – june 2013. market update 2 during the past month we have seen a...

Market and Portfolio Update – June 2013

Market Update

2

During the past month we have seen a major shift in markets:

• The A$ has started to fall;

• US$ strength; and

• Bond yields increase.

Federal Reserve talk of winding back quantitative easing.

The Australian market has been weaker than the global market.

US Economy showing signs of resilience

3

Home builders remain very confident

Home Builders Sentiment Survey

Initial Jobless ClaimsJobless claims trending down

Source: Bloomberg

Source: Bloomberg

The question is whether good news is bad news…

4

Bernanke: QE purchases could potentially be tapered "in the next few meetings"

What is the impact of a gradual tapering of quantitative easing?

What are the implications for Australian companies?

Source: IRESS

Chinese Economy

5

The Chinese economy remains a little soft with key manufacturing indices and industrial production remaining subdued (by their standards) as noted below.

The focus of the new leadership appears to be on corruption and environment at this point rather than re-accelerating the economy.

Lead indicators such as sales of yellow goods (excavators) and power have improved.

Industrial Production

Source: Bloomberg

Resources Underperforming

6

Over the past year we have seen resource companies substantially underperform defensive yielding companies.

Conditions are shifting to claw back some of this underperformance.

RIO share price assumes a long term Iron Ore Price of $80 and 90 cent currency which seems conservative.

CBA versus BHP

Source: IRESS

Mining Services

7

Reasonably optimistic on the outlook for the major resource companies however this is at the expense of mining service players.

We have seen a series of downgrades in this space.

Engineering Construction Activity

Domestic Confidence

8

With mining investment peaking the Government and RBA need to accelerate alternative areas of the economy to avoid a recession

Domestic confidence (especially business confidence) is very low at present.

We see a number of factors influencing this confidence:

• The unprecedented long election period is causing considerable damage.

• The poor competitive position of many Australian companies

Expect lower interest rates – perhaps down to 2%. Currency to assist competitive position and Government to accelerate PPPs.

Housing market showing signs of life and we have a range of companies in the portfolio that can benefit from greater housing activity levels (e.g. Dulux, Lend Lease).

A$ falling

9

Fall in the A$ a short term negative but long term positive.

• Short term - The pullback has resulted in international investors selling Australian holdings.

• Long term – Positive impact on earnings.

Competitive position of domestic companies competing with offshore will improve.

Great rotation from bonds to equities

10

With interest rates low and bond markets deteriorating, equities will remain an important asset class for investors.

Portfolio Positioning

11

We are benefiting from current trends given the following weightings:

1. Overweight currency exposed companies – QBE, ANN, BXB, CWN

2. Positioning in companies which benefit from rotation out of bonds – QBE, HGG, MQG

3. Position in housing exposed stocks (low interest rates) – DLX, SGP, LLC

4. Underweight defensive yield

In terms of future positioning we see a few key decisions:

5. Look for yield stocks that get oversold..

6. Look for companies getting caught up in the mining service sell down without much mining exposure.

7. As we look further out the prospect of lower interest rates, a lower US$ and a change in Government will provide a better environment for domestic stocks.

8. Look to add to resource positions given valuation support.

Investment Process – High Conviction portfolio

12

Stock Research Phase 1 - Quality Web assessment

─ Strength of management, balance sheet , earnings,industry structure and ESG review

Phase 2 - Fundamental bottom up valuation and thesis

1.Ideas Generation

2.Stock Research

3. Portfolio Construction

4.Portfolio Management

Idea Generation Quantitative and quality screening Company and industry contacts Daily meetings to discuss findings and allocate tasks

Portfolio ConstructionRecommended stocks considered given: Top down considerations Portfolio characteristic impacts Stock and sector correlation analysis After tax consideration Monthly ICM review provides strong oversight of process

Portfolio Management Conclusions constantly retested Sell decisions based on:

─ Reach target valuation─ Deterioration of quality characteristics / inv. thesis

13

Australian Equities High Conviction PortfolioPerformance as at 31 May 2013

Please note: Past performance is not an indication of future performance. No allowance has been made for taxation and fees are not taken into account.

1 Yr 2 Yrs 3 Yrs 4 Yrs 5 Yrs 6 Yrs 7 Yrs 8 Yrs 9 Yrs 10 Yrs% % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a. % p.a.

Dalton Nicol Reid 31.6% 10.5% 12.2% 14.8% 7.2% 4.2% 8.4% 10.4% 13.0% 13.5%Benchmark 26.5% 7.3% 8.5% 11.4% 1.8% 0.4% 4.3% 7.0% 8.7% 9.8%Outperformance 5.1% 3.2% 3.7% 3.4% 5.4% 3.8% 4.1% 3.4% 4.3% 3.7%

Tracking Error 4.5 3.8 3.6 3.6 4.1 4.8 4.9 5.0 5.0 4.9Information Ratio 1.1 0.9 1.0 0.9 1.3 0.8 0.8 0.7 0.9 0.8

Since Inception date October 2002

Blue data shows Positive Out-Performance

Benchmark: S&P /ASX 200 Accumulation Index

14

Australian Equities High Conviction Portfolio Stock Holdings as at 31 May 2013

Stock GICS Sector Issuer Name Actual ActiveCode Weight Weight

CASH 2.7% 2.7%ANZ Financials Australia and New Zealand Banking Group Limited 9.8% 3.9%BHP Materials Westpac Banking Corporation 9.3% 0.6%WBC Financials BHP Billiton Limited 8.1% 1.3%AZJ Industrial Aurizon Holdings Limited 5.4% 4.7%LLC Financials Lend Lease Group 5.1% 4.7%RIO Materials Rio Tinto Limited 4.7% 2.8%WPL Energy Woodside Petroleum Limited 4.4% 2.1%HGG Financials Bank of Queensland Limited 4.3% 4.1%MQG Financials Henderson Group PLC. 4.2% 3.1%BOQ Financials Macquarie Group Limited 4.0% 3.8%BXB Industrial Trade Me Group Limited 4.0% 2.9%TME Consumer Discretionary Seek Limited 3.4% 3.3%QBE Financials Brambles Limited 3.2% 1.8%AGK Utilities QBE Insurance Group Limited 3.0% 2.4%SGP Financials Coca-Cola Amatil Limited 3.0% 2.3%SEK Industrial Stockland 3.0% 2.7%CWN Consumer Discretionary Crown Limited 2.9% 2.2%ANN Health Care AGL Energy Limited 2.7% 2.5%SHL Health Care Southern Cross Media Group Limited 2.5% 2.1%SXL Consumer Discretionary Ansell Limited 2.4% 2.3%AIO Industrial Sonic Healthcare Limited 2.1% 1.7%DLX Materials Asciano Limited 2.1% 2.0%CCL Consumer Staples DuluxGroup Limited 2.0% 1.2%WTF Consumer Discretionary Wotif.com Holdings Limited 1.8% 1.7%Total 100.0%

15

Australian Equities High Conviction Portfolio Stock Attribution as at 31 May 2013

Top 10 Contributors Portfolio Position Alpha Top 10 Detractors Portfolio Position AlphaHenderson Group PLC. Overweight 0.64% Australia and New Zealand Banking Group LimitedOverweight -0.35%Macquarie Group Limited Overweight 0.45% News Corporation No Holding -0.33%National Australia Bank Limited No Holding 0.39% Coca-Cola Amatil Limited Overweight -0.23%Aurizon Holdings Limited Overweight 0.38% Westpac Banking Corporation Overweight -0.21%Commonwealth Bank of Australia No Holding 0.37% Bank of Queensland Limited Overweight -0.21%QBE Insurance Group Limited Overweight 0.35% Origin Energy Limited No Holding -0.16%Ansell Limited Overweight 0.31% Oil Search Limited No Holding -0.14%Brambles Limited Overweight 0.25% Lend Lease Group Overweight -0.12%Sonic Healthcare Limited Overweight 0.21% Seek Limited Overweight -0.12%Wotif.com Holdings Limited Overweight 0.20% Iluka Resources Limited No Holding -0.11%

1 Month Stock Contributions

Top 10 Contributors Portfolio Position Alpha Top 10 Detractors Portfolio Position AlphaHenderson Group PLC. Overweight 1.36% Commonwealth Bank of Australia Underweight -0.96%Trade Me Group Limited Overweight 0.83% Rio Tinto Limited Overweight -0.92%Seek Limited Overweight 0.81% National Australia Bank Limited No Holding -0.80%Lend Lease Group Overweight 0.79% AGL Energy Limited Overweight -0.64%Newcrest Mining Limited No Holding 0.78% Telstra Corporation Limited No Holding -0.58%Macquarie Group Limited Overweight 0.77% News Corporation No Holding -0.56%Crown Limited Overweight 0.59% CSL Limited No Holding -0.53%Westpac Banking Corporation Overweight 0.56% BHP Billiton Limited Overweight -0.43%Fortescue Metals Group Ltd No Holding 0.43% Coca-Cola Amatil Limited Overweight -0.37%Bank of Queensland Limited Overweight 0.41% Cash Overweight -0.36%

1 Year Stock Contributions

Investment Process – Socially Responsible portfolio

1. Ideas Generation

2.Stock Research

3.Portfolio Construction

4. Portfolio Management

16

Idea Generation Quantitative and quality screening Company and industry contacts Daily meetings to discuss findings and allocate tasks

Portfolio Construction Recommended stocks considered given: Top down considerations Portfolio characteristic impacts Stock and sector correlation analysis After tax consideration Positive and negative SRI screening Monthly ICM and Socially Responsible IC review

Portfolio Management Conclusions constantly retested Sell decisions based on:

─ Reach target valuation─ Deterioration of quality characteristics / inv. thesis─ Change in SRI screening outcomes

.




17

Australian Equities Socially Responsible portfolio Performance as at 31 May 2013


1 Yr 2 Yrs 3 Yrs 4 Yrs 5 Yrs 6 Yrs% % p.a. % p.a. % p.a. % p.a. % p.a.

Dalton Nicol Reid 29.8% 10.9% 12.2% 14.3% 7.0% 4.8%Benchmark 26.5% 7.3% 8.5% 11.4% 1.8% 0.4%Outperformance 3.3% 3.6% 3.7% 2.9% 5.2% 4.4%

Tracking Error 4.3 3.9 3.8 3.9 4.6 5.3Information Ratio 0.8 0.9 1.0 0.8 1.1 0.8


Benchmark: S&P /ASX 200 Accumulation Index

Since Inception date J une 2006

18

Australian Equities Socially Responsible portfolioHoldings as at 31 May 2013

Stock GICS Sector Issuer Name Actual ActiveCode Weight Weight

CASH 2.9% 2.9%ANZ Financials Australia and New Zealand Banking Group Limited 9.9% 4.0%BHP Materials Westpac Banking Corporation 9.5% 0.8%WBC Financials BHP Billiton Limited 8.4% 1.6%AZJ Industrial Aurizon Holdings Limited 5.4% 4.7%LLC Financials Lend Lease Group 5.0% 4.5%WPL Energy Woodside Petroleum Limited 4.6% 2.3%RIO Materials Bank of Queensland Limited 4.4% 2.6%HGG Financials Rio Tinto Limited 4.3% 4.2%MQG Financials Henderson Group PLC. 4.2% 3.1%BXB Industrial Macquarie Group Limited 4.2% 3.1%

BOQ Financials Coca-Cola Amatil Limited 4.0% 3.8%TME Consumer Discretionary Trade Me Group Limited 3.4% 3.3%QBE Financials Brambles Limited 3.3% 1.8%SGP Financials Seek Limited 3.0% 2.3%SEK Industrial QBE Insurance Group Limited 2.9% 2.7%ANN Health Care Stockland 2.9% 2.7%SHL Health Care Ansell Limited 2.7% 2.3%CCL Consumer Staples Sonic Healthcare Limited 2.4% 1.7%CDD Industrial InvoCare Limited 2.4% 2.4%IVC Consumer Discretionary Cardno Limited 2.2% 2.1%AIO Industrial Asciano Limited 2.1% 1.8%DLX Materials Southern Cross Media Group Limited 2.1% 1.9%SXL Consumer Discretionary DuluxGroup Limited 2.0% 1.9%WTF Consumer Discretionary Wotif.com Holdings Limited 1.8% 1.7%Total 100.0%

19

Australian Equities Socially Responsible portfolio Stock Attribution as at 31 May 2013

Top 10 Contributors Portfolio Position Alpha Top 10 Detractors Portfolio Position AlphaHenderson Group PLC. Overweight 0.65% Australia and New Zealand Banking Group LimitedOverweight -0.35%Macquarie Group Limited Overweight 0.46% News Corporation No Holding -0.33%National Australia Bank Limited No Holding 0.39% Coca-Cola Amatil Limited Overweight -0.28%Aurizon Holdings Limited Overweight 0.38% Cardno Limited Overweight -0.27%Commonwealth Bank of Australia No Holding 0.37% Westpac Banking Corporation Overweight -0.23%QBE Insurance Group Limited Overweight 0.36% Bank of Queensland Limited Overweight -0.21%Ansell Limited Overweight 0.33% Origin Energy Limited No Holding -0.16%Brambles Limited Overweight 0.26% Oil Search Limited No Holding -0.14%Sonic Healthcare Limited Overweight 0.24% Lend Lease Group Overweight -0.12%Wotif.com Holdings Limited Overweight 0.19% Seek Limited Overweight -0.12%


Top 10 Contributors Portfolio Position Alpha Top 10 Detractors Portfolio Position AlphaHenderson Group PLC. Overweight 1.37% Cardno Limited Overweight -1.24%Trade Me Group Limited Overweight 0.83% Commonwealth Bank of Australia Underweight -0.95%Newcrest Mining Limited No Holding 0.83% Rio Tinto Limited Overweight -0.83%Macquarie Group Limited Overweight 0.78% National Australia Bank Limited No Holding -0.80%Lend Lease Group Overweight 0.76% Telstra Corporation Limited No Holding -0.58%Seek Limited Overweight 0.71% News Corporation No Holding -0.56%Westpac Banking Corporation Overweight 0.60% CSL Limited No Holding -0.53%Fortescue Metals Group Ltd No Holding 0.43% AGL Energy Limited Overweight -0.51%Bank of Queensland Limited Overweight 0.42% BHP Billiton Limited Overweight -0.44%Australia and New Zealand Banking Group LimitedOverweight 0.25% Cash Overweight -0.39%


1. Idea Generation

2. Stock Research

3. Portfolio Construction

Portfolio Management

Investment Process – Income portfolio

20

Idea Generation and Quantitative Screen Quantitative and quality screening Company and industry contacts Daily meetings to discuss findings and allocate tasks

Portfolio Construction Top down considerations Portfolio characteristic impacts Stock and sector correlation analysis After tax consideration Monthly ICM review Positive and negative income screening

Control Risk & Retest Conclusions Conclusions constantly retested Sell decisions based on:

─ Reach target valuation─ Deterioration of quality characteristics / inv. thesis─ Change in income screening outcomes




21

Australian Equities Income PortfolioPerformance as at 31 May 2013


1 Yr 2 Yrs 3 Yrs 4 Yr 5 Yr% % p.a. % p.a. % %

Dalton Nicol Reid 38.0% 17.2% 15.1% 16.0% 6.9%Benchmark 36.6% 17.0% 13.5% 16.3% 5.7%Outperformance 1.4% 0.2% 1.6% -0.3% 1.2%

Tracking Error 4.6 4.0 3.7 3.8 4.1Information Ratio 0.3 0.1 0.4 -0.1 0.3Benchmark: S&P /ASX 200 Industial Index

Since Inception date December 2007


22

Australian Equities Income portfolioHoldings as at 31 May 2013

Stock Issuer Name Actual ActiveCode Weight Weight

CASH 3.6% 3.6%ANZ Westpac Banking Corporation 9.8% 2.4%WBC Australia and New Zealand Banking Group Limited 9.6% 0.9%CBA Commonwealth Bank of Australia 6.0% -4.6%AZJ Aurizon Holdings Limited 5.3% 4.4%LLC Bank of Queensland Limited 4.8% 4.2%MQG Lend Lease Group 4.6% 3.1%BOQ National Australia Bank Limited 4.5% 4.2%BXB Macquarie Group Limited 4.5% 3.1%HGG Stockland 4.1% 3.9%SGP Woodside Petroleum Limited 3.9% 3.1%

NAB Henderson Group PLC. 3.9% -2.8%WPL Brambles Limited 3.8% 3.8%AGK Telstra Corporation Limited 3.6% 2.8%TLS AGL Energy Limited 3.5% -2.3%QBE QBE Insurance Group Limited 3.4% 1.5%CWN Crown Limited 2.9% 2.0%CDD Southern Cross Media Group Limited 2.8% 2.7%SHL Coca-Cola Amatil Limited 2.6% 2.1%SXL Cardno Limited 2.6% 2.5%ANN Seek Limited 2.4% 2.2%SEK Sonic Healthcare Limited 2.3% 1.9%CKF Ansell Limited 2.0% 2.0%WTF Collins Foods Limited 1.9% 1.8%CCL Wotif.com Holdings Limited 1.9% 0.9%

Total 100.0%

23

Australian Equities Income portfolio Stock Attribution as at 31 May 2013

Top 10 Contributors Portfolio Position Alpha Top 10 Detractors Portfolio Position AlphaHenderson Group PLC. Overweight 1.01% Cardno Limited Overweight -1.48%FlexiGroup Limited Overweight 0.69% AGL Energy Limited Overweight -0.73%Macquarie Group Limited Overweight 0.48% Cash Overweight -0.69%Seek Limited Overweight 0.39% News Corporation No Holding -0.55%Crown Limited Overweight 0.39% CSL Limited No Holding -0.48%Orica Limited No Holding 0.35% Ansell Limited Overweight -0.43%Southern Cross Media Group Limited Overweight 0.35% QBE Insurance Group Limited Overweight -0.38%Lend Lease Group Overweight 0.31% Suncorp Group Limited No Holding -0.32%Wesfarmers Limited Underweight 0.27% Sonic Healthcare Limited Overweight -0.24%Bank of Queensland Limited Overweight 0.26% Origin Energy Limited Overweight -0.18%


Top 10 Contributors Portfolio Position Alpha Top 10 Detractors Portfolio Position AlphaHenderson Group PLC. Overweight 0.65% News Corporation No Holding -0.46%Macquarie Group Limited Overweight 0.49% Cardno Limited Overweight -0.26%Aurizon Holdings Limited Overweight 0.42% Australia and New Zealand Banking Group LimitedOverweight -0.17%Ansell Limited Overweight 0.30% Westpac Banking Corporation Overweight -0.16%Brambles Limited Overweight 0.29% ResMed Inc. No Holding -0.15%QBE Insurance Group Limited Overweight 0.28% Coca-Cola Amatil Limited Overweight -0.15%Sonic Healthcare Limited Overweight 0.24% Bank of Queensland Limited Overweight -0.14%Wotif.com Holdings Limited Overweight 0.24% Westfield Group No Holding -0.13%Cash Overweight 0.17% Computershare Limited No Holding -0.12%National Australia Bank Limited Underweight 0.15% Ramsay Health Care Limited No Holding -0.10%


24

Disclaimer

IMPORTANT NOTE: This presentation has been prepared by DNR AFSL Pty Ltd ABN 39 118 946 400, an Australian Financial Services Licensee, Licence Number 301658. Dalton Nicol Reid has used its best endeavours to ensure the information within this presentation is accurate it cannot be relied upon in any way and recipients must make their own enquiries concerning the accuracy of the information within. This presentation is not intended to provide you with personal advice and in providing this information, Dalton Nicol Reid has not taken into account your particular investment objectives, financial situation or needs. You should assess whether this information is appropriate for your particular needs, either by yourself or with your adviser.

Dalton Nicol Reid expressly disclaims any responsibility or liability to anyone who acts or relies upon anything contained in, or omitted from, this presentation. Past performance is not indicative of future performance. Total returns shown are based on Dalton Nicol Reid’s composite portfolio performance and have been calculated before taking Dalton Nicol Reid’s fees into account as actual performance on managed accounts is dependant on a number of factors including, but not limited to, timing of investment, blacklisted stocks and portfolio execution. No allowance has been made for taxation. Investment into managed accounts can only be made via the appropriate MDA Contract.

market and portfolio update – june 2013. market update 2 during the past month we have seen a...

Documents

australian companies

bloomberg slide

iress slide

range of companies

australian market

major resource companies

defensive yielding companies

chinese economy