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Ellerston Australian Market
Neutral Fund
PERFORMANCE REPORT March 2015
Fund performance^ (Net)
Net
Jan
Feb
Mar
2015
-0.15%
1.09%
1.41%
2014
2.50%
0.33%
0.93%
April
May
June
July
Aug
Sept
Oct
Nov
Dec
YTD
2.36%
-0.47%
2.31%
2013
3.60%
1.24%
2.42%
3.16%
-0.82%
1.53%
-0.95%
16.82%
0.48%
1.12%
1.74%
1.38%
2.87%
-0.34%
2.54%
10.18%
^ The net return figure is calculated after fees & expenses. The gross return is calculated before fees & expenses. Past performance is not a reliable indication of future performance. The benchmark is the RBA Cash Rate. The Fund
commenced on 3 June 2013.
Return
Net
BM
Alpha
Gross
Portfolio Metrics
1 Month
1.41%
0.20%
1.21%
1.84%
Positive months
3 Months
2.36%
0.57%
1.78%
3.13%
No. Relative Value positions
FYTD
9.21%
1.83%
7.37%
12.07%
No. Special Situations
1 Year
15.20%
2.46%
12.74%
19.80%
Net equity exposure
17.9%
Since inception^
31.74%
4.64%
27.11%
42.24%
Gross Portfolio Exposure
81.0%
Since inception^ p.a
16.23%
2.50%
13.72%
21.19%
Beta Adjusted
9.9%
Correlation coefficient (vs ASX 200 Accum)
-0.37
77%
32
7
Net Sharpe Ratio ( RFR = RBA Cash)
Performance
The Fund had a profitable month, generating a net return of +1.4% relative to the benchmark return of +0.2%. The quarterly
performance also exceeded the benchmark, with the Fund returning +2.4% (net) relative to the benchmark’s +0.6%.
Relative Value produced a gross return of +1.4% during the month and +3.3% (gross) for the quarter. Special Situations
contributed a gross return of +0.4% in March, however detracted 0.2% over the quarter.
Net equity exposure was +17.9% at month-end and +9.9% on a beta-adjusted basis, with the beta closing slightly above the
since-inception average of +6.5%. The gross exposure remained steady during the quarter, closing the month at 81.0%
Our long position in Yowie Group (+8.2%) added to performance in March, following an update on sales and distribution. The
Yowie confectionary product is now available in over 5,000 retail outlets in the US with potential rollout to an additional 19,000
stores. Sales have exceeded expectations and trial results in additional retail networks continue to look promising.
Ellerston Capital Limited
ABN 34 110 397 674
AFSL 283 000
Level 11
179 Elizabeth Street
Sydney NSW 2000
Tel: 02 9021 7797
Fax: 02 9261 0528
[email protected]
www.ellerstoncapital.com
APIR Code: ECL0013AU
3.1
A Building Materials pair comprising a long position in GWA Group (+3.6%) hedged with a short in CSR (-6.5%), contributed
most to Relative Value during March. Following a review of their aluminium price forecasts, several analysts cut their CSR
recommendation leading to a fall in the share price.
A pair within the Utilities sector that featured a long in Spark Infrastructure Group (-4.9%) and a short position in Ausnet Services
(-0.3%) also contributed during the month. The Ausnet share price exhibited escalated volatility during the month, with the pair
initiated when Ausnet reached record levels and unwound just prior to the intra-month low (-5.8%).
A sell down in APN News & Media (+3.1%) by two major shareholders provided the opportunity to establish a long position in
APN, hedged with a short in Fairfax Media (-0.5%). The APN trade was transacted at $0.88, which represented a 6.4% discount
to the previous close. The pair added to the performance of the Fund, as the market digested the implications of New Corp’s (5.6%) involvement in the block trade in which they increased their stake in APN to 14.99% (subject to regulatory approval).
A long position in GDI Property Group (+0.5%) hedged with a short in Stockland (-4.1%), together with the contracted News Corp
spread (-5.6%), contributed positively in the month. On the downside, pairs containing Charter Hall Group (+2.0%) hedged with
Charter Hall Retail (-5.9%), Scentre Group (-3.1%), and GPT Group (-2.8%) detracted modestly from performance. Despite
these detractors, pairs within the REIT sector were the primary net contributor to performance in the period.
Touchcorp (+10.7%) listed in late March, with the share price performance adding value to Special Situations. Orion Health
Group (-7.2%) was the primary detractor, with management expecting the 3Q cash flow slowdown to continue in the fourth
quarter.
Activity
Relative Value – Gross Contribution +1.4%
As previously mentioned, we participated in the APN News & Media (+3.1%) sell down during the month, in which two major
shareholders sold their respective interests. The sale of approximately 30.8% of APN’s issued capital involved Independent
News & Media (held 18.6%) and Baycliffe (held 12.2%) selling their shares in APN at $0.88 per share via a block trade. Media
giant News Corp (-5.6%), participated in the transaction, purchasing 10% of APN to bolster their existing 4.99% stake (subject to
regulatory approval). News Corp is attracted to APN’s high quality portfolio of Australian and New Zealand assets. With over
60% of APN’s proportionate earnings now in growth media (up from 44% 12 months ago), we believe the company is well
positioned in the media space.
Long positions were established in Investa Office Fund (-3.0%) and Arena REIT (+0.3%) in late February, with both hedged
against short positions in Stockland (-4.1%) and Mirvac Group (-3.4%). We profitably unwound the four pairs in early March, as
the long positions tracked horizontally while the short positions fell sharply for a +0.2% collective contribution.
We took advantage of share price weakness in Goodman Group (+1.8%) to establish a long position, and hedged the exposure
with a short position in Charter Hall Group (+2.0%) and Scentre Group (-3.1%). We unwound the two pairs after the spreads
converged for a +0.1% collective contribution to the Fund.
In late March, we once again benefited from retreating REIT levels, initiating a long position in Abacus Property Group (-4.8%)
and hedging it with GPT Group (-2.8%). The paired position was unwound for a modest contribution subsequent to the fall in the
share price of GPT.
Special Situations – Gross Contribution +0.4%
We established a long position in electronic transaction company Touchcorp (+10.7%) which listed late in the month. Touchcorp
provides the infrastructure that facilitates transactions of non-physical products such as mobile phone recharges and toll road
passes. The company has been operating for over 15 years and has a client base that includes some of the largest Australian
telecommunications companies as well as convenience stores, toll road operators and Medicare. Whilst the headline multiple of
20x 2015 earnings looks high, we think that the expected growth in earnings more than justifies the price and anticipate that the
share price will track higher following the listing.
Following Court approval of the Scheme of Arrangement and subsequent delisting, our holding in Chandler Macleod (+1.3%)
was removed from the portfolio.
Sector
Banks
Long Equity
0.0%
Short Equity
0.0%
Net Equity
0.0%
Div Financials
1.7%
0.0%
1.7%
Insurance
0.0%
0.0%
0.0%
REITs
20.2%
-12.5%
7.7%
Financials
21.9%
-12.5%
9.4%
Builders
2.8%
-2.4%
0.4%
Consumer Disc
0.0%
0.0%
0.0%
Consumer Staples
4.2%
0.0%
4.2%
Gaming
0.0%
0.0%
0.0%
General Industrials
0.0%
0.0%
0.0%
Health Care
2.8%
0.0%
2.8%
Infrastructure
0.5%
-0.5%
0.0%
Media
10.9%
-10.7%
0.2%
Telcos
3.0%
-3.0%
0.0%
Utilities
0.7%
-0.7%
0.0%
Industrials
24.9%
-17.3%
7.6%
Energy
2.3%
0.0%
2.3%
Gold
0.0%
0.0%
0.0%
Resources
2.3%
0.0%
2.3%
Hedge
0.0%
-1.4%
-1.4%
Index
0.0%
-1.4%
-1.4%
Total
49.1%
-31.2%
17.9%
Market Commentary
After coming close to breaching the 6,000 point barrier several times during March, the local S&P/ASX 200 finished largely
unchanged (-0.06%) by month end, printing its strongest quarter (+10.3%) in 24 years to end at 5,891. Global markets sold off
initially as speculation around an imminent rate hike in the US mounted. Subsequent more dovish-than-expected commentary in
the Fed’s March statement alluded to a delay in the much-anticipated rate hikes, which ignited a relief rally midway through the
month and caused global indices to reclaim some lost ground. Despite this, the MSCI World index (-1.6%), the S&P500 (-1.6%)
and the FTSE 100 (-2.5%) all ended lower. Europe, as measured by the Euro Stoxx 50, outperformed (+2.7%), led by Germany’s
DAX up 5.0%, with QE purchases kicking off from the outset, as did Japan with the Nikkei 225 posting a 2.2% gain.
Chinese shares were the clear outlier during the month, with the Shanghai 300 rallying 13.4%.
At a sector level, Materials (-4.5%) lagged, whilst Banks (+2.5%), IT (+2.6%) and Healthcare (+2.1%) outperformed. Excess
supply in commodities markets overshadowed a cyclical bounce in China. Even with the Chinese equity market rising strongly on
the back of continued policy easing, ongoing supply concerns weighed on the iron ore price, with the spot market falling another
12% and ASX Resources (-6.0%). FY16 consensus earnings for the Miners were cut by circa 11% during the month, despite
having already been revised down by over 35% during calendar 2014. The resource sector now trades in line with the broader
market at 15.8x 2016 PER.
Having stabilised for a month or so, renewed A$ weakness to fresh 6 year lows (now approaching 76 cents vs. the USD) again
supported the offshore earners (+3.6%) which have delivered strong returns (+17% CYTD). Stocks in Australia with >50% of
revenue from US/Europe now trade at an average forward PER of 22x. The best performers in this category for the month
included Aristocrat (+13.3%), ResMed (+13.0%) and Ansell (+10.0%). Conversely, the worst $A sensitive performers included
Alumina (-12.7%), BlueScope (-12.7%) and TWE (-4.6%).
This month WBC, CBA, ANZ and NAB added the most points to the ASX200 index, while BHP and Woolworths were the biggest
detractors.
Domestically, the RBA left rates unchanged at 2.25% in early March, commenting that domestic growth was continuing at a
“below-trend” pace. In China, PBOC governor Zhou Xiaochuan stated that growth had slowed “a bit too much” and that policy
makers had scope to respond with interest rates and other quantitative measures following a below-trend February growth print
of 6.3% y/y. Long-term bond yields fell in both the US and Australia, with the yield differential continuing to narrow to 35bps, the
lowest gap in 15 years.
Relative Value Gross Contribution
+1.4%
Positive
Special Situations Gross Contribution
+0.4%
Positive
CSR - GWA GROUP
0.12%
YOWIE GROUP
0.49%
AUSNET SERVICES - SPARK INFRASTRUCTURE
0.11%
TOUCHCORP
0.19%
APN NEWS & MEDIA - FAIRFAX MEDIA
0.11%
CHANDLER MACLEOD GROUP
0.05%
GDI PROPERTY GROUP - STOCKLAND
0.10%
NEWS CORP - NEWS CORP NEW
0.09%
Negative
Negative
CHARTER HALL GROUP - CHARTER HALL RETAIL REIT
-0.07%
ORION HEALTH GROUP
-0.23%
CHARTER HALL GROUP - SCENTRE GROUP
-0.03%
S&P/ASX 200 INDEX
-0.04%
SINGAP0RE TELECOMM - TELSTRA CORP
-0.03%
PAPERLINX
-0.02%
CHARTER HALL GROUP - GPT GROUP
-0.01%
CALTEX AUSTRALIA
-0.01%
ADELAIDE BRIGHTON - GWA GROUP
-0.01%
Distribution of Strategy Returns (Net)
Key Information
14
Fund Inception Date: 3 June 2013
Frequency
12
Liquidity: Daily
Management Fee: 1.20%
10
Performance Fee: 20% of outperformance
Buy/Sell Spread: 0.25%
8
Application price: $1.1274
6
Redemption price: $1.1218
Fund AUM: $61.36M
4
Core Concentrated Team AUM: $2,907M
Firm AUM: $4,096M
2
% return for the month
4 to 5
3 to 4
2 to 3
1 to 2
0 to 1
‐2 to ‐1
‐1 to 0
0
Key Service Providers

Registry: Link Market Services Limited

Auditor: Ernst & Young

Prime Broker & Derivative Counterparty:
Morgan Stanley Intl & Co PLC

Administrator: BNP Paribas Securities
Services
TOP RELATIVE VALUE POSITIONS










TWENTY-FIRST CENTURY - TWENTY-FIRST CENTURY
FEDERATION CENTRES - NOVION PROPERTY GROUP
NEWS CORP - NEWS CORP
SINGAP0RE TELECOMM - TELSTRA CORP
CHARTER HALL GROUP - CHARTER HALL RETAIL REIT
BORAL - GWA GROUP
GDI PROPERTY GROUP - GOODMAN GROUP
GDI PROPERTY GROUP - MIRVAC GROUP
ASTRO JAPAN PROPERTY GROUP - HOTEL PROPERTY INVESTMENTS
CHARTER HALL GROUP - GPT GROUP
TOP SPECIAL SITUATION POSITIONS







YOWIE GROUP
ORION HEALTH GROUP
CALTEX AUSTRALIA
TOUCHCORP
S&P/ASX 200 INDEX
SUNCORP FLOATING RATE NOTES
NUFARM FINANCE
Material Matters
During the month there were no material changes to
the Fund in terms of its risk profile, investment
strategy or changes to investment staff which would
impact this strategy. There have been no changes to
the key service providers described above.
Further Information
Retail investors
ECS Investment Partners
NSW/QLD/ACT
Adam Coughlan 0418 653 560
[email protected]
VIC/TAS/SA/WA
Andrew Seddon 0417 249 577
[email protected]
DISCLAIMER
This newsletter has been prepared by Ellerston Capital Limited ABN 34 110 397 674 AFSL 283 000, the responsible entity of the Ellerston Australian Market Neutral Fund ARSN 168 025 670
(Fund) without taking account of the objectives, financial situation or needs of investors. Before making an investment decision about the Fund persons should obtain advice from an appropriate
financial adviser and consider their own individual circumstances and obtain a copy of the Product Disclosure Statement dated 31 March 2014 for the Fund which can be obtained by contacting
[email protected]. Actual performance for your account will be provided in your monthly account statement which may vary from that set out in this newsletter and will vary for investments
made in different classes, or at different times throughout the year.
This material has been prepared based on information believed to be accurate at the time of publication. Assumptions may have been made which may prove not to be accurate. Ellerston Capital
undertakes no responsibility to correct any such inaccuracy. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information. To the full extent
permitted by law, none of Ellerston Capital Limited, or any member of the Ellerston Capital Limited Group of companies makes any warranty as to the accuracy or completeness of the information
in this newsletter and disclaims all liability that may arise due to any information contained in this newsletter being inaccurate, unreliable or incomplete.
Past performance is not indicative of future performance.