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TRANSCRIPT
Disclaimer
Contango Asset Management Limited (ABN 52 085 487 421) holds an Australian Financial Services Licence (AFSL #237119) restricting it to providing financial products and services to wholesale clients only.This presentation has been prepared for the consideration and use of ‘wholesale’ investors, as defined by the Corporations Act (Cwlth 2001), and may contain information that assumes a level of knowledge and expertise particular to such investors. If you do not meet the criteria of a wholesale investor, you should disregard this information and seek advice from a licensed financial advisor.Forecasts in this presentation are predictive in character, based on numerous assumptions including the forecast outlook for key variables and may be affected by various factors including inaccurate assumptions, risks and unforeseen events. Accordingly, actual results may differ materially from those forecasted. Contango Asset Management Limited (“CAML”), its officers, employees and agents believe that the information in this document is correct at the time of compilation but do not warrant the accuracy of that information. Performance information is historical. Performance returns may vary. Past performance is not indicative of future performance. Performance has been calculated based on cumulative daily returns excluding any allowance for fees, expenses and taxes.Save for statutory liability which cannot be excluded, CAML disclaims all responsibility for any loss or damage which any person may suffer from reliance on this information or any opinion, forecast, conclusion or recommendation in this document whether the loss or damage is caused by any fault or negligence on the part of CAML or otherwise.
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Contents
1. Overview of Contango Asset Management2. Macro outlook – challenges persist3. Are current market valuations attractive?4. What are the implications for your portfolio?
• Large Cap (GARP) Portfolio• Mid Cap (ex30) Income Portfolio• Mic Cap Portfolio
5. Summary
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1. Overview of Contango Asset Management
• Established in 1998 and is a wholly owned subsidiary of Contango MicroCap Limited (CTN)
• Experienced and successful wholesale fund manager with a large investment team
• Also manage two Listed Investment Companies on the ASX
• Proven track record in managing funds across all segments of the Australian market
• Well known and rated by both wholesale and retail consultants
Contango Asset Management Limited is a boutique Australian fund manager
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Contango Asset Management has a streamlined ownership structure
Contango MicroCap Ltd (CTN)
Contango Asset Management Limited 100%
Contango Income Generator Ltd (CIE)
Economics is key to determining intrinsic value in the equity market
• Intrinsic value is an estimate of ‘fundamental value’ without reference to current ‘market value’
• Intrinsic and market valuations can diverge−Market is not always efficient−Different estimation theories, assumptions and data sources−Cyclical vs structural changes
• Understanding and forecasting economic conditions is key to estimating intrinsic value− Economic growth drives company revenue and earnings growth − Growth, inflation, interest rates, exchange rates all important− Interest rates also determine discount rate for future cash flows
Our investment philosophy is based on three basic principles
1. Economic conditions drive earnings and valuations
2. Stocks and sectors perform differently at each stage of the economic cycle
3. These relationships can be exploited in a systematic way to add value to investment portfolios
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EPS
PE
Australian cash rates over the long run. Stable and consistent monetary policy signals helps drive economic growth
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Local equity valuations around long run historical benchmark. Earnings outlook revised lower for FY16
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Global equity valuations trading below long run historical benchmark
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Lower cash rates leads to greater demand for dividends
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Demographic outlook is a significant policy challenge
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Equity market attractive vs fixed income
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Lower long bond rates is supportive for equity valuations
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Interest rates to remain low supporting growth and equity markets
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• Global growth modest and uneven with limited price pressure− Developed Markets improving but Emerging Markets soft
• Underlying US growth improving, employment growth reasonable− Consistent with FOMC delaying rate rises − Global economy remains fragile combined with rising USD and lack of inflation
• Growth in Europe recovering but tail-risks re-emerge− ECB’s QE on going
• Growth in China is moderating as economy rebalances− Government stabilising transition but risk of policy errors increasing− Commodity prices to remain under pressure
• Domestic economy not transitioning as quickly as RBA would like− Continued low rates and lower AUD
We group stocks by macro relationships to add alpha at the super sector level
1.0
3.2
-6.8
-1.4
-1.3
-0.5
2.3
3.5
-8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0
[Cash]
[Futures]
Global Cyclicals
Domestic Cyclicals
Interest Rate Sensitives
Gold
Defensives
Market Leverage
Contango Large Cap Fund: SS Active Weight vs ASX300
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Strategy enables us to take high conviction positions at the industry level
Heavily Moderately Slightly Neutral Slightly Moderately HeavilyUnderweight Underweight Underweight Overweight Overweight Overweight
Global Cyclical MaterialsOil
CoalGold
Iron OreCopper
NickelAluminium
SteelSpeciality (lithium, graphite)
UraniumMineral sands
Domestic CyclicalsCapital Goods
Non-Res ConstructionBuilding materials
RetailingMedia
ITCommercial Services
Market leverageDiv Fin
DefensivesStaples
HealthcareGeneral InsuranceConsumer services
Interest Rate SensitiveBanksREITs
UtilitiesInfrastructure
Telcos16
Large Cap (GARP*) Fund is a diversified portfolio of large cap growth stocks
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Offers a diversified exposure to the Australian equity market and a higher expected return than investments in cash or fixed income
Actively managed portfolio of Australian listed shares on the S&P/ASX 300 Index• Target return of the S&P/ASX 300 Accumulation Index plus 2%• Tracking error of 1.5% - 4%• Broad composition of 25 - 40 stocks
Business cycle process• Combines a systematic top-down and bottom-up analysis
Fund facts• Size is $152 million• Inception is April 1999
Large Cap (GARP) Fund’s performance has been strong since inception
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Consistent alpha generation in different market conditions
September 2015 Large Cap Fund
ASX 300 Accumulation Added Value
3 Months -6.0% -6.5% 0.4%
6 Months -13.1% -12.5% -0.5%
1 Year 1.4% -0.7% 2.1%
3 Years pa 10.6% 9.1% 1.5%
Since inception (April 1999) pa 8.8% 7.4% 1.4%
Large Cap (GARP) stock positions consistent with defensive strategy view
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*Stock not held. September 2015.
Code Stock Over%
ANZ ANZ Banking Group Limited 3.0
OSH Oil Search Limited 2.4
BOQ Bank of Queensland Limited 2.3
CSL CSL Limited 2.0
GMG Goodman Group 2.0
SUN Suncorp Group Limited 1.8
JHX James Hardie Industries PLC 1.8
BXB Brambles Ltd 1.8
SHL Sonic Healthcare Limited 1.7
CGF Challenger Limited 1.7
Code Stock Under%
BHP BHP Billiton Limited -2.2
NAB National Australia Bank Limited -1.9
WBC Westpac Banking Corporation -1.9
SCG* Scentre Group -1.6
RIO* Rio Tinto Limited -1.6
WPL* Woodside Petroleum Ltd -1.5
WFD* Westfield Corporation -1.4
TCL* Transurban Group Ltd. -1.4
QBE* QBE Insurance Group Limited -1.3
WES Wesfarmers Limited -1.3
September 2015
Large Cap (GARP) portfolio employing and actively managing risk
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Large Cap (GARP) active risk positions are consistent with the fund’s objectives
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September 2015 ContangoLarge Cap
ASX 300Accum Index
Price to Earnings Ratio 13.4 14.1
Dividend Yield (net) 5.1 5.3
Dividend Yield (gross) 6.6 6.9
EPS Growth (%) 8.3 2.4
Return on Equity (%) 16.5 15.1
Beta 1.03 1.00
Tracking Error* 1.93 -
Source: Factset (next twelve months)* Ex ante. Bloomberg.
The Income Generator Fund’s active risk positions are consistent with the fund’s objectives
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Source: Contango AM, 12 month forward consensus forecast, Factset
September 2015Contango
Income Generator
All Ordinaries
ASX300top-30
ASX300ex-30
Median market cap ($m) 1,438 397 18,312 636
Price to earnings ratio 13.7 14.1 14.0 14.4
Earnings growth 5.4 3.9 0.1 8.9
Dividend yield (net) 6.0 5.1 5.7 4.3
Dividend yield (gross) 7.9 6.7 7.6 5.3
Return on equity 16.0 15.1 15.4 14.4
Beta to ASX300 0.84 0.95 1.04 0.91
The Income Generator Fund’s performance has been less volatile than the market
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Monthly Returns: Contango Income Generator vs All Ordinaries
Source: Contango AM, Iress, gross of fees, September 2015
The Small Cap Fund is a diversified portfolio of small cap stocks
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Offers a diversified exposure to ASX listed small companies and a higher expected return than the Large Cap (GARP) FundActively managed portfolio of Australian listed shares outside of the ASX 100• Target return of the S&P/ASX Small Ords Accumulation Index plus 3%• Tracking error of 4% - 10%• Broad composition of 30 - 60 stocksBusiness cycle process• Combines top-down and bottom-up analysisFund facts• Size is $160 million• Inception is Feb 2005• Max cash is 25%
The Small Cap Fund’s performance has been strong since inception
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Gross performance
September 2015 Small Cap Fund
ASX Small Ords
AccumulationAdded Value
3 Months 1.0% -3.9% 4.9%
6 Months -4.2% -7.8% 3.6%
1 Year 1.6% -4.9% 6.5%
3 Years pa 5.5% -1.2% 6.8%
Since inception (Feb 2005) pa 8.6% 1.7% 6.9%
Consistent alpha generation in different market conditions
Small Cap Fund’s September quarter sector attribution
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Sector Weight Added Value
Energy -2.9% 1.6%Materials -2.1% 0.7%Industrials -1.5% 2.4%Consumer Discretionary 1.3% 0.1%Consumer Staples -3.7% -0.4%Health 0.8% 0.4%Financials 5.7% 0.3%Information Technology 0.0% -0.6%Telcos 0.9% 0.3%Utilities -0.7% 0.1%Cash & Futures 1.9% 0.0%Total 4.9%
September 2015. Attribution updated quarterly.
Small Cap Fund’s stock positions are consistent with Strategy view
27*Stock not held. September 2015.
Code Stock Over%
GUD G.U.D. Holdings Limited 2.8
CHC Charter Hall Group 2.7
PGH Pact Group Holdings Ltd. 2.6
VOC Vocus Communications Limited 2.5
BAP Burson Group Ltd 2.5
SCP Shopping Centres Australasia Property Group RE Ltd. 2.5
MYX Mayne Pharma Group Limited 2.4
VED Veda Group Limited 2.4
MVF Monash IVF Group Ltd 2.3
SGF SG Fleet Group Ltd. 2.3
Code Stock Under%
BKL* Blackmores Limited -1.6
MTU* M2 Group Ltd -1.5
NST* Northern Star Resources Ltd -1.4
BWP* BWP Trust -1.3
NUF* Nufarm Limited -1.3
PTM* Platinum Asset Management Ltd -1.3
NHF* NIB Holdings Ltd -1.3
FBU* Fletcher Building Limited -1.1
CMW* Cromwell Property Group -1.1
SUL* Super Retail Group Limited -1.1
Small Cap Fund is employing & actively managing risk
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September 2015
Small Cap Fund’s active risk positions are consistent with the funds objectives
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Source: Factset (next twelve months)* Ex ante. Bloomberg.
September 2015 ContangoSmall Cap
ASX Small Ords Index
Price to Earnings Ratio 14.0 13.3
Dividend Yield (net) 4.4 4.5
Dividend Yield (gross) 5.4 5.6
EPS Growth (%) 16.3 9.7
Return on Equity (%) 17.7 14.9
Beta 0.91 1.00
Tracking Error* 4.04 -
4.4 The Contango AM Micro Cap Fund
The Micro Cap Fund is a diversified portfolio of emerging company micro cap stocks
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Offers a diversified exposure to ASX listed micro cap companies and a higher expected return than the Large Cap (GARP) FundActively managed portfolio of Australian listed shares with a market capitalisation of between $30-$350 million• Target return of the S&P/ASX Small Ords Accumulation Index plus 3%• Tracking error of 5% - 12%• Broad composition of 50 - 100 stocksBusiness cycle process• Combines top-down and bottom-up analysisFund facts• Total Micro Cap mandate size $280 million• Inception March 2004• Max cash is 25% wholesale / 50% LIC
Micro Cap Fund’s September quarter sector attribution
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Sector Weight Added Value
Energy -2.5% 1.5%Materials -5.7% 0.5%Industrials -3.1% 1.0%Consumer Discretionary -0.1% -0.6%Consumer Staples -2.1% -0.2%Health -2.4% -1.0%Financials -2.8% 1.6%Information Technology 11.4% -0.3%Telcos -4.2% -0.1%Utilities 0.9% 0.2%Cash & Futures 10.7% 0.1%Total 2.7%
September 2015. Attribution updated quarterly.
High tech company• Monitoring devices, infrared sensors,
license plate readers, parking meters
Attractive market offering• Cost savings and higher accuracy in
processing infringements• Payback period of only 15 weeks
Successful trial in Westminster (UK) • Potential for 10,000 parking bays
Metrics• Market cap $36.5m• Sales growth 40% FY16• Price target $0.29 (107% TSR)
High tech company• Global leader in sports analytics technology• AUS, US and European sports teams• Every AFL, NRL and Super Rugby Team
Strong business model• Owns all the data produced and continually
improves analytics• Large upside via potential use in
broadcasts
Metrics• Market cap $180.2m• Sales growth 45% FY16 • Price target $2.00 (38% TSR)
Smart Parking (SPZ)
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Catapult Group (CAT)
Micro Cap Fund’s active risk positions are consistent with the funds objectives
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Source: Factset (next twelve months)* Ex ante. Bloomberg.
September 2015 ContangoMicro Cap
ASX Small Ords Index
Price to Earnings Ratio 11.5 13.3
Dividend Yield (net) 4.7 4.5
Dividend Yield (gross) 5.9 5.6
EPS Growth (%) 18.8 9.7
Return on Equity (%) 46.0 14.9
Beta 0.77 1.00
Tracking Error* 6.3 -
5. Summary
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“Do you know the only things that gives me pleasure? It’s to see my dividends coming in” John D Rockefeller
• Understanding and forecasting economic conditions is relevant for portfolio construction
• Commodity outlook remains subdued
• Domestically the re rating continues. Corporate Australia adjusting. Recent reporting season confirms challenges for future earnings
• RBA cash rates and the AUD need to stay low to drive earnings higher
• Demographic structural drivers imply the search for yield will intensify
• Volatility is a part of investing. Always remain alert but never alarmed
Investing is easy but not simple
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Contact details
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George BoubourasChief Investment Officer Contango Asset Management LimitedTel: +61 (3) 9222 2324Mobile: +61 (0) 414 614 225E-mail: [email protected]