quarterly newsletter of dmp asset management ltd september ... 2015.pdf · quarterly newsletter of...

Quarterly Newsletter of DMP Asset Management Ltd September 2015

Issue 19

DMP Asset Management Ltd ABN 77 145 590 316 Australian Financial Services Licence Number 383580 Level 30, 80 Collins Street, Melbourne VIC 3000 T (03) 9981 3300 F (03) 9981 3399 W www.dmpam.com.au


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In late 2011 DMP Asset Management (DMPAM) presented our thesis on the outlook for the Australian commodity sector titled “Hopium”. In July 2015 we wrote about our outlook for the Australian bank sector titled “Hopium – The Sequel”. On both occasions we focused on the concept of supply and demand – the foundation stone of economic theorem - indicating how future supply was at risk of outstripping demand, inevitably leading to the decline in the profitability of the respective industry. Since their respective share price peaks, Australia’s top three resource and top four bank stocks have performed, in price terms, as detailed in the table below: Company Date of Peak

Price Peak Closing

Price ($) Price at 30

Sept 2015 ($) Percentage

Change BHP 19 May 2008 44.89 22.22 -51 RIO 19 May 2008 123.12 48.60 -61 WPL 22 May 2008 68.32 28.93 -58 ANZ 25 Mar 2015 37.19 27.08 -27 CBA 20 Mar 2015 95.91 72.72 -24 NAB 7 May 2015 43.92 29.98 -32 WBC 25 Mar 2015 39.89 29.70 -26

Unlike the Global Financial Crisis (GFC) of 2008-09 which can be characterised as a credit and liquidity crisis, the issue for the resource stocks in 2011-12 and the bank stocks in 2015 is one of valuation. The key return metric for a bank is Return on Equity (RoE). This is a function of the amount of equity (capital) that a bank is required to hold by the regulator for any given level of risk weighted assets. Risk weighted assets are otherwise known as loans to you and me and businesses in general. How efficiently they can manage these assets determines the RoE for the banks. After 30 plus years of deregulation in the bank sector, global regulators are now upping the ante with regards to the amount of equity (capital) banks are required to hold making it harder to earn returns. This regulatory impost on capital is imposed at a time when the degree of lending in Australia has reached a mathematical saturation point and the concentration into residential property present an asymmetrical risk to the growth profile of our banks.

The conundrum for local equity investors is that the seven stocks identified above account for some 34% of the ASX 300 Index. If you are concerned with resource stocks off the back of slower China growth, and you agree with the view that banks can’t continue to increase Earnings Per Share (EPS) at historical rates given Australian’s high levels of indebtedness – where to next? At DMPAM we are focusing on a group of often lesser known stocks that we refer to as “strategic assets”. In very basic terms, we define strategic assets as those that the community needs as opposed to those that they want. We are gradually shifting your portfolios managed by DMPAM to hold more of these strategic assets stocks with the belief that in the current environment these stocks will be thrust into the limelight and outperform. As we do so, it may be that your portfolios managed by DMPAM look different to what you have been used to over the past 25 years. The purpose of this quarterly is to highlight some of the areas identified by DMPAM as core areas of need, and a few of the sectors and stocks which capture this concept.

Childcare The need for childcare may appear at odds with the oft cited research that shows we are a rapidly ageing nation. As the graph below indicates, however, that whilst we are indeed confronting an ageing of the population, there is also a “bulge” in the age cohorts who are most likely to be raising a family.


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This bulge has in turn led to a marked increase in the number of children in the 0 – 4 years cohort.

As the dependency ratio increases, that is the ratio of the number of those under 15 and over 64 to the number of those in the working population goes up, then the demand for childcare is forecast to remain robust. Government policy is already in place, effective 1st July 2017, to support lower income families (earning less than $65,000) by providing funding for up to 85% of the childcare cost per child.

Australia’s Aging Population There are further aspects of Australia’s demographic pattern over the next 25 years that need addressing – the provision of care for, and the funding of, the increasing percentage of the population moving into retirement. We are getting older as a nation and we are expected to live longer.

The provision of care takes on many facets, from the development of retirement living; to hospitals; to new drug and technology development; to new medical procedures; and to more efficient and productive ways of providing health related services, to name but a few. The catch to this pool of potential investment ideas is that they need to be funded. As global regulators of the financial services sector increase pressure on the banks to not be a burden on the public purse again, as they were in the GFC, so too are governments recognising that unless they rein in the cost of publicly funded healthcare, the underfunded liabilities are effectively insurmountable.


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According to the United States Centre for Medicare and Medicare Services (CMS), National Health Expenditure (NHE) increased by 3.6% in 2013, to $2.9 trillion, accounting for a whopping 17.4% of GDP. Within this figure, Medicare and Medicaid comprised $1.035 trillion, an increase of 4.6% with Government at the State and Local level contributing a further $212 billion to the overall NHE. The CMS forecasts health spending to grow by 5.8% per annum over the decade to 2024 with the share of GDP expected to grow to 19.6% over the period. The contribution from Federal, State and Local Government is expected to increase from 43% to 47% over the same period. In Australia, Federal budget papers recently released by the Australia Government indicate that healthcare costs have risen from $51 billion in 2009/10 to $67 billion in 2014/15, a compound annual growth rate (CAGR) of 5.6%. This has accelerated from 5.0% per annum across the preceding 5 year period, largely attributed to increased demand in healthcare needs from an aging baby boomer population. As a greater percentage of the population moves into the above-70s bracket, the growth rate in costs is likely to remain well above headline inflation. How the government deals with this issue, as well as companies seeking to innovate to meet needs will lead to interesting opportunities for investment.

Essential “Infrastructure” In life there are few certainties. One aspect which is highly predictable, however, is the impact of demographic trends on economies. The only ways to offset the economic impact of a known demographic trend, such as the increasing percentage of the population being older than 64, are to either a) radically increase the immigration rate; or b) raise the official retirement age; or c) significantly increase the productive capacity of those still in the work force; or d) a mixture of (a) through (c). Option (c) occurs if essential infrastructure is made a policy priority. Such infrastructure can be described, by way of example, as that which allows Australia to create elaborately transformed manufacturers; to build upon a highly efficient agriculture sector; to commercialize bio-technology patents; to leverage the services sector in the international arena and to

maximize the potential of the 4th largest savings pool in the world. We are familiar now with CSL, Cochlear, Nufarm and Resmed, as companies that have led their respective industries on a global basis over the past 20 years. We need to actively determine which group of companies in the essential infrastructure space in Australia can replicate the success of our current “winners”. How familiar is the investment community with Impedimed, iSentia, Veda, Urbanize, 1-Page, Covata, Freelancer, Catapult and Aconex? At DMPAM we believe that these companies have the potential to be the “infrastructure” plays of the coming investment environment.

High Value Add “Assets” Over the last 50 years Australia has become synonymous with iron ore, thermal or coking coal or gold. In response to strong demand in the early 2000’s, global supplies substantially increased. The slowdown in economic growth, particularly in China, has now lessened demand. This double whammy in supply and demand dynamics has hit the value of Australia’s traditional resource sector earnings hard. To compound this impact, there is a notable trend in the investor community to move away from fossil fuels. Last week, it was announced by a coalition of financial and environmental groups that they would divest fossil fuels from their holdings, which total US$2.6 trillion dollars – not a small sum on any measure. Australia has a number of assets which are resources for a new, more environmentally conscious community. Resources such as graphite, lithium, niobium or hafnium all play into this trend. For example, the push to the electric engine, only helped by the extraordinary scandal that has engulfed VW in Europe and the potential ripple effect on diesel powered cars, is strong. Electric powered cars require specialised batteries, and lithium and graphite are pivotal to the commercialisation of this form of power. We believe that many of these assets have potential to be among the strategic assets of Australia’s future, and selectively we will be looking for opportunities in this sector.


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Meanwhile….”are we there yet?” Whilst our thoughts thus far are focused on how we see the potential shift in the investment environment, we clearly need to be cognizant of immediate investment hurdles. As identified in the opening paragraph, some of the price declines in our leading stocks have been quite brutal. The confluence of events to create this negative reaction seem to be a significant oversupply of oil, the intervention of the regulators in the finance sector and the decision by the Chinese central bank to devalue the Chinese currency. The fall guy in this crisis of confidence was the Australian dollar. For those of our readers with children or young cousins the question “are we there yet?” may resonate! The answer is yes and not yet. Yes we recognize that some of the valuation excess has now been removed from many equity markets but not yet when it comes

to the consistent delivery of top line revenue growth. Quantitative easing to date has no doubt created a vast pool of liquidity which has benefited financial assets over the past five years as well as preventing an economic depression. The follow through into consistent economic growth outside the US is less convincing and China’s latest high jinxing in the currency markets makes you wonder how much of a prop they have been of late to sustaining global activity. We will continue to watch markets carefully, but we do believe that in some cases the “baby has been thrown out with the bathwater” and for clients with available cash, we have begun to purchase some high quality stocks, at what are now quite compelling prices.

Harry Cator Executive Chairman


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Latest DMPAM Developments In these changing and challenging times DMPAM is evolving to ensure we stay ahead of the tide. We would like to take this opportunity to let you know of all of the important evolutions at DMPAM, all designed to ensure that we continue to provide our clients with tailored portfolio solutions targeting high, after tax, risk adjusted returns. New Chief Executive Officer (CEO) Almost a year ago now we recruited Mrs Allison Hill to the position of CEO. Allison has settled in very well and many of the changes are as a result of her vision to grow the strength and breadth of DMPAM.

Dedicated Chief Operating Officer (COO) and Client Service Executive Roles To further build our resources to ensure prompt and comprehensive reporting of your investments with DMPAM we engaged Mr Warren Allen as a full time COO. This has freed Mr David Doolan to focus exclusively on business development and client service, an initiative again designed to ensure clients’ needs are met. Additions to the Funds Management Team We are delighted to announce the appointments of Mr Stephen Babidge, Senior Fund Manager, and Mrs Linda Trusler, Fund Manager to the Funds Management team who have 29 and 20 years of experience respectively in financial markets. This brings the overall team to six highly experienced and qualified staff. The initiative behind appointing new staff is to provide “extra fire power under the bonnet” to ensure we are on top of all issues in navigating the environment. We believe that the team is now more than adequately resourced.

SEPTEMBER 2015

By HARRY CATOR


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DMPAM for 24 years has offered broad market Australian listed securities tailored portfolios, and for 20 years a specialised microcap fund, the Australian New Horizon’s Fund. This latter fund focuses on innovation and impact investing in Australia and has an exceptional long term track record. We are also proud of our after tax performance in our tailored portfolio service portfolios. To enhance our product range we are introducing a new dedicated small companies strategy, the DMP Australian Small Cap Trust, which will also be available in mandate form. Small cap companies are those which are listed on the ASX and are ranked outside the top 100, but above 300. We believe that this strategy will be a strong complement to our existing product range, and that increased research in this space will enhance stock selection opportunities for current client portfolios. Stephen Babidge has a long and stellar track record in small cap management and will be the lead portfolio manager for this strategy. We have also embraced the digital age and we are now on LinkedIn and Twitter . Each Friday we tweet a “fun financial fact” of the week, as well as share other interesting articles. We would be delighted if you would “follow us” on Twitter. We continue to strive towards improvements in all areas of our business for the benefit of clients. One significant area of focus is our online reporting to clients where we are aiming towards providing a more flexible and complete suite of online reports. This will, over time, be complemented by a more user friendly website to access information on markets, stocks, as well as the personalised reporting section. We are also considering a small number of other complementary product services to enhance our ability to meet client needs, as well as a change of logo to refresh our design in line with our refreshed business strategy. We will ensure to keep you abreast of any new developments in this regard. DMPAM is genuinely excited about the numerous positive changes and we look forward to working with our clients in achieving optimal outcomes for their individual needs.

New Products and Strategies

Future Plans


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Disclaimer The information, opinions, estimates, conclusions, material and other data (the “Information”) presented in this document are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities. Nothing in this document constitutes legal or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. The Information presented in this document has been obtained or derived from sources believed by DMP Asset Management Ltd (DMPAM) to be reliable, but DMPAM makes no representation or warranty, express or implied, as to their accuracy or completeness. To the extent permissible by law, DMPAM, its employees, agents and advisers exclude all liability for any loss or damage arising directly or indirectly as a result of any person acting or relying on the Information presented in this document. Any projections contained in this document are estimates only and may not be realised in the future. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. This document was prepared for multiple distribution and contains general securities advice only. It does not take into account the specific investment objectives, financial situation or needs of individual recipients and may not be appropriate in all circumstances. Persons relying on this Information should do so taking into consideration their specific investment objectives, financial situations and needs. Before acting on the basis of this document you are advised to contact DMPAM or an independent adviser for individual advice tailored to your personal circumstances. Finally, in accordance with the Corporations Act 2001 (Cth) please note that: (a) DMPAM may receive fees and commissions concerning any or all of the entities which are the subject of this document. Details of those fees and commissions are available on request;

and (b) DMPAM and/or its employees may hold securities or rights to take up securities or may intend to acquire securities in any or all of the entities which are the subject of this document.

quarterly newsletter of dmp asset management ltd september ... 2015.pdf · quarterly newsletter of...

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