Auscap Long Short Australian Equities Fund
Newsletter – April 2014
© Auscap Asset Management Pty Ltd
Disclaimer: This newsletter contains performance figures and information in relation to the Auscap Long Short Australian Equities Fund from
inception of the Fund. The actual performance for your account will be provided in your monthly statement. Actual performance may differ for
investments made in different classes or at different times throughout the year. This newsletter is intended to provide general background
information only. It is not a Product Disclosure Statement under the Corporations Act 2001 (Cth), nor does it constitute investment, tax, legal or any
other form of advice or recommendation to be relied upon when making an investment or other decision. Past performance is not a reliable indicator
of future performance. While all reasonable care has been taken to ensure that the information in this document is complete and correct, no
representation or warranty is given as to the accuracy of any of the information provided, including any forecasts. To the maximum extent permitted
by law, Auscap Asset Management Pty Ltd ACN 158 929 143 AFSL 428014, its related bodies corporate, directors, employees or representatives are
not liable and take no responsibility for the accuracy or completeness of this document. No investment in the Fund should be made without fully
reviewing the information, the disclosures and the disclaimers contained in the Information Memorandum or any supplement to that document.
Auscap Long Short Australian Equities Fund
Newsletter – April 2014
Welcome
Welcome to the Auscap newsletter, an opportunity for us to report the performance of the Auscap Long Short
Australian Equities Fund (“Fund”) to current and prospective investors. In each publication we will also discuss
a subject that we have found interesting in our research and analysis of the market. We hope that you enjoy
reading these snippets and encourage any feedback. In this edition we take a look at the real earnings and
dividend yield on the ASX 200 and S&P 500 at the current time. We compare current and historic real yields
and highlight the effect inflation has had on market multiples over recent decades.
Overview
The Fund was launched in December 2012 and targets strong absolute returns in excess of the RBA Cash Rate.
The Fund focuses predominantly on fundamental long and short investments while utilising a multi-strategy
approach to take advantage of shorter term market opportunities to increase returns, hedge the portfolio, protect
capital and minimise volatility where prudent. The Fund will typically have 25-45 positions primarily in liquid
stocks in the ASX200. Further information, including access for sophisticated investors to the Fund’s Information
Memorandum, is available at our website www.auscapam.com. Enquiries can be directed to
info@auscapam.com.
Fund Performance
80%
The Fund returned 0.70% net of fees during March
2014. This compares with the benchmark return of
0.21%. Average gross capital employed by the
Fund was 107.4% long and 32.1% short. Average
net exposure over the month was +75.2%. At the
end of the month the Fund had 35 long positions
and 5 short positions. The Fund’s biggest stock
exposures at month end were spread across the
consumer
discretionary,
financials
and
telecommunications sectors.
70%
60%
50%
40%
30%
20%
10%
0%
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Cumulative Fund Performance
Fund Returns
Feb-14
Cumulative RBA Cash Return
Fund Exposure
Period
Auscap
Benchmark
March 2014 Average
% NAV
Positions
0.70%
0.21%
Gross Long
107.4%
36
Financial Year to date
38.18%
1.92%
Gross Short
32.1%
6
Since inception
65.43%
3.67%
Gross Total
139.5%
42
75.2%
50.6%
March 2014
Net / Beta Adjusted Net
Sector Exposure - 31 March 2014
60%
Long
50%
Short
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
Consumer Consumer
Discretionary Staples
Energy
Financials
Healthcare
Industrials
Information
Technology
Materials
Telco
Utilities
ASX200
Futures
Cash
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Auscap Long Short Australian Equities Fund
Newsletter – April 2014
INVITATION │ Auscap Events in May: Food For Thought
Auscap will be presenting our thoughts on equities and markets during May.
We will be discussing the following topics:
·
·
·
Australia’s growth path and the business cycle
Can traditional retail have a renaissance?
Does China’s shadow finance loom large over Australia?
There will also be general Q&A on stocks and markets.
The dates for the events are as follows:
·
·
·
·
Brisbane – Thursday 1st May 2014 – 5.30pm
Sydney – Wednesday 7th May & Thursday 8th May 2014 – 5.30pm
Melbourne – Thursday 15th May 2014 – 5.30pm
Perth – Thursday 22nd May 2014
You’re invited! We would like to extend an invitation to these events to our
investors and newsletter subscribers.
If you wish to attend please email info@auscapam.com and we will send you
further information. We look forward to seeing many of you at the presentations.
Does The Real Yield On Equities Represent Relative Value?
Relative value is the process of determining the attractiveness of one asset by comparing it to the price of other
similar assets. Generally speaking, we find relative value arguments dangerous, especially if there is no
consideration of absolute value measures in the assessment process. To give this some context, we see little
merit in an argument that suggests that solely because Company A in a particular sector is trading on 30x
prospective earnings that Company B is therefore “cheap” because it only trades on 23x prospective earnings
and has a similar growth outlook. It might be a useful analysis for shareholders in Company A, who might want
to consider switching into Company B if they want the particular sector exposure, assuming no tax or other
implications from a sale and repurchase. But the analysis is not at all helpful to an investor who has no exposure
to Company A, because clearly both companies might be expensive. As a result, our first consideration in
assessing the merits of an investment are the absolute rewards and risks associated with it.
We analyse relative value as a secondary consideration for our investment decisions, because we want to be
purchasing the cheapest asset amongst alternatives that we consider offer the same potential investment
rewards. We assess relative value both across assets at a particular point in time and for a single asset across
a period of time. In this edition we look at the real yield currently offered by the equities market compared to
recent history, both from an earnings and a dividend perspective.
Over the last forty years the trend in inflation has been downward and the nominal earnings yield offered to
investors by equities has also, and we would suggest consequently, fallen. That is, investors have implicitly
focused on the real yield (nominal yield less inflation) offered by equities as an asset class rather than the
absolute yield. The real yield is perhaps the better measure for investors to focus on because it reflects the
returns that are generated that in turn increase the investors’ purchasing power.
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Auscap Long Short Australian Equities Fund
Newsletter – April 2014
ASX 200 Historical Earnings Yield & Inflation
ASX 200 Earnings Yield vs Inflation (%)
20%
15%
10%
5%
0%
ASX 200 Earnings Yield
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
-5%
Australian Inflation
In recent history, times of lower inflation appear to have corresponded with periods when the ASX 200 has
traded on a higher price earnings multiple. Analysing the current real earnings yield offered by the ASX 200 on
a historical basis leads us to the conclusion that although the market multiple looks somewhat high, especially
compared to the last decade (excluding the period of the global financial crisis), the real earnings yield is
relatively, but not materially, lower than previous years.
ASX 200 Real Earnings Yield
ASX 200 Price Earnings Ratio
2013
2011
2009
2007
2005
0x
2003
-15%
2001
10x
1999
-10%
1997
20x
1995
-5%
1993
30x
1991
0%
1989
40x
1987
5%
1985
50x
1983
10%
1981
60x
1979
15%
1977
70x
1975
20%
1973
ASX 200 Real Earnings Yield
ASX 200 Earnings Yield & Price to Earnings Multiple
ASX 200 PE
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Auscap Long Short Australian Equities Fund
Newsletter – April 2014
By contrast, the real dividend yield offered by the market appears relatively high compared with the last decade
if we exclude periods of financial stress.
ASX 200 Real Earnings & Dividend Yield
8%
6%
Real Yield (%)
4%
2%
0%
-2%
ASX 200 Real Dividend Yield
Apr-13
Apr-12
Apr-11
Apr-10
Apr-09
Apr-08
Apr-07
Apr-06
Apr-05
Apr-04
Apr-03
Apr-02
Apr-01
Apr-00
-4%
ASX 200 Real Earnings Yield
This is a function of the payout ratio, or the dividends that are being paid as a percentage of earnings, which for
the ASX 200 currently exceeds 80%. A high payout ratio has the potential to decrease future earnings growth if
it represents a lack of investment in new projects. That being said, viable options for growth need to be present
to justify investment, otherwise often the best use of excess capital is returning it to shareholders.
20%
1%
0%
0%
ASX 200 Payout Ratio
Inflation
2%
Apr-13
40%
Apr-12
3%
Apr-11
60%
Apr-10
4%
Apr-09
80%
Apr-08
5%
Apr-07
100%
Apr-06
6%
Apr-05
120%
Apr-04
7%
Apr-03
140%
Apr-02
8%
Apr-01
160%
Apr-00
Payout Ratio (%)
ASX 200 Payout Ratio & Australian Inflation
Australian Inflation
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Auscap Long Short Australian Equities Fund
Newsletter – April 2014
It is perhaps not surprising that post the peak in the mining capital expenditure cycle, given the weighting of
mining and mining related stocks in the index, there is an absence of compelling growth options for the market
as a whole and many companies are choosing to return capital to shareholders. Australia’s earnings yield is
lower than that of the S&P 500, while its dividend yield is higher.
S&P 500 Real Earnings & Dividend Yield
10%
8%
6%
Real Yield (%)
4%
2%
0%
-2%
-4%
-6%
-8%
S&P 500 Real Dividend Yield
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
-10%
S&P 500 Real Earnings Yield
This reflects the fact that the companies within the S&P 500 pay out materially less in the form of dividends, with
their current payout ratio circa 34%. This is in part due to the different tax treatment afforded to dividends, with
the tax benefits encouraging Australian companies to pay higher dividends to pass on the franking credits to
investors.
S&P 500 Payout Ratio
Inflation (%)
2013
2011
2009
-4%
2007
-2%
0%
2005
10%
2003
0%
2001
20%
1999
2%
1997
4%
30%
1995
40%
1993
6%
1991
8%
50%
1989
60%
1987
10%
1985
70%
1983
12%
1981
14%
80%
1979
90%
1977
16%
1975
100%
1973
Payout Ratio (%)
S&P 500 Payout Ratio & US Inflation
US Inflation
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Auscap Long Short Australian Equities Fund
Newsletter – April 2014
Clearly inflation in the US is also benign. The chart below demonstrates the inverse relationship between market
multiples and inflation over time. Lower inflation appears to have led to higher market multiples in the US.
S&P 500 Price to Earnings Multiple
US Inflation (inverted)
2013
2011
2009
2007
2005
2003
2001
20%
1999
0x
1997
15%
1995
5x
1993
10%
1991
10x
1989
5%
1987
15x
1985
0%
1983
20x
1981
-5%
1979
25x
1977
-10%
1975
30x
1973
S&P 500 Price to Earnings Multiple
S&P 500 - Price to Earnings Multiple vs US Inflation
US Inflation
While we prefer to let readers draw their own conclusions about these charts, we do think that real yield is a
relative measure worth reflecting on to assess the merits of an investment in equities at a given point in time.
While the current position of the market does not lead us to a definite conclusion about its direction, it does
highlight the significance of a few factors that are worthy of the attention of investors. As many market
commentators would suggest, particularly those who are critical of the various central banks currently engaged
in quantitative easing, any material change in the rate of domestic and/or global inflation could have a material
impact on the market.
If you do not currently receive the Auscap Newsletter automatically, we invite you to register. To register
please go to www.auscapam.com and follow the registration link.
Interested wholesale investors are encouraged to download a copy of the Information Memorandum from the
website, www.auscapam.com/information-memorandum.
We welcome any feedback or comments you have. Please direct them to info@auscapam.com.
Auscap Asset Management
ACN 158 929 143 AFSL 428014
Lvl 24, 9 Castlereagh St, Sydney
Service Providers
Email: info@auscapam.com
Web: www.auscapam.com
Prime Brokerage: Citi Global Markets
Administration: White Outsourcing
Tax & Audit: Ernst & Young
Legal: Henry Davis York
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