absolute-return-fund_115_2657974203.pdf

7/27/2019 absolute-return-fund_115_2657974203.pdf

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Wavestone AbsoluteReturn Fund

Quarterly Investment Report30 September 2013


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Absolute Return Fund Quarterly Investment Report September 2013 WaveStone Capital Pty Ltd 1

Portolio returnsThe Fund delivered a positive return o +8.25% (ater ees) or the September 2013 quarter. The S&P/ASX300

Accumulation Index gained +10.28% over the same period.

Fund size: $86.1m

Unit price cash only $1.4006

Unit price including ranking $1.4043

Period WaveStoneAbsolute

Return Fund1

RBAcash rate

benchmark

Net longexposure

S&P/ASX 300Acc Index

Fundimpliedalpha2

MSCI (A$)

Dec 2012 Qtr 7.92% 0.82% 91.7% 6.77% 1.7% 1.95%

Mar 2013 Qtr 8.88% 0.74% 91.3% 8.04% 1.0% 6.93%

Jun 2013 Qtr 2.30% 0.71% 77.9% 2.83% 4.7% 13.93%

Sep 2013 Qtr 8.25% 0.66% 81.2% 10.28% 0.1% 5.51%

1 year3 30.12% 2.90% 85.5% 23.61% 9.1% 31.04%2 years p.a.3 21.24% 4.07% 84.7% 18.94% 5.0% 20.25%

3 years p.a.3 12.94% 4.27% 84.4% 8.90% 4.5% 10.73%

4 years p.a.3 10.01% 3.93% 85.1% 6.78% 3.6% 6.73%

5 years p.a.3 12.69% 3.89% 84.0% 7.12% 2.8% 2.09%

Since inception p.a.3,4 12.12% 4.69% 78.9% 4.55% 6.5% 0.99%

Total since inception3,4 124.66% 33.17% 78.9% 37.00% 77.7% 6.80%

1 Ater all ees and includes ranking

2 Alpha equals Fund return ater all ees less beta (ASX/S&P 300 Index return net long exposure)

3 Includes reinvestment o distributions

4 From close o business on 5 September 2006

WaveStone Absolute Return Fund Monthly % returns

FinYear

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun FundYear

ASX 300Year

2007 1.98% 4.64% 3.94% 3.45% 0.23% 1.19% 2.74% 2.71% 4.24% 2.43% 31.12% 25.98%

2008 1.92% 2.04% 7.03% 3.94% 1.00% 0.12% 6.34% 0.30% 5.98% 3.27% 0.83% 3.16% 0.58% 13.67%

2009 2.70% 3.98% 6.29% 4.31% 2.85% 1.62% 4.02% 0.14% 6.12% 2.65% 0.54% 1.88% 3.95% 20.34%

2010 7.12% 7.30% 6.57% 0.50% 2.11% 2.79% 5.67% 1.80% 6.58% 0.06% 6.64% 2.91% 18.75% 13.04%

2011 2.36% 1.24% 3.73% 2.03% 0.67% 2.52% 0.72% 0.71% 1.24% 1.16% 1.38% 0.94% 10.58% 11.90%

2012 1.69% 0.56% 4.91% 2.28% 2.87% 0.83% 3.53% 2.12% 2.45% 0.63% 5.54% 0.59% 3.57% 7.01%

2013 2.45% 3.36% 2.84% 2.66% 2.35% 2.71% 3.95% 4.88% 0.14% 3.72% 0.14% 1.23% 30.90% 21.90%

2014 2.87% 2.29% 2.87% 8.25% 10.28%

Best month: 7.30% Worst month: 6.64% Fund volatility: 11.2%

Sharpe ratio: 0.72 Positive months: 69% S&P300 volatility: 15.1%

Portolio analysis as at 30 September 2013

Exposure analysis Largest stock holdings

Position % o netinvested capital

Stock net exposure analysis % o netinvested capital

Long stocks (44) 116.6

Short stocks (5) 3.1

Gross exposure 119.7

Net physical long 113.5

Index utures/puts 40.2

Net eective equity exposure 73.3

Cash/(Borrowings) 13.5

BHP Billiton 6.7

Twenty-First Century Fox 5.5

Crown 4.9

Seek 4.8

Macquarie Group 4.6

Top 10 45.3

Small cap exposure (30% maximum) 12.1


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2 WaveStone Capital Pty Ltd Absolute Return Fund Quarterly Investment Report September 2013

Quarter in reviewInvestment markets recovered their poise ater the

quantitative easing taper losses o May and June a

response that saw some vindication late in the quarter

when the US Federal Reserve opted not to cut back on

asset purchases.

The MSCI World (USD) Index gained +7.7% over the

quarter despite a lagging perormance by the US

S&P500 Index at +4.7%. The stand-out equities region

over the quarter was the eurozone at +11.2%, which

emerged rom recession ater six consecutive quarters

o alling GDP.

The August 2013 Australian reporting season was

characterised by low top-line growth, a continuation o

cost reduction initiatives and high payout ratios. Share

price reactions had a positive skew as investors were

encouraged by commentary that conditions were not

weakening with green shoots emerging in both housing

and consumer spending.

The Reserve Bank o Australia cut its cash rate target to a

record low 2.50% in August. At its September meeting,

the US Federal Reserve surprisingly opted to continue its

asset purchases at the current rate, rather than slow them

as many had expected. Chinese data improved over the

quarter and there was no repeat o the money market

tensions seen there in June.

Perormance and activity

The Fund rose strongly in absolute terms over the quarter,

up +8.28%.but trailed the ASX/S&P300 Accumulation

Index increase o +10.28%. The dierence can be

attributed to the Funds average net equity exposure

o c81% over the period. Over the last 12 months the

Fund has delivered a return o 30.1% well ahead o the

equity market return o 23.6%, and this has been driven

by stock selection as well as identiying and riding the

market trends.

Furthermore strong investment outperormance against

both cash and the overall Australian equities market has

been consistently delivered over all longer time periods asdetailed in the perormance table on page 1.

Cyclical sectors enjoyed a quarter in the sun as investors

warmed to the idea o a pickup in local growth and some

improving signs rom China. Consumer Discretionary

(+14.7%) and Materials (+16.3%) were strong perormers

as was Energy (+14.0%).

At an individual stock level it is worth highlighting some

key contributors.

Crown rose 30% over the quarter, driven by strong

perormance rom its Macau assets. With unmet demand

rom mainland Chinese and massive ongoing investment

in Macaus inrastructure as well as the new Studio City

casino complex under construction, ongoing earnings

growth looks highly prospective. Closer to home,

management displayed highly disciplined cost control

at its Melbourne and Perth casino resorts.

REA Group was up 38% or the quarter, ater delivering

another stellar prot result. The company is quickly

evolving rom a simple subscription model oering

additional data driven services and mobile connectivityto agents and vendors, and is now starting to fex its

inherent pricing power, which underpins a strong multi

year earnings trajectory.

Other notable contributors included our re-established

position in Seek and a sizeable re-rating o Bank o

Queensland.

In a particularly strong rising market, declining stocks

were rare in the quarter. The high prole detractor to

perormance was McMillan Shakespeare which was

eectively side-swiped by the now removed Rudd

governments announced policy to eectively scupper the

tax benets on novated car leases. At its depths the stock

halved, however the new Abbott coalition government,

Stock contribution by basis point return (gross) or September Quarter 2013

Funds best perorming investments Funds least perorming investments

Longs Shorts Longs Shorts

Crown 130 McMillan Shakespeare 69 SPI Futures 215

REA Group 96 Treasury Wines 25 Bradken 29

BHP Billiton 95 Iress 15


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Unit price accumulation

WaveStone

0.50

1.00

0.75

1.25

1.50

1.75

2.00

2.50

2.25

DEC

07

AUG

07

APR

08

AUG

08

DEC

08

APR

09

AUG

09

DEC

09

APR

10

AUG

10

DEC

10

APR

11

AUG

11

DEC

11

APR

12

AUG

12

APR

13

AUG

13

DEC

12

APR

07

AUG

06

DEC

06

RBACash Index

S&P 300

Accum Index

MorningstarHF Index

WCARF quarterly alpha

MAR

10

MAR

11

MAR

12

MAR

13

SEP

13

SEP

12

SEP

09

SEP

10

SEP

11

MAR

09

SEP

08

MAR

08

SEP

07

MAR

07

SEP

06

-6

-4

-2

0

2

4

6

Fund exposure history

MAR10

MAR11

MAR12

MAR13

SEP12

SEP09

SEP10

SEP11

MAR09

SEP08

MAR08

SEP07

MAR07

SEP06

-150

-100

-50

0

50

100

150

200

Long Short Average NEE

Portolio positioning as at 30 September 2013

Sector exposure analysis as % o invested capital

Long Short Net Index Di

Consumer D&S 32.0 5.8 26.2 13.1 13.1

Metals & Mining 15.2 5.9 9.3 14.5 5.2

Banks 21.2 12.3 8.9 30.0 21.1

Healthcare 9.9 1.8 8.1 4.6 3.5

Transport 6.8 1.3 5.5 3.2 2.3

Other Financials 8.5 3.3 5.2 8.2 3.0

Misc Industrials 8.5 4.0 4.5 4.3 0.2

Materials 4.8 1.2 3.6 2.9 0.7

Energy 5.4 2.6 2.8 6.4 3.6

Telecoms 2.4 2.0 0.4 5.1 4.7

Property Trusts 1.9 2.4 0.5 6.0 6.5

Utilities 0.0 0.7 0.7 1.7 2.4

Total Exposure 116.6 43.3 73.3 100.0 26.7

Industrials 64.4 16.8 47.6 34.9 12.7

Financials 31.6 18.0 13.6 44.2 30.6

Resouces 20.6 8.5 12.1 20.9 8.8

Portolio composition

%o

fportfolio

Resources Industrials Financials

0

10

20

30

40

50

60

70

80

90

100

Sep-13Aug-13Jul-13Jun-13May-13Apr-13Mar-13Feb-13Jan-13Dec-12Nov-12Oct-12


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has ormally rejected the policy change, and post-election

both the business and the share price are gradually

recovering.

Against the backdrop o a strongly rising market,

there were very ew opportunities in the short space.

The deault short SPI position detracted rom overall

perormance. We remain doubtul over the mining

services space as we believe the ull eect o passing the

mining capital expenditure peak and margin pressure

rom mine owners has yet to run its course.

The Fund perormed reasonably well through the

reporting season despite the hiccup with McMillan

Shakespeare. The Fund rose a solid +2.87% in the montho September (Index +2.16%).

One eature o the past three years has been currency

volatility. We constantly monitor the potential impact

o currency fuctuation on our investments, and seek to

invest in high quality, sustainable ranchises, who business

case is not based upon currency orecasts.

The Portolio continued a tilt towards an improving

domestic economy built around accommodative Reserve

Bank policy settings.

On top o elevating the exposure to Seek, we

re-established a position cyclically sensitive Harvey

Norman shares ater a 5 year absence. Seek has a

burgeoning portolio o international investments in

protable online employment sites (China, Brazil, ASEAN),

a well-placed Education business (to both online and

international students) as well the market dominant

online employment site in Australia. Harvey Norman

represents the market leading exposure to an uptick in

housing related expenditure (urniture white goods, air

conditioning, fooring, kitchens), with valuation supportrom a property portolio and a massive bank o untapped

ranking credits.

Resource exposure was increased on a more benign

outlook rather than the uncertainty that has prevailed

over recent years.

China Investment Trip September 2013

Ian Harding attended an extensive week long CLSA

Investor Conerence in Hong Kong. While the primary

ocus was on Asian economies and companies, the

implications or a relatively ew Australian stocks remain

proound. Essentially we believe that with such a massive

population base, the ollowing identied trends in the

Chinese economy and its society represents substantial

structural opportunities.

Rising middle class

As incomes grow, so do the dreams o everyday Chinese.

Central to their goals is the upgrading o their quality o

lie. The 300 million middle class are clearly moving up

the bourgeois hierarchy o needs.

Among their strongest preerences is the desire or their

childrens education, a clean environment (ater requent

hazardous smog occurrences), sae ood (scandalous

practices, bird/swine fu), health (industrialisation causing

high cancer rates), overseas travel and gambling:

30% want to upgrade to a bigger apartment;

most want to spend signicantly more on their next car;

travel, dining, shopping and cinema are preerred

pursuits.

Macau gaming has been the best perorming Chinese

consumer goods or services sector or the past ew years.

This is despite just 1% o the Chinese population having

visited Macau - there is ongoing penetration into greater

China with extensive inrastructure expansions (hi-speedrail, erry terminal, connecting Hong Kong bridge) well

underway.


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The greatest surprise at the Macau casinos has been the

insatiable demand driving up the minimum table bet size

to $120 being 5x the global average. Due to restricted

supply and popularity, Cotai Island casinos earn 4x-5x

the EBITDA o comparable Las Vegas properties.

Major casino expansion projects kick-in rom 2015

together with 3rd party investment on the neighbouring

Hengqin Island including a university, theme parks,

business district, residential complex and additional hotel

rooms. Macau is set to become the luxury capital o Asia

a true Shangri-La.

E-commerce

The rapid adoption o mobile enabler technology within

an underdeveloped greater China has seen an explosion

o e-commerce. Online growth there is leading the world

booming at 100%p.a. growth rates, despite still poor

logistic eciency.

Chinas youth meanwhile are obsessed with their online

social image and constantly update their prole. People

under 30 appear to have an additional sense:

53% o 16-22 year olds would rather lose their sense

o smell than their mobile smartphone!

65% o Asian mothers would rather choose a mobile

phone over an engagement ring or passport i they

could only carry one thing

55% o Asian people judge others based on their

mobile device or network.

Matching mobile technology empowerment with an

undeveloped retail bricks and mortar network has seen

the rapid take up o online services.

Weak eciencies have not been a hindrance to

e-commerce growth to date. However, there is:

a lack o pallet standardisation with no pooling practices

limited A grade warehouses or distribution centre exist

a multitude o toll roads presenting high transport costs

goods are oten handled up to 16 times beore they

reach the end consumer.


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The upcoming potential $100bn IPO o Alibaba.com will

be transormational to expectations. This company is the

Amazon o China where unds raised will be reinvestedto accelerate growth options.

Structural reorm

Migrant worker registrations look set or liberalisation in

order to maintain the generally cheap labour dividend

accruing to Chinese businesses. Under the archaic 1950s

hukou classication system, people only have rights (eg

social security, healthcare, education) in their original

birthplace, not where they work. You have either a rural

or urban hukou with no transers generally available.

In Beijng, 37% o the 20m population are migrant

workers toiling in actories with poor living conditions

experiencing rst hand an ever widening wealth gap.

As China wants to switch to a more consumption-based

economy, urther reorms will become necessary. In

order to preserve social harmony, extending Government

benets to migrant workers would cost an estimated

minimum o $16,000 per person (a massive $100bn

expenditure/stimulus or a single city like Beijing).

The class system that exists within cities would betested were the inequalities abruptly removed and

competition or scarce opportunities increased.

Chinas economic miracle has to an extent been orged

on cheap manuacturing labour sourced rom peasant

rural inland villages. Already, 70% o parents have lettheir villages to earn higher incomes by perorming low-

skilled manuacturing or construction work in urban areas.

Parentless children are being reared by grandparents with

migrant workers sending their wages back home.

In addition, alling birth rates (rom 5 to 1.6 births per

emale) since the advent o the stringent 1 child policy

in the 1970s will see the labour orce peak then rapidly

decline by 2030. Thereore, the time to change policy is

now so as to address a rapidly increasing dependency

ratio (workorce to elderly) in 17 years time.

There are currently 16mpa births in China. A relaxation

in amily policy would see a near term baby boom as

ertile couples across a 20 year age cohort seek to take

advantage.

Emigration

Internal migration throughout Asia projects 40m people

will move into cities each year. Inrastructure needs will be

ongoing and massive estimated at $300bn/year thereby

maintaining demand or raw materials. Cheap coal energy

sources will still dominate though renewables are in thespotlight (during Bejings January 2013 airpocalyse, 95%

o air ltering scrubbers at coal red power stations were

turned o).

Last year, 95m Chinese tourists travelled to other

countries, up 15% on the prior year. This new travel

reedom also shows up in their generous spending habits

through duty ree stores where they can oten represent

25% o total store sales on just 1% o passenger

volumes. To urther boost tourism, the State is moving to

enorce the taking o paid leave (35% do not take all o

their vacation days).

A recent survey indicates that 15% o the Chinese

population want to emigrate. More relevant is that

among the upper income cohort that has the nancial

means to easily do so, an astounding 45% wish to leave.

This cohort equates to around 70 million people clearly,

the Chinese are coming!

Australia meanwhile ranks very highly among oreign

destinations or Chinese both rom an emigration or

travel perspective.


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To Emigrate: Cities to Visit:

1. Canada Hong Kong

2. Australia Taiwan3. USA Seoul

4. Singapore Sydney

5. EU ex UK Tokyo

6. Hong Kong Paris

7. United Kingdom New York

8. Japan Los Angeles

9. Taiwan Macau

10. New Zealand Melbourne

The number 1 domestic Chinese destination is the beach

town o Sanya on Hainan Island which urther supportsthe Australian emigration preerence.

Chinese demand or oreign apartments should remain

strong or even accelerate. Purchases by amilies or their

Chinese students here already represent around 15% o

market activity. As Australian universities also rank well

internationally, the combined liestyle and educational

opportunity meets many o middle class Chinese desires.

Australasian companies set to beneft

Crown Resorts is uniquely positioned as a prime

beneciary o Asian growth. 33% owned Crown Melcooperates one o the highest margin casinos on Macau

Cotai with their new Studio City acility due to open

within 18 months.

Seek today earns nearly hal its prots rom overseas

versus its traditional domestic search business. Ranked

a close No. 2 in Chinese job search plus its education

business makes Seek a diversied online/Asian/cyclical play.

Sydney Airport operates the gateway access to Australia

(similarly or Auckland Airport in New Zealand). China

is progressively spending a jaw dropping $780bn onbuilding and buying a 5,600 aircrat feet.

Navitas is seeing the return to overseas student growth

into Australia now that visa issues and red tape are

resolved. The emergence o online courses could urther

accelerate international demand or their services.

Fonterra is the worlds largest exporter o milk protein.

A Chinese baby boom would immediately boost the

already double digit demand or inant ormula.

Goodman Group has established a major $1bn industrialproperty joint venture in China. Prime industrial rents in

China have been growing at a strong 13%pa over the

past 3 years.

Brambles Group has the opportunity to be at the

oreront o development o a pallet pooling system

in China.

USA Investment Trip September 2013

Catherine Allrey spent a week in the USA this September,

visiting companies which we have shareholdings in

like FOX, Ainsworth and Telstra as well competitors o

Crown in Las Vegas. She had an amazing day in Silicon

Valley absorbing the where to rom here trends with

companies like Apple, Facebook, EBay and Netfix.

Finally she attended the Merrill Lynch Media and Telco

conerence in Hollywood hearing all about exploding

revenue growth and ever expanding buybacks.

Here are a ew o her pertinent observations:

1. Content remains king producers o quality scripted

lms and dramas are beneting as international

audiences explode and home entertainment is

driven by broadband and new competition or cable

companies rom Netfix and Amazon.

2. Sport costs will keep escalating unless Washington

does something 96% o sport is viewed live! This

is appealing to advertisers so expect ridiculous rights

costs as new players like Apple contemplate how to

break into the content model.

3. Its all about mobile moving social media rom talk to

video is being led by mobile, and or the vast majority

o the worlds population mobile is the main access to

the internet.

4. Movies are all about the evergreen ranchise Star

Wars 7 is coming in 2015! The sales o ranchise toys,

books, games, resort themes all add to the value.

5. Most o the earnings upside in 21st Century FOX will

come rom cable. The engine room o FOX are the

content creators, FOX TV and Film. FOX TV presented

showcasing its enormous upside rom shows like

Modern Family moving into syndication at $5m per

episode as well as its library such as the Simpsons which

the CEO called the greatest TV asset o this generation

he meant returns not the quality o the show!


10/12


Whilst on the gaming side, social media games like Candy

Crush and Farmville, and the increasing access to poker

online is taking the edge o revenue growth. Casinosare providing more entertainment and hence or gaming

machines to keep growing, entertaining games like Sex

in the City, Batman are the way orward. The Casinos in

the US with Asian operations (like Crown) are beneting

rom the rise o the Asian middle class and their desire to

gamble in resort casinos. The US sourced revenue remains

low growth like the recovering economy.

The word rom Silicon Valley is that the cloud or iCloud

as Apple like to call it, is the new big thing. There is

talk o moving education, especially school curriculum,

online using o course iPads so expect more apps on the

measurement o a childs progress than ever beore.

Facebooks campus was ascinating with signs like is

connectivity a human right? and No company can be

all things to all people yes unortunately Facebook

is blocked in many totalitarian societies you knew

we were in or a dierent meeting! As a parent all my

concerns were realised as everything you write and

like on Facebook will now be marketed to advertisers

to target you going orward. Today 5% o newseed is

advertising and this will only grow.

For those interested we recommend The New Digital

Age co-authored by Googles Executive Chairman, Dr Eric

Schmdit covering the outlook or all o these topics!

Outlook and strategy

Early anecdotal and partial sales data supports a

domestic economic uplit since the Federal election on

7 September.

Consumer and business condence have rallied which

should eventually fow through to urther improved

activity. Already, house prices have been on the move so

ar this calendar year. We note that Australia has one o

the highest economic multipliers to house price growth in

the developed world.

Meanwhile, most economists are still uncertain pushing

the rising unemployment/cut interest rates strategy.

Have stockmarkets then already anticipated the rising

tide and pushed cyclical share prices beyond current

undamentals? We dont think so. Instead, urther

normalisation developments may occur as earnings

momentum takes hold over secure dividend yields.

Our strong China consumption theme continues to play

out in ASX listed stocks exposed to tourism, education

and ood. Our recent business trip to the USA conrmed

a trending up economy where content is still king!

Persistent US political wrangling over budget cuts andthe debt ceiling limit elevates the risk prole in global

markets. Just as central banks have altered perceptions

with articially suppressed interest rate settings, so can

politicians impact with extreme policies or even just

stalemate scenarios.

Overall market valuations are at average historical levels

with the only missing ingredient being earnings growth.

WaveStone Strategy Summary

LONG: US Media, Gaming, Energy, Healthcare

HIGH: Foreign-based earnings, Market sensitive

exposures

RISING: Domestic cyclicals

HOLD: Modest diversied mining exposure

YIELD: Focus on yield + growth, via Inrastructure

(Airports and Toll Roads)


11/12


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12/12

WaveStone Capital Pty Ltd

Level 15, 255 Pitt Street, Sydney NSW 2000

Phone +61 2 9993 9162

[email protected]

www.wavestonecapital.com

ABN 80 120 179 419 AFSL 331644

Thank you for your continued support.

From the WaveStone Capital investment team:

Ian Harding, Graeme Burke, Catherine Allfrey and Vik Pitrans

This report has been prepared by WaveStone Capital Pty Ltd (WaveStone) for the exclusive use of WaveStone Capital Absolute Return Fund investors. WaveStone does not

warrant or represent that the information in this report is free from errors or omissions or is suitable for your intended use. WaveStone accepts no responsibility for any direct

or indirect loss, damage, cost and expense as a result of any person acting on this report.

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absolute-return-fund_115_2657974203.pdf