Fund Manager
Commentary
May 2017
Contents
Australian Shares 3
International Shares 10
Australian Fixed Income 14
International Fixed Income 15
Credit 17
Cash 18
Australian Property 21
International Property 22
Active Balanced 24
Performance as at 31 May 2017 27
Fund Manager Commentary – April 2017 3
Australian Shares
BT Wholesale Core Australian Share Fund
Market review
The S&P/ASX 300 Accumulation Index lost its momentum from the previous month, retreating 2.7%
over May - the largest monthly loss since January 2016. This was largely attributable to the significant
de-rating of the Banking sector (Financials ex-REITS -7.7%) off the back of weak reported earnings
from the ‘Big Four’ followed by the Bank Levy proposal announced in the May Federal Budget. The
market, at least initially, expected the new Bank Levy to drag on large banks’ future earnings,
accentuating share price falls. All four major banks pulled back significantly, ranging from -8.6% (NAB)
to -12.2% (ANZ).
Turning to other sectors, Healthcare slid 2.4% over the month, as sector heavyweight CSL (CSL,
-2.5%) took a respite from its strong rally since the beginning of this year. REITs (-0.7%) also retreated,
as investors became wary of retail concerns both domestically (VCX, -4.2%) and in the US (WFD,
-6.6%). In contrast, losses from Materials (-0.2%), Consumer Discretionary (-0.3%) and Consumer
Staples (-0.4%) were relatively small.
On the other side of the tally board, Industrials (+4.7%) and Telecoms (+3.4%) posted some solid
gains over the month. Returns from Energy (+1.5%) and Utilities (1.0%) were also positive. Within
Industrials, Qantas (QAN, +18.2%) and Sydney Airport (SYD, +8.0%) were the top performers. The
share price of the national airliner rallied after releasing its 3Q17 trading update and FY17 guidance
which beat market consensus, reinforcing an improved outlook for its business. SYD also reported its
April traffic data which showed evident boost from the Easter holiday period. The airport operator also
benefited from the gradual sectoral rotation from Cyclicals to Defensives which occurred though the
month, as thematic momentum from ‘Trumponomics’ further abated. Peers of SYD including Aurizon
(AZJ, +6.8%) and Macquarie Atlas (MQA, + 9.6%) also performed strongly.
Finally on global macroeconomics, fresh flare-ups of geopolitical uncertainty, tied chiefly to Trump,
helped underpin a strong performance from bonds (and bond-sensitives) during the month. The latest
round of media headlines centred on the President’s dismissal of FBI Director James Comey and
accusations that Trump had asked for an FBI investigation to be dropped. In turn, US 10 year yields fell
8 basis points to 2.20%, while the 2 year yield actually added 2 basis points to 1.28% over the month.
The latter’s move was likely tied to an upbeat outlook from the Fed that reinforced expectations of a
June rate hike. The central bank also offered some clarity on its balance sheet contraction plans, which
helped ease investor uncertainty. Meanwhile in Europe, ECB President, Mario Draghi offered a
constructive outlook for wage growth, but reiterated a need to retain an “extraordinary amount of
monetary policy support”. This added to confidence instilled by the victory of pro-Euro, centrist
Fund Manager Commentary – April 2017 4
candidate Emmanuel Macron in the final round of the French Presidential Election. Finally in Asia,
Chinese data including trade figures and manufacturing PMI eased back. China also suffered a
downgrade of its sovereign credit rating.
Portfolio performance
The BT Wholesale Core Australian Share Fund returned -2.14% (post-fee, pre-tax) in May 2017,
outperforming its benchmark by 0.60%.
Contributors
Overweight Qantas
Qantas (QAN, +18.2%) remains our largest active position within the portfolio, and this paid off again
over May. The airliner has maintained its momentum since November last year, extending gains into
May with another outstanding monthly return. The share price of the national airliner rallied after it
released its consensus-beating 3Q17 trading update and FY17 guidance, reinforcing the improved
outlook for its underlying business. The recent strong share price performance has not diminished our
conviction towards Qantas moving forward. While the market has started to realise the relative
attractiveness of Qantas’ valuation versus peers, we believe strong cash flow, capital management and
cost discipline will continue to support the airliner and drive further positive returns for shareholders.
Overweight Caltex
Shares in Caltex (CTX, +10.7%) performed strongly in May. Caltex took a material hit in October last
year as a result of speculation in the press that Woolworths might be favouring a bid from BP for its
network of petrol stations, and its shares had been trading sideways since. Contrary to market views,
we believe management at Caltex have other options to drive growth even if they were to lose the
contract with Woolworths. May gave weight to our view with the ACCC’s approval of Caltex’s Milemaker
Petroleum deal driving the share price up. Going forward, the stock’s current valuation still implies the
market is perhaps underestimating the growth potential from the marketing and retail parts of its
business. As a result, Caltex is among our preferred consumer defensive stocks. It trades at a more
attractive valuation than other stocks within this space, while offering good scope for outperformance.
Overall, we believe the investment case for Caltex remains strong.
Underweight Westpac Banking Corporation
Share price of Westpac (WBC, -10.4%) fell heavily in May due to a confluence of the bank’s reporting
season result and the Bank Levy proposal that was announced in the May Federal Budget. Westpac’s
reported result was broadly in line with market consensus at the headline level. On an underlying basis,
cost management was seen as better than expected, but partially offset by moderately lower revenue
growth. That said, the impact from the result was completely overwhelmed by the surprise
announcement of the Bank Levy proposal, which aims to tax the big banks about $6.2 billion over the
Fund Manager Commentary – April 2017 5
next four years, putting pressure on bank’s already squeezed margin in a low interest rate environment.
In our view, the valuation gap in the banking sector largely closed after recent strong gains, and given
the potential headwinds ahead we reduced our allocation to the Big Four banks prior to most of the
recent falls.
Overweight Resmed
Resmed (RMD, +3.2%) has recouped all the losses it incurred in the previous two months, posting a
moderate gain in May. Its share price oscillated moderately early in the month and started rising after
positive trial results for its Home Oxygen Therapy - Home Mechanical Ventilation (HOT-HMV). Patients
in the study who received this non-invasive ventilation treatment at home in addition to oxygen therapy
had a 51 percent decreased risk of re-hospitalization or death, and stayed out of the hospital more than
three times longer, compared to those who received oxygen alone. Going forward, Resmed remains our
largest active position in the Healthcare sector due to its product innovation and its track-record of
effectively bringing products to market.
Detractors
Overweight ANZ Banking Group
Similar to its Big Four peers, ANZ suffered an acute sell-off in May, finishing the month 12.2% lower.
Whilst there were both good and bad elements within their May update, the reported cash profit of $3.4
billion was slightly below consensus, highlighting the continued trade-off between an improving balance
sheet position and softness in underlying earnings. The decisive blow was the newly announced Bank
Levy proposal in the May Federal Budget, which aims to tax the big banks about $6.2 billion over the
next four years, putting pressure on bank’s already squeezed margin in a low interest rate environment.
In our view, the valuation gap in the banking sector largely closed after the recent rallies, and given the
potential headwinds ahead, we reduced our allocation to the Big Four banks. Moving forward, ANZ
remains our preferred exposure amongst the major banks as we believe it has a greater scope to
reduce costs and improve capital efficiency via the disposal of non-core and under-performing assets
than its peers.
Underweight Sydney Airport
The global reflation trade, or ‘Trumponomics’ tailwind, further abated in May, driving sectoral rotation
from Cyclicals back to Defensives over the month. As a result, bond-proxies including Sydney Airport
(SYD, +8.0%) attracted buying attention and performed strongly over the month. The airport operator
also reported its April traffic data which showed a boost from the Easter holiday period. Whilst we had
avoided holding the stock due to the stretched valuation, its pull-back last year has made it relatively
attractive again. Alongside our decision to reduce the portfolio’s exposure to the reflation thematic, we
have moved the portfolio’s position in SYD from a zero weight to under-weight.
Fund Manager Commentary – April 2017 6
Underweight Origin Energy
Origin Energy (ORG, +7.2%) maintained its momentum from the previous month. During the month the
market responded favourably to Origin’s announced sale of both the Stockyard Hill windmill and the
Darling Downs Pipelines to Jemena. The first sale (which is still subject to final closure) was priced at
$110 million, above the asset’s book value of $60-70 million; whereas the second sale was done at
$392 million. These latest sales will take total proceeds from Origin’s asset sale program close to $1
billion. Whilst the portfolio has a moderate overweight in Energy, Caltex and Santos remain our
preferred picks within the space, given the better potential upside from both businesses compared to
peers.
Underweight Aurizon
The global reflation trade or ‘Trumponomics’ tailwind further abated in May, driving sectoral rotation
from Cyclicals back to Defensives over the month. As a result, bond-proxies including Aurizon (AZJ,
+6.8%) attracted buying attention. Whilst we have decided to reduce the portfolio’s exposure to the
reflation theme, we continue to avoid holding Aurizon given its all-time-high valuation.
Strategy & Outlook
The portfolio outperformed the index in May helped by strong gains in Qantas (QAN), Caltex Australia
(CTX), and Macquarie Atlas (MQA). The latter’s strength illustrates the thematic reversal that has taken
place in recent weeks as wavering conviction in President Trump’s ability to deliver his pro-growth
agenda of tax reform and deregulation has seen bond yields stabilise and many bond-sensitive stocks –
including listed infrastructure such as MQA – regain all the losses they suffered in the ‘reflation trade’ in
H2 2016. We remain wary of some of the highest-profile bond-sensitives, both the defensive yield and
high growth variants, which remain on challenging valuations. At the same time, we believe underlying
growth in the US remains decent – even without the added impetus of the Trump agenda – and the Fed
remains on track to gently raise interest rates in coming months. As a result we remain broadly
underweight bond-sensitives. However we are also mindful that the absolute level of interest rates is
likely to remain low and the equity dividend yield remains at a significant premium to the yield from
other asset classes. As a result, we have been using the pullback over the last six months as an
opportunity to add to specific bond-sensitives.
The market as a whole remains at a reasonable valuation. The current index P/E is above the long-term
average, however this is entirely consistent with today’s low interest rates and we believe historically
low rates can support a slightly elevated market rating. That said, we think it is unlikely that the market’s
valuation can increase significantly from here, given muted domestic economic growth. This leaves
earnings to drive market growth and, with earnings likely to be mid-single digit at best, underpins our
expectations for lower market returns than has been the case in recent years.
Fund Manager Commentary – April 2017 7
Lower overall returns increases the importance of active management in extracting extra gains for the
investor. The current investment environment is challenging, given heightened geopolitical volatility, the
waning influence of monetary policy, and significant levels of disruption within a swathe of Australian
industries. Ironically, these very challenges provide a beneficial environment for active managers:
greater uncertainty drives greater mispricing – and greater mispricing drives greater opportunities.
At the moment, several of our highest-conviction positions are in industrials which have been
overlooked by a market obsessed with defensive yield and high growth in recent years. Qantas,
Metcash and Caltex Australia provided cases in point. The recent strength in Qantas demonstrates that
the market is recognising the significant opportunity in these stocks, which are at significant discounts to
their long-term ratings and illustrate that there is no lack of opportunities in this market despite its
overall valuation.
Australian Shares
BT Wholesale Smaller Companies Fund
Market review
The Small Ordinaries Index extended losses from April into May, finishing the month 2.1% lower than
the previous period. However, the index outperformed its larger cap sibling, the S&P/ASX 300 index as
the Bank Levy announced in the May Federal Budget weighed more heavily on the ‘Big Four’ banks.
From a sector perspective, performance was again relatively evenly split with five sectors posting
positive returns whereas the other six finished the month in the red. In particular, Healthcare was the
largest detractor from the benchmark return, with a double digit loss of -13.7% incurred in May.
Amongst other losers, the share price of two large pharmaceutical companies within the small cap
universe fell significantly during the month: Sigma Healthcare (SIG) retreated 35.8% over the month,
after it initiated legal proceedings against its largest client, My Chemist/Chemist Warehouse Group,
over certain aspects of the current supply agreement. Mayne Pharma (MYX, -19.3%) also posted a
significant monthly loss which was partly attributable to an unusually aggressive pricing environment
overseas that is expected to affect Mayne Pharma’s US generic business in 2H17. The strong gain from
Fisher & Paykel Healthcare (FPH, +10.1%) wasn’t enough to turn the tide within the sector.
The other sector which dragged the index’s performance down was Consumer Discretionary (-4.5%).
Within it, double-digit losses from both Myer (MYR, -22.1%) and Super Retail Group (SUL, -18.5%)
detracted from sector performance. Putting aside the perceived competition hit from global e-commerce
giant Amazon (which has become more imminent after Amazon’s announcement the previous month),
the March retail sales figure released in May showed the domestic industry was struggling: retail sales
dropped 0.1% in March compared to the consensus forecast of a positive 0.3%. The news that Top
Shop was placed into voluntary administration following Marcs, David Lawrence, Pumpkin Patch,
Fund Manager Commentary – April 2017 8
Payless Shoes, Herringbone and Rhodes & Beckett didn’t help market sentiment. Taken together, it all
weighed heavily on the sector.
Turning to the positives of the month, Industrials (+3.0%), Information Technology (+5.0%) and
Telecoms (+4.6%) were the stand-out sectors. Within Industrials, performance was upbeat in general,
with some solid returns from RCR Tomlinson (RCR, +21.1%), Reliance Worldwide (RWC, +8.2%)
and sector heavyweight Cleanaway (CWY, +3.9%) contributing positively. The share price of Wisetech
(WTC, +24.5%) soared after the cloud-based software solution developer reaffirmed FY17 guidance in
light of strong industry tailwinds. It was the largest contributor to the IT sector performance, alongside
outstanding returns from Isentia (ISD, +21.4%) and Netcomm (NTC, +32.1%).
Finally on global macroeconomics, fresh flare-ups of geopolitical uncertainty, tied chiefly to Trump,
helped underpin a strong performance from bonds (and bond-sensitives) during the month. The latest
round of media headlines centred on the President’s dismissal of FBI Director James Comey and
accusations that Trump had asked for an FBI investigation to be dropped. In turn US 10 year yields fell
8 basis points to 2.20%, while the 2 year actually added 2 basis points to 1.28% over the month. The
latter’s move was likely tied to an upbeat outlook from the Fed that reinforced expectations of a June
rate hike. The central bank also offered some clarity on its balance sheet contraction plans, which
helped ease investor uncertainty. Meanwhile in Europe, ECB President, Mario Draghi offered a
constructive outlook for wage growth, but reiterated a need to retain an “extraordinary amount of
monetary policy support”. This added to confidence instilled by the victory of pro-Euro, centrist
candidate Emmanuel Macron in the final round of the French Presidential Election. Finally in Asia,
Chinese data including trade figures and manufacturing PMI eased back. China also suffered a
downgrade of its sovereign credit rating.
Portfolio performance
The BT Wholesale Smaller Companies Fund returned -0.62% (post-fee, pre-tax) in May 2017,
outperforming the S&P/ASX Small Ordinaries Accumulation Index by 1.43%.
May saw a rebound for several of our core positions which have been weak over the last six months,
including accommodation provider Mantra Group and enterprise software company Technology One.
Two of our New Zealand-listed holdings, Synlait Milk and Mainfreight, also helped drive the month’s
outperformance. There was broad-based weakness in the health care sector and our avoidance of
Sigma Healthcare and Mesoblast also helped, although our holdings in Mayne Pharma Group did drag
slightly.
Fund Manager Commentary – April 2017 9
Contributors
Overweight Synlait Milk
Synlait Milk (SML.NZ) is a Canterbury-based dairy company which produces a range of milk-based
products including infant milk formula for the Chinese market. It gained 17.4% for the month, boosted
by the news in late April that it had received the green light from the US Food and Drug Administration
(FDA) to export lactoferrin – a milk protein - to the United States for use in infant formula, becoming
only the second company to have such approval. Late in the month it also announced the acquisition of
Auckland-based The New Zealand Dairy Company, which allows it to diversify its production line,
mitigating some of the risk inherent in single-site manufacturing companies.
Underweight Sigma Healthcare
Sigma Healthcare (SIG) is a distributor of pharmacy products. The stock fell 35.8% for the month after
My Chemist – which owns the Chemist Warehouse brand – announced it was using another supplier for
its medicines. We do not own the company.
Detractors
Overweight Greencross
Greencross (CXL) is an integrated pet care company which operates over 130 vet practices, under the
Greencross brand, as well as 230 specialty pet retail stores under the Petbarn brand, among others. It
fell 17.2% in May as the market’s outlook for earnings softened. We maintain a positive view on their
strategy of co-location – where vets are available inside Petbarn stores – which promotes cross-selling.
At the same time, trends in pet ownership and insurance provide a relatively defensive earnings stream.
Overweight Automotive Holdings Group
Automotive Holdings Group (AHG) is Australia’s largest auto dealership group and also operates a
logistics business. It fell over 21% in May after management downgraded their earnings expectations
for the full year on weaker car sales and tighter condition in the auto finance market. While the
combination of a weaker Australian dollar and compressed household incomes has weighed on the
auto industry, there remains significant opportunity for consolidation, given its highly fragmented nature,
and we think AHG is well placed in this regard.
Outlook
The small cap retail sector came under pressure in May. This was partly due to some disappointing
data which indicates that Australian consumer demand remains soft, a notion reinforced by the
announcement of Top Shop’s liquidation, the latest in a regular stream of closure over the past year.
This is all exacerbated by speculation over the arrival of Amazon Prime in the Australian market. At this
Fund Manager Commentary – April 2017 10
point, there is very little information available about when Amazon will arrive and in what form. There
are many questions over whether the economics of it model would work in Australia, given the
differences from the United States in terms of minimum wages, union power and population density,
among others. At the same time, Amazon’s arrival in markets such as the US and UK has not resulted
in the obliteration of the retail sector – there have been winners and losers among the bricks-and-mortar
chains.
The upshot is that Amazon’s potential arrival is undoubtedly a salient example of the kind of disruption
that we are seeing in many sectors of the Australian market today. Disruption provides challenges – but
it also provides the opportunity when the market typically washes its hands of an entire sector. The
ability to understand a company’s management and their strategy, and determine whether they are
capable of responding to disruption or not, is key to making money from these challenges and is the
ongoing focus of our large team of research analysts in the small cap sector.
Looking forward, we continue to place great emphasis on earnings stability and visibility in what
continues to be a challenging period for the economy. We have key positions in companies with
reasonably defensive revenue streams, such as auto parts distributor Bapcor, as well as where we see
structural thematic opportunities, such as in agriculture where we hold Synlait Milk, Tassal Group and
Nufarm.
International Shares
BT Concentrated Global Share Fund
Market review
Global developed equity markets continued their strong run over the last few months with the MSCI
World ex Australia in AUD returning 2.75%. This was despite growing geo-political uncertainties with a
snap UK Election, Trump impeachment rumblings and the UK terrorist bombing. The US market was up
with the Nasdaq up 2.5% and the broader S&P500 up 1.2% (closing at an all-time high of 2411). Trump
made some announcement regard breaking up big banks and the FOMC left rates on hold and mapped
out a plan for scaling back its balance sheet. Towards the end of the month there were fresh concerns
around Trump’s involvement with Russia and potential impeachments, however the markets looked
past this as continued reasonable economic data continued to show US growth and inflation on track.
European markets were also stronger as the outcome of the French Presidential election saw a relief
rally, whilst a continued uplift in economic data supported the positive mood. The UK market was
strongest returning 4.4%, whilst Germany and France both delivered positive returns of 1.4% and 0.3%
respectively.
Japanese, Korean and Hong Kong equities rallied throughout May, despite ongoing geo-political
tension in the region surrounding North Korea. The South Korean market delivered a strong 6.4%,
Fund Manager Commentary – April 2017 11
Hong Kong next at 4.2% and Japan’s Nikkei index was up 2.4%. China shares rebounded strongly
returning 3.7% (H shares) buoyed by strong positive economic results for April including imports and
exports rising +11.9% and +8% YoY respectively, while M2 Money Supply grew +10.5% YoY and Retail
Sales grew +10.7%.
The Australian dollar was broadly weaker over the month with falls against the USD (-0.8%), Euro
(-3.8%) and Pound (-0.3%). The US was also weaker against both the Yen (-0.1%) and the Euro
(-2.3%).
Portfolio performance
The BT Concentrated Global Share Fund returned 3.95% (post fee, pre-tax) in May 2017,
outperforming its benchmark by 1.20%.
YUM! Brands, one of the world’s largest restaurant operators and owner of the Taco Bell, KFC and
Pizza Hut brands was a positive contributor to our performance this month after reporting better than
expected first quarter earnings. Taco Bell is arguably YUM's strongest brand, and its performance this
quarter was impressive with same store sales up 8%. Taco Bell contributes 32% of YUM’s operating
profit, even though it represents only 15% of YUM’s units domestically, and 1% internationally. KFC
continued its turnaround reporting 2% growth in same store sales. Pizza Hut, however, was relatively
soft, down 3% after a weak performance in the US. What is pleasing is management have come to an
agreement with the Pizza Hut franchisees in the US which should lay the groundwork for a turnaround
in sales. This agreement, similar to what proved to be a catalyst for the transformation of KFC sales,
involves restaurant upgrades and investment in technology and marketing. Our investment in YUM!
Brands is predicated on their dominant market position and our confidence in management to transition
the company to an asset light, 98% franchised business, whilst at the same time extracting significant
costs out of the business. This more capital-efficient low cost model will lead to greater earnings
predictability, a significant increase in margins and step up in free cash flow. Management have
committed to returning the free cash flow to shareholders via increased dividends and buybacks.
Lloyds Banking Group, the largest domestic retail bank in the United Kingdom was also a positive
contributor to the Fund this month, following a robust quarterly earnings report. Underlying profit of 2.1
billion pounds was 10% ahead of expectations. It appears net interest income has reached an inflection
point, growing meaningfully for the first time in two years. Guidance for net interest margins was also
upgraded for the full year which resulted in 8% earnings upgrades for the business this year. Strong
capital generation lifted Lloyds’ Core Tier 1 ratio to 14.3% which underpins a very healthy dividend and
buyback policy and offers a significant buffer to unforseen risks in the economy.
During May the Government reduced its stake to less than 1% shareholding in the business down from
42% holding at the peak of the GFC. Lloyds is now a simpler business, focused on the domestic
market, with a balance sheet which has been strengthened considerably. The management team is
focused on cost savings and benefiting from net interest income dynamics, with free cash flow being
Fund Manager Commentary – April 2017 12
directed back to shareholders. We believe we are buying Lloyds Banking Group exactly like Kerry
Packer bought Westpac in 1992 and intend to hold this business for many years to come.
Our media holdings detracted from performance this month. One such holding, Discovery
Communications, was down 10% following the release of its quarterly earnings report. The earnings
release highlighted a better US advertising market but was offset by significant currency headwinds and
a softer international advertising and education environment. Whilst the company reiterated full year
guidance of low to mid- teens earnings per share growth and low double digit free cash flow growth, a
3% year-on-year decline in US subscribers was a key source of concern for the market. Media
companies are facing headwinds, with consumers cancelling subscriptions and becoming more
selective about the content the pay for. However, with superior content, we believe over the longer term
media companies can go direct to the consumer, similar to what Netflix have done with their original
House of Cards content. Over the past three years Discovery has significantly increased their content
production budgets and focused their exposure on more exclusive content related to the Olympics,
European cycling and their core male ‘how things work’ genre. With the business trading on a current
year 11x price to earnings multiple, with EBIT margins of 32% and high returns on assets of 80% we
have used the weakness to increase our weighting in Discovery and our other US media holdings.
Strategy & Outlook
Looking forward we believe we have entered a period in equity markets that is best suited to selective
stock picking rather than broader market exposure. Tailwinds over the last five years that have helped
propel equity markets higher have become headwinds. We have positioned our portfolio to the leading
businesses in sectors that are trading below their intrinsic value. Over time, and as interest rates
normalise, we believe these businesses will revert to their intrinsic value and in the interim we are being
paid a dividend to wait. The companies we own have astute management teams and strong balance
sheets in order to circumnavigate a challenging geopolitical outlook.
We prefer to know fewer stocks very well than many stocks not so well, and hence we have a
concentrated portfolio of 35-55 stocks in our portfolio.
International Shares
BT Wholesale Core Global Share Fund, managed by AQR
Market review
Global developed equity markets continued their strong run over the last few months with the MSCI
World ex Australia in AUD returning 2.75%. This was despite growing geo-political uncertainties with a
snap UK Election, Trump impeachment rumblings and the UK terrorist bombing. The US market was up
with the Nasdaq up 2.5% and the broader S&P500 up 1.2% (closing at an all-time high of 2411). Trump
Fund Manager Commentary – April 2017 13
made some announcement regard breaking up big banks and the FOMC left rates on hold and mapped
out a plan for scaling back its balance sheet. Towards the end of the month there were fresh concerns
around Trump’s involvement with Russia and potential impeachments, however the markets looked
past this as continued reasonable economic data continued to show US growth and inflation on track.
European markets were also stronger as the outcome of the French Presidential election saw a relief
rally, whilst a continued uplift in economic data supported the positive mood. The UK market was
strongest returning 4.4%, whilst Germany and France both delivered positive returns of 1.4% and 0.3%
respectively.
Japanese, Korean and Hong Kong equities rallied throughout May, despite ongoing geo-political
tension in the region surrounding North Korea. The South Korean market delivered a strong 6.4%,
Hong Kong next at 4.2% and Japan’s Nikkei index was up 2.4%. China shares rebounded strongly
returning 3.7% (H shares) buoyed by strong positive economic results for April including imports and
exports rising +11.9% and +8% YoY respectively, while M2 Money Supply grew +10.5% YoY and Retail
Sales grew +10.7%.
The Australian dollar was broadly weaker over the month with falls against the USD (-0.8%), Euro
(-3.8%) and Pound (-0.3%). The US was also weaker against both the Yen (-0.1%) and the Euro
(-2.3%).
Portfolio performance
The BT Wholesale Core Global Share Fund returned 2.67% (post-fee, pre-tax) in May 2017,
underperforming its benchmark by 0.08%.
The Fund underperformed its benchmark over May 2017. Outperformance in North America was offset
by underperformance in Europe and developed Asia, versus regional benchmarks.
The thematic drivers of active returns varied across regions over the month. In North America,
momentum themes were the largest driver of positive results, outweighing negative performance of
relative-value signals. In Europe, underperformance of momentum themes drove underperformance,
offset somewhat by positive contributions by investor sentiment and earnings quality measures.
Underperformance in Asia was attributable to Japan, where relative-value and investor sentiment
signals drove underperformance, outweighing positive results to momentum and business quality
measures.
Sector/industry selection was a positive contributor to active returns, though offset by negative
contribution from stock selection within industry groups over the month. At a sector level, the
underweight to Energy along with overweight to Information Technology sectors were the largest
positive contributors, with the largest negative being offset the underweight to Consumer Staples. Stock
Fund Manager Commentary – April 2017 14
selection within industry groups detracted overall, notably within Consumer Staples and Health Care
with the largest offset the outperformance of active positioning within Industrials.
At a stock level, the strongest positive contributions came from overweight positions in: Applied
Materials Inc., an American semiconductor and electronics industry supplier and service provider; Atos,
a European IT services corporation headquartered in France; and UAL Corporation, an American airline
holding company and parent of United Airlines, a major international carrier. Largest detractors over the
month were an: underweight in Nestle S.A., a Swiss multinational food and drink company; an
overweight position in SunTrust Banks, Inc., American bank holding company and parent of SunTrust
Bank, which operates in the United States; and an overweight in Tyson Foods Inc., an American
multinational food company.
Strategy & Outlook
Entering June, the largest sector tilts are overweights in Industrials and Information Technology and
underweights in Consumer Staples and Energy. Relative to long-term allocations, we remain mildly
tilted towards higher quality companies with positive momentum and away from cheaper industry peers
in Europe and the US, while mildly tilted towards relative value considerations in Japan.
Australian Fixed Income
BT Wholesale Fixed Interest Fund
Market review
Australian yields fell across the curve, which flattened further during the month. At the shorter-end, 90
day BBSW ended 1 basis point lower at 1.74% and the 3 year fell 15 basis points to 1.66%. The longer-
dated 10 year maturity slid even further by 19 basis points to 2.42%. A fresh round of geopolitical flare-
ups, related chiefly to Trump, drove some demand for bonds at a global level. In addition, a number of
domestic developments sapped investor sentiment. This included credit rating downgrades for local
financial institutions as well as the sovereign debt of neighbouring China. The banks were also hit after
the announcement of a levy on the ‘Big Four’ as part of the 2017 Budget. Adding to local woes was
another leg lower for key commodity prices with iron ore suffering its third consecutive double digit
monthly decline. Meanwhile on the monetary policy front, the RBA left the cash rate unchanged at
1.50% as widely expected. Its statement repeated comments on improving global growth, but mixed
domestic labour market metrics. This was reflected in the April employment figures released later in the
month. Other indicators painted a similarly patchy picture with Business Confidence improving, but
Consumer Confidence, Retail Sales and Building Approvals slipping.
Fund Manager Commentary – April 2017 15
Portfolio performance
The BT Wholesale Fixed Interest Fund returned1.27% in May 2017 (post-fees, pre-tax), outperforming
its benchmark by 0.10%.
The portfolio outperformed its benchmark in May. The performance of the alpha overlay was slightly
positive. Duration and Yield Curve strategies added to performance while Cross-Market and FX
strategies detracted and Macro strategy was flat. The Government bond component also outperformed
its benchmark. Both the Duration and Yield Curve strategies performed strongly. Finally, the Credit
component was in line with its benchmark as negative performance from a short supra-nationals
position was offset by positive performance from long infrastructure and utilities holdings.
Strategy & Outlook
Information over the past month has not swayed the Reserve Bank’s view - the Board remains on hold
and has not suggested a desire to ease monetary policy further at this point. Early indications are that
macro-prudential measures are having the desired effect on the housing market and lending practices.
This in turn may provide the Reserve Bank with some comfort that rapid house price appreciation won’t
occur if policy easing was required. In our view this helps skew risks towards a rate cut.
That said, we acknowledge there are some positive signs for the Australian economy with the global
economic backdrop improving and forward looking indicators for the Australian labour market modestly
encouraging; job ads and vacancies reflect moderate employment growth in the near term. Significant
slack does however remain and it is unlikely that wage inflation picks up noticeably anytime soon.
Inflationary pressures remain well contained in Australia. The direction of the Australian dollar will be of
most concern to the Reserve Bank and their course for monetary policy. The RBA has stated previously
that currency appreciation risks stalling the rebalancing in the Australian economy that is underway.
They do however remain reluctant to ease further given the already accommodative monetary policy
stance.
International Fixed Income
BT Wholesale Global Fixed Interest Fund
Market review
Fresh flare-ups of geopolitical uncertainty, tied chiefly to Trump, helped underpin a strong performance
from bonds during the month. The latest round of media headlines centred on the President’s dismissal
of FBI Director James Comey and accusations that Trump had asked for an FBI investigation to be
dropped. In turn US 10 year yields fell 8 basis points to 2.20%, while the 2 year actually rose 2 basis
points to 1.28% over the month. The latter’s move was likely tied to an upbeat outlook from the Fed that
Fund Manager Commentary – April 2017 16
reinforced expectations of a June rate hike. The central bank also offered some clarity on its balance
sheet contraction plans, which helped ease investor uncertainty. Meanwhile in Europe, ECB President,
Mario Draghi offered a constructive outlook for wage growth, but reiterated a need to retain an
“extraordinary amount of monetary policy support”. This added to confidence instilled by the victory of
pro-Euro, centrist candidate Emmanuel Macron in the final round of the French Presidential Election.
Finally in Asia, Chinese data including trade figures and manufacturing PMI eased back. China also
suffered a downgrade of its sovereign credit rating.
Portfolio performance
The BT Wholesale Global Fixed Interest Fund returned 0.58% in May 2017 (post-fees, pre-tax),
underperforming its benchmark by 0.01%.
Performance for the month was driven largely by the Duration strategy with a more modest contribution
from the Yield Curve strategy. The former was tied to long duration positions in the 3 and 10 year
maturities of the Australian yield curve, which fell and flattened over the month. This also served the
latter component thanks to a flattener trade.
On the other side of the ledger, the Cross-Market, FX and Macro strategies dragged on performance.
Losses in the Cross-Market area were related to a long Germany versus short Italy position, which was
closed out during the month. Towards the end of May, a long Australia position against both the US
long-end and European front-end was opened. Meanwhile losses in the FX strategy arose from short
EUR/GBP, long USD/JPY and long USD/KRW trades, which were closed out during the period. The
USD directional bias was also shifted to short and gains were made on subsequent positions into the
end of the month. Finally, the marginal loss in the macro strategy was due to hedging of the Euro Main
vs US High Yield trade.
Strategy & Outlook
Further monetary policy tightening is expected from the Federal Reserve in the United States in June
although the pace of subsequent tightening is expected to slow with inflation benign, signs of slowing
economic growth and much policy uncertainty from the Trump administration. Central bank balance
sheet reduction in both the United States and Europe will also receive more attention. There is also a
re-emergence of political risks in the US as the market speculates on a possible impeachment of
President Trump. In Europe, the market hasn’t fully priced in the unfavourable outcomes of political
events. The general election in the UK and the chance of early Italian elections cast doubts on the
outlook of both economies.
Fund Manager Commentary – April 2017 17
Credit
BT Wholesale Enhanced Credit Fund
Market review
Domestic cash credit spreads continued to tighten in May, albeit the rate continued to slow. The US-
inspired risk market excitement has seemingly abated. It hasn’t helped that its flag bearer, President
Trump, has turned out to be rather ineffectual. Macron’s win in France was seen as a victory for the
centre of politics. Commodity markets, while testing lower levels have remained close to prior month
levels.
At the end of May the market has priced in a 91% probability of the US Fed raising the cash rate 25
basis points. That said, no further rate rises are priced for the remainder of the year by the market in
contrast to the Fed’s stated total of three raises in 2017.If the Fed raises the cash rate in June that will
represent two increases to-date.
During May President Trump embarked on his first major overseas tour, including meeting with other
G7 leaders in Sicily. Whilst away his budget proposal was circulated. Most parties believe it’s unlikely to
pass in its current form as it markedly changes the government’s spending programs. From the
perspective of markets, perhaps no news is good news.
On May 21 S&P downgraded the stand-alone credit profiles (SACP) of 23 Australian financial
institutions. This downgrade did not impact the long term foreign currency rating of Australia’s big four
banks due to the “extraordinary support” from the government that S&P inputs into their rating but
hasn’t removed the risk of an additional one notch downgrade if Australia’s sovereign rating drops
below AAA.
Moody’s downgraded China’s long term sovereign rating one notch to A1 from Aa3. The downgrade
was based on the expectation of a weakening of China’s financial strength. In response the markets
largely shrugged off the downgrade.
One of the strongest performing credit sectors during the month was senior domestic banks. The banks
rallied in the latter part of the month after S&P lowered SACP’s by one notch.
The Australian iTraxx and US CDS tightened over the month.
Portfolio performance
The BT Wholesale Enhanced Credit Fund returned 0.96 % in May 2017 (post-fees, pre-tax),
underperforming the benchmark by 0.03%.
Fund Manager Commentary – April 2017 18
Performance from credit was solid during the month but negative performance was generated by the
Fund’s short positions in supra-nationals and offshore banks. Positive performance was generated from
being long infrastructure and utilities. Activity over the month involved participating in the primary
issuance of Westpac’s covered bond.
Strategy & Outlook
Our macro credit view remains neutral. There is the potential for significant event risk and associated
volatility for the remainder of 2017. Early in 2017 the new US President has not wasted time in signing
Executive Orders. What is clear so far is to expect the potential for significant change in government
policies which could test markets. We also expect continued monetary policy action from central banks
such as the US Federal Reserve and ECB to impact risk appetite. In Europe and the UK we have the
start of Brexit and elections in Germany which could influence investor sentiment.
Whilst to-date, the Trump administration has been unable to implement any new policies regarding
taxes and trade, we would not rule out the distinct possibility the Republican Party coalescing over the
area of tax and possibly trade which could represent a meaningful change to global growth. The impact
spans the spectrum of outcomes from a pick-up in growth to damaging trade wars.
Global growth started the year tracking around 2.8% with corporate capital spending expected to
increase given improved global business sentiment. Underpinning this is the expectation of China
maintaining it balancing act of stimulus, credit easing and currency depreciation. Statements coming out
of the National People’s Congress appear to support a continuation of the balancing act. China’s growth
story underpins commodity price stability.
Accordingly whilst near term market tone is positive we remain cautious with many unknowns in the
latter half of 2017. Domestically we see weak growth persisting and improvement largely dependent on
commodity price stability and housing. As such we continue to recommend a defensive approach with
any overweights in operationally resilient sectors such as utilities and infrastructure that provide a
higher yield to index returns.
Cash
BT Wholesale Managed Cash and BT Wholesale Enhanced Cash Funds
Market review
May was an interesting month in terms of market divergence. While Australian shares took a dive, other
global equity markets rallied to record highs. At the same time fresh flare-ups of geopolitical uncertainty,
tied chiefly to Trump, helped underpin a strong performance from bonds. The latest round of media
Fund Manager Commentary – April 2017 19
headlines centred on the President’s dismissal of FBI Director James Comey and accusations that
Trump had asked for an FBI investigation to be dropped.
Domestically, sentiment was dampened by credit rating downgrades for local financial institutions as
well as the sovereign debt of China. The banks were also hit after the announcement of a levy on the
‘Big Four’ as part of the 2017 Budget. Adding to local woes was another leg lower for key commodity
prices with iron ore suffering its third consecutive double digit monthly decline.
In terms of monetary policy developments, the RBA kept the cash rate unchanged at 1.50%, as widely
expected. Its statement revealed few changes from prior months with comments on improving global
growth, but mixed domestic labour market metrics. This was reflected in employment figures during the
month that indicated an encouraging 37,400 jobs added, which pulled the unemployment rate 0.2%
lower to 5.7%. However, once again this was driven by part-time jobs and wage growth remained
sluggish. Other domestic data points painted a similarly mixed picture with Business Confidence
gaining, but Consumer Confidence, Retail Sales and Building Approvals slipping once more. In turn,
near-term expectations for the cash rate held steady.
Abroad, the Fed stayed its hand at its May gathering, but offered fairly upbeat commentary that
reinforced expectations for a June rate hike. Some greater clarity on its balance sheet contraction plans
also helped ease investor uncertainty. The path to normalisation was entrenched further by a 0.1% fall
in the unemployment rate to 4.4%. Additionally, the soft first quarter GDP print was downplayed as
“transitory”. Meanwhile in Europe, ECB President, Mario Draghi offered a constructive outlook for wage
growth, but reiterated a need to retain an “extraordinary amount of monetary policy support”. This
added to confidence instilled by the victory of pro-Euro, centrist candidate Emmanuel Macron in the
final round of the French Presidential Election.
Finally on market movements, Australian yields fell across the curve, which flattened further during the
month. At the shorter-end, 90 day BBSW ended 1 basis point lower at 1.74% and the 3 year fell 15
basis points to 1.66%. The longer-dated 10 year maturity slid even further by 19 basis points to 2.42%.
This was a much deeper decline than in the US, where 10 year yields fell 8 basis points to 2.20%, while
the 2 year actually rose 2 basis points to 1.28%. In turn, the yield differential between Australian and US
bonds narrowed to a 16 year low. Together with the aforementioned weakness in commodity markets,
this put pressure on the AUD/USD, which slipped 0.9% to 0.7430.
Portfolio performance
Managed Cash
The BT Wholesale Managed Cash Fund returned 0.15% in May 2017 (post-fee, pre-tax), matching the
benchmark performance.
Fund Manager Commentary – April 2017 20
With a higher running yield than the index the Fund is well positioned to outperform. Themes and credit
exposure remain consistent with prior months, with excess spread from A-1 rated issuers and yield
curve positioning likely to be the main driver of outperformance. The Fund ended the month with a
weighted average maturity of 68 days (maximum limit of 70 days). Yields further out the curve continue
to offer better relative value and the weighted average maturity has consistently been longer than
benchmark due to this. With longer dated yields offering better value and with Reserve Bank monetary
policy tightening a distant prospect we will remain longer than benchmark. The Fund is well positioned
to continue to outperform its benchmark.
Enhanced Cash
The BT Wholesale Enhanced Cash Fund returned 0.25% in May 2017 (post-fee, pre-tax),
outperforming its benchmark by 0.10%.
Positive performance came from industrials, financials, infrastructure and RMBS sectors. As at the end
of the month, the portfolio had a credit spread of 75 basis points over bank bills, interest rate duration of
0.09 years and credit spread duration of 1.64 years.
Strategy & Outlook
Information over the past month has not swayed our view on the Reserve Bank - they remain on hold
and have little desire to ease monetary policy further in this cycle. Early indications are that macro
prudential measures are having the desired effect on the housing market and lending practices and
may provide the Reserve Bank with some comfort that rapid house price appreciation won’t occur if
policy easing was required. The next key domestic economic release is first quarter gross domestic
product data due in early June, which is expected to be weak with some economists raising the
possibility of the economy contracting. There were however one-off factors weighing on growth,
including Cyclone Debbie, that the Reserve Bank will look through. A weak GDP number is unlikely to
change the Reserve Bank’s immediate stance.
There are some positive signs for the Australian economy with the global economic backdrop improving
and forward looking indicators for the Australian labour market modestly encouraging with job ads and
vacancies reflecting moderate employment growth in the near term. Significant slack does however
remain and it is unlikely that wage inflation picks up noticeably anytime soon. Increasing competition in
the retail sector is also dampening inflationary pressures, despite a depreciating currency that should
be adding to tradeables inflation. Inflationary pressures remain well contained in Australia.
It is likely that external developments drive market pricing and expectations more than domestic events
in the nearer term. Further monetary policy tightening is expected from the Federal Reserve in the
United States in June although the pace of subsequent tightening is expected to slow with inflation
benign, signs of slowing economic growth and much policy uncertainty from the Trump administration.
Central bank balance sheet reduction in both the United States and Europe will also receive more
Fund Manager Commentary – April 2017 21
attention. The direction of the Australian dollar will be of most concern to the Reserve Bank and their
course for monetary policy. The RBA has stated previously that currency appreciation risks stalling the
rebalancing in the Australian economy that is underway. They do however remain reluctant to ease
further given the already accommodative monetary policy stance.
Australian Property
BT Wholesale Property Securities Fund
Market review
The ASX AREIT index generated a total return of -1.1% last month, outperforming the broader market
which was down 2.8%. Year rolling, REITs have returned 1.3%, underperforming the broader market by
9.2%. Stand out performers for the month were Goodman Group (+4.8%), Bunnings Property Trust
(+4.1%) while retail REITs were mostly down with Westfield down 6.6%, Vicinity Centres down 4.2%
and Stockland Group down 2.7%. Globally REITs were up 0.9%, with Singapore the best performing
region, up 23% YTD.
The Federal Reserve left policy rates on hold in May, however the markets have all but priced in a 25
basis point rate hike for June 2017. Non farm payrolls in the US were strong, up 211,000 for April and
the unemployment rate fell to 4.4%, well below what the Fed considers the NAIRU rate of 4.7%. The
University of Michigan consumer sentiment index was strong at 97.1 and retail sales were solid, up
0.4%, although excluding gas and building materials were up 0.2%. The US 10 year bond yield fell 8
basis points to 2.20% and the Australian dollar fell 1% against the US dollar.
The Reserve Bank left the cash rate unchanged at 1.5% and noted that slow wages growth was likely to
persist. The Treasurer delivered the 2017/18 Commonwealth Budget forecasting a deficit of $29.4B,
equal to 1.6% of GDP. It was a terrible month for the broader equity market with Financials (-9.2%)
dragged down by the Federal Budget’s proposed bank levy. Retail sales were down 0.1% for March
(reported in May) bringing the YOY rate to 2.1%, the slowest in almost four years. Employment growth
was solid over the period, up 37, 400 jobs with the unemployment rate falling from 5.9% to 5.7%.
The AREITs’ quarterly updates revealed a very soft retail environment with Scentre Group sales
decelerating (-20 basis points) to +2.4%, Vicinity Centre sales decelerating (-90 basis points) to +0.4%
and Charter Hall Retail sales decelerating (-110 basis points) to +0.5%. Also during the month, the
majority of unitholders (56%) voted against the partial internalisation proposal recommended by the
directors and management of Investa Office Fund. Aventus Property Group also raised $215 million via
a 1:4.3 entitlement issue for the purchase of two large format retail centres in Sydney (Castle Hill and
Fund Manager Commentary – April 2017 22
Marsden Park) on a blended cap rate of 5.6%. The Manager of Generation Healthcare REIT, Northwest
Australia, made a $2.30 all cash offer for GHC, which has been recommended by directors.
Portfolio performance
The BT Wholesale Property Securities Fund returned-0.89% in May 2017 (post-fee, pre-tax),
outperforming its benchmark by 0.11%.
The portfolio outperformed the benchmark over the month. Overweight positions in Propertylink Group,
Mirvac Group, Aveo Group and Arena REIT and an underweight position in Vicinity Centres all added to
performance. Underweight positions in Goodman Group, BWP Trust, Dexus Property Group and
Centuria Industrial REIT as well as our overweight position in Stockland Group all detracted from
performance.
Over the month we increased our overweight positions in Charter Hall Long WALE REIT, Scentre
Group and Aveo Group. This was funded by reducing our overweight position in Stockland Group and
accepting Northwest’s $2.30 cash offer for our entire position in Generation Healthcare REIT.
Strategy & Outlook
The sector is now priced on an FY17 dividend yield of 4.8%, a PE ratio of 17 times and a 26% premium
to NTA. While this is still some way ahead of its long term average, AREIT valuations still lag the
physical market, so there is still some catch up in NTA. Balance sheets are stable with sector gearing at
29% and falling slowly as asset prices continue to rise. Low cash rates continue to be supportive. The
better managed REITs continue to use the buoyant direct market as an opportunity to divest non-core
assets.
International Property
BT Wholesale Global Property Securities Fund, managed by AEW
Market Review (In USD)
Performance of the global property securities market (on an ex-Australia basis) as measured by the
FTSE EPRA/NAREIT Developed Index continued to climb in May, posting a total return of 1.1%.
Europe (up 5.5%) was the strongest performing region, followed by Asia Pacific (up 2.8%), while North
America (down 0.8%) was negative. In the Asia Pacific, results were positive across the region. New
Zealand (up 4.5%) posted the highest return, followed by Japan (up 3.3%), Hong Kong (up 2.5%), and
Singapore (up 1.8%). Results in Europe were positive in all countries with the exception of the United
Kingdom (down 0.6%). Italy (up 12.3%) posted the largest gain, followed by Germany (up 12.0%) and
Sweden (up 9.3%). Within North America, the US and Canada returned -0.9% and 1.2%, respectively.
Fund Manager Commentary – April 2017 23
Portfolio performance
The BT Wholesale Global Property Securities Fund returned 0.56% in May 2017 (post-fee, pre-tax)
underperforming the benchmark return by 0.07%.
North America
The North America portfolio returned -0.73% in May before fees, outperforming the FTSE
EPRA/NAREIT North America Index by nine basis points. Outperformance relative to the benchmark
was attributable to positive sector allocation results, which were partially offset by negative stock
selection results. Regarding sector allocation, positive results were driven by the portfolio’s underweight
to the underperforming triple net lease sector as well as an overweight to the outperforming data center
sector. Conversely, the portfolio’s overweight to the underperforming regional mall sector was a
detractor to relative performance. In terms of stock selection, results were weakest in the diversified,
regional mall, and apartment sectors and were strongest in the triple net lease, health care, and
industrial sectors. Among the portfolio’s holdings, top individual contributors to relative performance
included overweight positions in outperforming Rexford Industrial Realty (REXR), Dupont Fabros
Technology (DFT), and Gramercy Property Trust (GPT). Detractors most notably included overweight
positions in underperforming American Assets Trust (AAT) and Penn REIT (PEI) and a lack of exposure
to outperforming Essex Property Trust (ESS).
Europe
The European portfolio returned 5.64% in May before fees, exceeding the regional EPRA benchmark
by nine basis points. Modest outperformance relative to the benchmark was driven by both positive
stock selection results and positive country allocation results. In terms of stock selection, results were
strongest in Germany, the United Kingdom and the Netherlands and were weakest in Sweden, Austria,
and France. Regarding country allocation, positive results were attributable to the portfolio’s
underweight to the underperforming United Kingdom as well as an overweight to outperforming markets
in Sweden and France. Among the portfolio’s holdings, top contributors to relative performance included
a lack of exposure to underperforming Great Portland Estates Plc. (United Kingdom) and Derwent
London Plc. (United Kingdom), and an overweight position in outperforming Deutsche Wohnen AG-BR
(Germany). Detractors most notably included overweight positions in underperforming United Group
Plc. (United Kingdom), Workspace Group Plc. (United Kingdom), and Segro Plc. (United Kingdom).
Asia
The Asia portfolio returned 2.28% in May before fees, trailing the regional EPRA benchmark by 52
basis points. Underperformance relative to the benchmark was attributable to negative stock selection
results in Japan and Singapore, which were partially offset by positive results in Hong Kong. Country
allocation results were neutral, while the portfolio’s small cash position was a detractor to relative
performance in light of the regional benchmark’s positive absolute performance for the period. Among
Fund Manager Commentary – April 2017 24
the portfolio’s holdings, top contributors to relative performance included overweight positions in
outperforming Invincible Investment (Japan) and Aeon Mall (Japan), and a lack of exposure to
underperforming CapitaLand Ltd. (Singapore). Detractors most notably included underweight positions
in outperforming Nomura Real Estate Holdings (Japan) and Sumitomo Realty & Development (Japan),
and an overweight position in underperforming HongKong Land Holdings (Hong Kong).
Active Balanced
BT Wholesale Active Balanced Fund
Market review
Australian shares underperformed global share markets and delivered their largest negative return in
over 12 months. The S&P/ASX 200 Accumulation Index returned -3.3%, whilst the MSCI World index
ex-Australia in AUD returned 2.75%, driven by a combination higher global markets and a falling
Australian dollar.
Australian shares had a terrible month primarily driven by Financials (especially banks) which started
the month poorly but continued their fall after the Federal Budget when the government announced their
intention to introduce a new Bank Levy. Weaker economic data, especially around consumer sales and
sentiment, saw retail stocks and healthcare also under pressure. There were, however, a handful of
bright spots, with Industrials (+4.7%), Telco (+3.4%) and Energy (+2.0%) all delivering reasonable
gains. Miners continued to do it tough with Iron Ore Prices prices slumping over 17% to US$57.02/t,
driven by growing concerns surrounding ructions in the China Interbank market.
Global developed equity markets continued their strong run over the last few months with the MSCI
World ex Australia in AUD returning 2.75%. This was despite growing geo-political uncertainties with a
snap UK Election announced, Trump impeachment rumblings and a UK terrorist bombing. The US
market was up with the Nasdaq up 2.5% and the broader S&P500 up 1.2% (closing at an all-time high
of 2411). Trump made some announcements regard breaking up big banks and the FOMC left rates on
hold while mapping out a plan for scaling back its balance sheet. Towards the end of the month there
were fresh concerns around Trump’s involvement with Russia, however the markets looked past this as
reasonable economic data continued to show US growth and inflation is on track.
European markets were also stronger as the outcome of the French Presidential saw a relief rally,
whilst a continued uplift in economic data supported the positive mood. The UK market was strongest
returning 4.4%, whilst Germany and France both delivered positive returns of 1.4% and 0.3%
respectively.
Fund Manager Commentary – April 2017 25
Japanese, Korean and Hong Kong equities rallied throughout May, despite ongoing geopolitical tension
in the region surrounding North Korea. South Korea delivered a strong 6.4%, Hong Kong next at 4.2%
and Japan’s Nikkei index was up 2.4%. China shares rebounded strongly returning 3.7% (H shares),
buoyed by strong positive economic results for April including Imports and Exports rising +11.9% and
+8% YoY respectively, M2 Money Supply +10.5% YoY and Retail Sales +10.7%.
The Australian dollar was broadly weaker over the month with falls against the USD (-0.8%), Euro
(-3.8%) and Pound (-0.3%). The US was also weaker against both the Yen (-0.1%) and the Euro
(-2.3%).
Bond yields globally continued their drift lower. The Australian curve flattened with the spread between
long-term rates and short-term rates narrowing again in May (-2 basis points). The Australian 3-year
bond yield fell 16.5 basis points to 1.63%, while the 10-year bond yield fell 18.5 basis points to 2.39%.
The US curve flattened, with the spread between long term rates and short term rates narrowing 9.7
basis points. The US 2-year bond yield rose 2 basis points to 1.28%, while the US 10-year bond yield
fell 7.7 basis points to 2.2%.Overall bond returns were positive with Australian bonds returning a
positive 1.17% and global bonds producing a positive return of 0.59%.
Portfolio performance
The BT Wholesale Active Balanced Fund returned -0.03% (post-fee, pre-tax) in May 2017,
outperforming its benchmark by 0.18%.
The key drivers of returns were stronger global equity and Australian bond markets which helped offset
losses from Australian share and listed property markets. Our Australian and global equities and
Australian and global fixed income strategies all delivered strong active returns, whilst our Alternatives
underperformed which detracted from overall returns. Our tactical asset allocation positioning
contributed positively to returns adding 0.07%.
Our Australian equity strategy outperformed the market by 0.70% The portfolio exceeded the
benchmark return helped by our underweight positions in the sold-off banking and property sectors, as
well as our key individual overweight positions in Qantas, Resmed and Aristocrat, which all performed
strongly on the back of solid reporting updates during the month.
Our global equities exposure also outperformed, delivering a return of 0.3% above benchmark. Over the
month our large cap concentrated, Emerging Market and quant strategies all outperformed and our
European exposures underperformed as our non-financial exposure detracted.
Our Alternatives strategy underperformed in May delivering a positive return of -0.66% versus cash of
0.15%. Our Risk Parity, Pure Alpha Fixed Income and our equity market neutral strategies all added to
returns, whilst our managed futures and global macro strategies detracted.
Fund Manager Commentary – April 2017 26
Our tactical asset allocation added 0.02% to returns as our overweight equities offset losses in our long
Oil and Copper positions.
Strategy and Outlook
Markets seem to be more focussed on rising political risks as the uncertainty seems to increase with
every month this year. There is an increasing view that despite improving economic growth in Europe
and parts of Asia, the potential for not-so-solid growth out of the US has seen some profit taking and
risk aversion creeping into markets.
Further monetary policy tightening is expected from the Federal Reserve in the US in June although the
pace of subsequent tightening is expected to slow, with inflation benign, signs of slowing economic
growth and much policy uncertainty from the Trump administration. Central bank balance sheet
reduction in both the US and Europe will also receive more attention. There is also a re-emergence of
political risks in the US as the market speculates on a possible impeachment of President Trump. In
Europe, the market hasn’t fully priced in the unfavourable outcomes of political events. The general
election in the UK and the chance of early Italian elections casts doubt on the outlook of both
economies.
Bond markets have erased all the post-Trump reflation trade, with bond yields back to November levels,
which seems to be in contrast to equity markets.
We continue to recommend a defensive approach: being active in pursuing some opportunities in
markets, however looking to take profits and rotate positions when markets move. Overall active
management across all asset classes at the moment appears to be prudent in controlling risks.
Fund Manager Commentary – April 2017 27
Performance as at 31 May 2017
F YT D 1 year 2 Years 3 Years 5 Years Since
(pa) (pa) (pa) (pa) Incp. (pa)
Australian Shares - All Cap
B T Who lesale C o re A ustralian Share F und A P IR - R F A 0818A U
Total Return (post-fee, pre-tax) -2.14 1.84 7.50 13.92 9.63 2.98 6.00 11.96 9.87
Total Return (pre-fee, pre-tax) -2.07 2.04 7.92 14.74 10.48 3.80 6.84 12.85 10.87
Benchmark -2.74 1.43 7.30 13.57 10.80 4.15 6.04 11.70 9.92
B T Who lesale Imputat io n F und A P IR - R F A 0103A U
Total Return (post-fee, pre-tax) -2.82 1.47 7.10 13.93 9.55 2.08 4.82 10.44 9.43
Total Return (pre-fee, pre-tax) -2.74 1.69 7.58 14.86 10.52 2.99 5.76 11.43 10.45
Benchmark -2.74 1.43 7.30 13.57 10.80 4.15 6.04 11.70 8.61
B T Who lesale F o cus A ustralian Share F und A P IR - R F A 0059A U
Total Return (post-fee, pre-tax) -1.80 2.51 8.33 16.79 11.86 4.83 7.87 13.56 8.92
Total Return (pre-fee, pre-tax) -1.61 2.90 8.88 17.86 12.95 5.77 8.87 14.53 9.99
Benchmark -2.74 1.43 7.30 13.57 10.80 4.15 6.04 11.70 7.27
B T Who lesale Ethical Share F und A P IR - R F A 0025A U
Total Return (post-fee, pre-tax) -2.53 1.63 7.37 13.85 8.82 3.11 6.56 11.81 8.32
Total Return (pre-fee, pre-tax) -2.45 1.88 7.88 14.83 9.85 4.09 7.58 12.87 9.38
Benchmark -2.74 1.43 7.30 13.57 10.80 4.15 6.04 11.70 7.93
Australian Shares - Mid Cap
B T Who lesale M idC ap F und A P IR - B T A 0313A U
Total Return (post-fee, pre-tax) -0.84 2.14 7.16 11.78 8.60 7.98 11.85 15.22 9.53
Total Return (pre-fee, pre-tax) -0.76 2.37 7.64 12.70 9.57 9.13 13.22 17.10 11.81
Benchmark -0.13 4.44 9.95 12.78 10.63 9.66 12.15 12.87 4.86
Australian Shares - Small Cap
B T Who lesale Smaller C o mpanies F und A P IR - R F A 0819A U
Total Return (post-fee, pre-tax) -0.62 -0.32 1.40 2.20 0.86 4.83 7.15 10.83 12.89
Total Return (pre-fee, pre-tax) -0.51 -0.01 2.02 3.35 2.10 6.14 8.49 12.22 14.17
Benchmark -2.05 0.31 2.72 4.92 3.55 5.22 6.04 4.22 7.32
Australian Shares - Micro Cap
B T Who lesale M icro C ap Oppo rtunit ies F und A P IR - R F A 0061A U
Total Return (post-fee, pre-tax) 1.49 1.52 3.36 13.02 14.73 13.19 17.48 19.67 18.37
Total Return (pre-fee, pre-tax) 2.44 2.16 4.18 16.35 19.03 16.59 21.85 25.16 23.92
Benchmark -2.05 0.31 2.72 4.92 3.55 5.22 6.04 4.22 1.79
International Shares
B T Who lesale C o re Glo bal Share F und A P IR - R F A 0821A U
Total Return (post-fee, pre-tax) 2.67 8.51 12.10 19.18 13.02 6.22 13.52 18.65 5.74
Total Return (pre-fee, pre-tax) 2.76 8.77 12.64 20.23 14.09 7.23 14.61 19.79 6.91
Benchmark 2.75 8.36 12.14 17.84 13.33 7.31 14.15 18.72 7.24
B T Glo bal Emerging M arkets Oppo rtunit ies F und - Who lesale A P IR - B T A 0419A U
Total Return (post-fee, pre-tax) 3.83 13.73 18.45 22.44 23.98 2.93 10.94 N/A 11.62
Total Return (pre-fee, pre-tax) 3.97 14.13 19.27 24.00 25.70 4.40 12.56 N/A 13.97
Benchmark 3.43 11.40 16.63 22.54 23.99 3.88 9.47 N/A 10.86
B T C o ncentrated Glo bal Share F und A P IR - B T A 0503A U
Total Return (post-fee, pre-tax) 3.95 10.86 12.11 N/A N/A N/A N/A N/A 17.72
Total Return (pre-fee, pre-tax) 4.06 11.20 12.81 N/A N/A N/A N/A N/A 18.94
Benchmark 2.75 8.36 12.14 N/A N/A N/A N/A N/A 15.53
Property
B T Who lesale P ro perty Securit ies F und A P IR - B T A 0061A U
Total Return (post-fee, pre-tax) -0.89 2.18 8.92 -0.37 3.11 8.88 15.09 15.82 7.63
Total Return (pre-fee, pre-tax) -0.84 2.35 9.27 0.24 3.79 9.57 15.84 16.55 8.45
Benchmark -1.00 2.25 8.30 -1.18 2.30 8.73 15.21 16.29 7.48
B T Who lesale Glo bal P ro perty Securit ies F und A P IR - R F A 0051A U
Total Return (post-fee, pre-tax) 0.56 -0.16 5.93 1.30 3.76 3.60 7.47 11.41 9.41
Total Return (pre-fee, pre-tax) 0.64 0.08 6.43 2.17 4.71 4.55 8.47 12.45 10.41
Benchmark 0.63 -0.08 6.43 1.97 5.00 4.31 8.06 11.95 9.18
Fixed Interest
B T Who lesale F ixed Interest F und A P IR - R F A 0813A U
Total Return (post-fee, pre-tax) 1.27 2.50 2.56 0.14 1.70 2.33 4.44 3.97 6.60
Total Return (pre-fee, pre-tax) 1.31 2.63 2.82 0.60 2.20 2.84 4.97 4.49 7.16
Benchmark 1.17 2.38 3.00 1.16 2.50 3.56 4.85 4.48 6.82
B T Who lesale Glo bal F ixed Interest F und A P IR - R F A 0032A U
Total Return (post-fee, pre-tax) 0.58 1.28 1.43 -1.93 0.74 2.74 4.87 4.66 6.33
Total Return (pre-fee, pre-tax) 0.63 1.42 1.70 -1.45 1.28 3.28 5.43 5.20 6.92
Benchmark 0.59 1.29 1.95 -1.00 1.53 4.26 5.49 5.37 7.25
B T Who lesale Enhanced C redit F und A P IR - R F A 0100A U
Total Return (post-fee, pre-tax) 0.96 2.10 2.95 2.84 3.59 3.69 4.68 5.08 5.90
Total Return (pre-fee, pre-tax) 1.00 2.22 3.18 3.26 4.06 4.16 5.15 5.56 6.43
Benchmark 0.99 2.16 2.93 2.76 3.53 3.74 4.72 5.05 6.02
Cash & Income
B T Who lesale Enhanced C ash F und A P IR - WF S0377A U
Total Return (post-fee, pre-tax) 0.25 0.74 1.54 2.75 2.98 2.57 2.73 3.37 5.02
Total Return (pre-fee, pre-tax) 0.27 0.80 1.66 2.99 3.24 2.82 2.99 3.63 5.36
Benchmark 0.15 0.45 0.89 1.67 1.84 2.05 2.25 2.55 5.01
B T Who lesale M anaged C ash F und A P IR - WF S0245A U
Total Return (post-fee, pre-tax) 0.15 0.45 0.90 1.73 1.91 2.06 2.22 2.54 6.59
Total Return (pre-fee, pre-tax) 0.17 0.51 1.02 1.93 2.13 2.28 2.45 2.77 6.89
Benchmark 0.15 0.45 0.89 1.67 1.84 2.05 2.25 2.55 6.67
B T Who lesale M o nthly Inco me P lus F und A P IR - B T A 0318A U
Total Return (post-fee, pre-tax) 0.38 1.63 2.90 3.28 3.07 3.33 4.37 5.15 5.63
Total Return (pre-fee, pre-tax) 0.44 1.80 3.23 3.90 3.74 4.00 5.05 5.84 6.29
Benchmark 0.13 0.38 0.75 1.41 1.56 1.78 2.00 2.36 3.09
Diversified
B T Who lesale A ct ive B alanced F und A P IR - R F A 0815A U
Total Return (post-fee, pre-tax) -0.03 3.07 7.32 9.66 7.92 3.74 7.40 10.00 7.66
Total Return (pre-fee, pre-tax) 0.05 3.30 7.81 10.59 8.93 4.72 8.42 11.05 8.74
Benchmark -0.21 2.89 6.62 9.48 8.39 5.20 7.54 10.10 7.51
(%)1 M o nth 3 M o nths 6 M o nths
For more information Please call 1800 813 886, contact your Business Development Representative or visit btim.com.au
All returns calculated by BT Investment Management (Fund Services) Limited, ABN 13 161 249 332, AFSL 431426 (BTIM). No part
of this Fund Manager Commentary (Commentary) is to be circulated without this page attached.
This Commentary is dated 14 June 2017 and has been prepared by BTIM. The information in this Commentary is for general
information only and should not be considered as a comprehensive statement on any of the matters described and should not be
relied upon as such. The information contained in this Commentary may contain material provided directly by third parties and is
believed to be accurate at its issue date. While such material is published with necessary permission, neither BTIM nor any
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BTIM does not give any warranty as to the accuracy, reliability or completeness of the information contained in this Commentary.
This Commentary is not to be published without the prior written consent of BTIM.
Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs.
Performance data (pre-fee) is calculated by adding back management costs to the (post-fee) performance. Past performance is not
a reliable indicator of future performance. The term ‘benchmark’ refers to the index or measurements used by an investment
manager to assess the relative risk and the performance of an investment portfolio.
BTIM is the issuer of the following products:
BT Wholesale Core Australian Share Fund ARSN 089 935 964
BT Wholesale Smaller Companies Fund ARSN 089 939 328
BT Concentrated Global Share Fund ARSN 613 608 085
BT Wholesale Core Global Share Fund# ARSN 089 938 492
BT Wholesale Global Fixed Interest Fund ARSN 099 567 558
BT Wholesale Enhanced Credit Fund ARSN 089 937 815
BT Wholesale Fixed Interest Fund ARSN 089 939 542
BT Wholesale Property Investment Fund ARSN 089 939 819
BT Wholesale Global Property Securities Fund ARSN 108 227 005
BT Wholesale Managed Cash Fund ARSN 088 832 491
BT Wholesale Enhanced Cash Fund ARSN 088 863 469
BT Wholesale Active Balanced Fund ARSN 088 251 496
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# AQR began managing international equity for BT Financial Group in June 2006.