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Invest with Conviction
Patrick Hodgens, MD & Portfolio Manager Firetrail Absolute Return Fund
Important information This presentation was prepared by Firetrail Investments Pty Limited (ABN 98 622 377 913, AFSL 516821) (Firetrail) as the investment manager of the Firetrail Australian High Conviction Fund (ARSN 624 136 045) and the Firetrail Absolute Return Fund (ARSN 624 135 879) (the Funds) for financial advisers only. It is general information only and has been prepared without taking account of any person’s objectives, financial situation or needs. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. Any persons relying on this information should obtain professional advice before doing so. The relevant Product Disclosure Statement (‘PDS’) is available at www.firetrailinvest.com. Any potential investor should consider the relevant PDS before deciding whether to acquire or continue to hold units in a fund. The issuer is not licensed to provide financial product advice. Please consult your financial adviser before making a decision. Firetrail and Pinnacle Fund Services Limited believe the information contained in this communication is reliable, however its accuracy, reliability or completeness is not guaranteed. Subject to any liability which cannot be excluded under the relevant laws, Firetrail and Pinnacle Fund Services Limited disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. Any opinions or forecasts reflect the judgment and assumptions of Firetrail and its representatives on the basis of information at the date of publication and may later change without notice. The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. This communication is for general information only. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from Firetrail. Firetrail Absolute Return Strategy Composite: The Firetrail Absolute Return Strategy Composite Performance has been calculated using the monthly returns (after fees) of the Firetrail Absolute Return Fund from 14 March 2018 to current date, as well as the monthly returns of the Macquarie Pure Alpha Fund between 30 June 2015 to 23 November 2017. The Firetrail Absolute Return Fund employs the same strategy as was used by the same investment team that managed the Macquarie Pure Alpha Fund as at 23 November 2017. Firetrail has records that document and support the performance achieved as the Macquarie Pure Alpha Fund. All of the investment decision makers are employed by Firetrail Investments and the decision process remains intact and independent within Firetrail Investments. The Composite returns for the Strategy and the RBA Cash Rate (Benchmark) excludes returns between 24 November 2017 and 13 March 2018. During this period the investment team did not manage the strategy. As such, the annualised performance periods stated are inclusive of the combined composite monthly returns, and do not include the period when the team were not managing the strategy. For example, the annualised return over 3 years for the strategy and benchmark are inclusive of 36 monthly performance periods available in the Composite return period, excluding the period between 23 November 2017 and 13 March 2018. For additional information regarding the performance please contact us through the link on our website.
STRICTLY CONFIDENTIAL
Firetrail Absolute Return Fund
Opportunities & risks are elevated
An uncorrelated alternative
3
Designed to be different
A proven alternative to traditional asset classes STRICTLY CONFIDENTIAL
1. Opportunities & risks are elevated
Opportunities are elevated Cross sectional volatility – ASX 200
>$30bn of COVID driven equity raisings to date‌ $3,500 m m $2,000
0.3
$1,800 m
$1,600 m
0.25
$1,400 m
0.2
$1,200 m $1,000 m
0.15
$800 m $600 m
0.1
$400 m
0.05
$200 m $0 m
0 Jun-00
Jun-04
Jun-08
Jun-12
Jun-16
Higher share price dispersion creates opportunities for active stock pickers
Jun-20
Increased corporate activity = opportunity for active institutional investors
Volatility + corporate activity = opportunity STRICTLY CONFIDENTIAL
Source: Firetrail, Bloomberg
But so are the risks‌ S&P ASX 200 Accumulation Index
5 key macro uncertainties on the horizon
Markets experiencing a V-shaped recovery
Jul-20
Jun-20
May-20
Apr-20
Mar-20
Feb-20
Jan-20
Dec-19
Nov-19
Oct-19
Sep-19
Aug-19
Jul-19
80,000 70,000 60,000 50,000 40,000 Coronavirus lockdowns 2.0
US Election Impact
Fiscal & Monetary impacts
Valuation risks emerging Valuation of High Growth stocks >2x low growth stocks 2.5x
2.4
Dispersion
Median Trade Wars 2.0
2.0
Recessionary impacts
1.6 1.2
2006
2008
2010
2012
2014
2016
2018
2020
Be aware, understand and reduce binary risk exposures STRICTLY CONFIDENTIAL
Source: Firetrail, Bloomberg
2. An uncorrelated alternative
Why alternatives are on the rise
+ Equity market valuations are elevated
= Interest rates & bond yields are low
Investors looking to alternatives to achieve desired risk AND return outcomes
Alternatives can supplement traditional asset classes STRICTLY CONFIDENTIAL
An uncorrelated alternative Firetrail Absolute Return Fund Correlations 0.5 0.4 0.3 0.2 0.1 0 -0.1 -0.2 -0.3 -0.4 -0.5 ASX 200
MSCI Global
Ausbond Composite
US Barclays Agg (Bonds)
Winton Global Alpha (CTA's)
RBA Cash
Diversification from traditional & alternative asset classes Past performance is not an indicator of future performance. Fund inception 14 March 2018. Monthly fund returns used.
STRICTLY CONFIDENTIAL
Downside protection characteristics Growth of $1000 through the GFC
Growth of $1000 through COVID-19
Macquarie Australian Market Neutral Fund $1,400
$1,200
ASX 200 Accumulation Index
$1,300
$1,150
$1,200
$1,100
+10.1%
$1,100
$1,050
$1,000
$1,000
$900
$950
$800
$900
$700
-47.2%
$800
$500
$750
Aug… Sep… Oct… Nov… Dec… Jan… Feb… Mar… Apr… Ma… Jun… Jul 08 Aug… Sep… Oct… Nov… Dec… Jan… Feb…
ASX 200 Accumulation Index +8.8%
-12.3%
$850
$600 $400
Firetrail Absolute Return Fund
$700 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE RETURNS 1. Source: Mercer I nsig ht Pre-Fee Data - Macq uarie Australian Market Neutral Fund returns v s the ASX 200 Accum ulation Index. The M acq uarie Australian Market N eutral Fund w as a m arket neutral strateg y (typ ically 100% long /100% short) that inv ested in hig h conv iction long p ositions and shorted using SPI f utures and system atic techniq ues . Patrick H odg ens w as the p ortf olio m anag er of the strateg y f or the f ull history b etw een May 2003 to April 2011. The Fund closed in A pril 2011.
Uncorrelated from equity market movements STRICTLY CONFIDENTIAL
A proven approach Firetrail Absolute Return Performance vs ASX 200 35%
ASX 200 Accumulation Index
Firetrail Absolute Return Strategy (after fees)
+28.2%
30% 25%
+21.7%
20% 15%
+13.5% p.a.
+11.9%
10%
+5.4% p.a.
5% 0% -5% -10%
-15% Quarter
6 Months
1 Year
3 Years (p.a.)
5 Years / Inception (p.a.)
A proven approach to adding alpha & reducing equity risk Past performance is not an indicator of future performance. Fund inception 14 March 2018. Fund benchmark is RBA Cash Rate. ASX 200 return comparison used to illustrate uncorrelated nature of Fund
STRICTLY CONFIDENTIAL
3. Designed to be different
Designed to be market-neutral 1. High conviction (mid to large caps) BUY up to $200 Predominantly in Australian listed securities
~25 positions
2. Small companies / Events ~20 positions
Megaport
$100 Invested 3. Fundamental shorts SHORT up to $200 Predominantly in Australian listed securities
~20 positions
4. Risk shorts ~100 positions
Select earnings-based shorts
Proprietary risk short algorithm
Four levers to add alpha and reduce risk
Portfolio construction 10% Risk short algorithm
5%
0%
-5%
High conviction longs Small company longs Fundamental shorts Risk shorts
Portfolio construction 10%
5% Risk short algorithm
Expands when there are less fundamental shorts
0%
-5%
High conviction longs Small company longs Fundamental shorts Risk shorts
Portfolio construction 10%
5% Risk short algorithm Contracts as fundamental shorts increase
0%
-5%
High conviction longs Small company longs Fundamental shorts Risk shorts
A true to label market-neutral portfolio
Portfolio outlook Firetrail Absolute Return Fund Embedded Value Estimates
16.9% LT Avg
Significant embedded value in current portfolio Source: Firetrail Forecasts. Not indicative of future returns.
Firetrail Absolute Return Fund
Opportunities & risks are elevated
An uncorrelated alternative
3
Designed to be different
A proven alternative to traditional asset classes STRICTLY CONFIDENTIAL
Explore the income and total return opportunities in Australian equities Dr Don Hamson Founder Plato Investment Management
25
Covid-19 has changed the investment world
• Many value and income-orientated equity strategies have struggled 26
Is Covid-19 heralding the death of dividends?
Equity income strategies Strategy
Pros
Cons
- tilt to high yield stocks
✓ Simple ✓ Inexpensive ✓ Low turnover
Changing environment Dividend traps
Buy Write
✓ Lowers risk and boosts income
Complex (costly) Limit capital growth
✓ ✓ ✓ ✓
Not tax effective for higher tax
Buy and Hold
- write call options for extra income
Active Rotation (Plato Australian Shares Income)
27 Source: Plato
Active strategy Reduce permanent sector biases (should) Avoid dividend traps Tailored for low tax
Franked dividends (equity income) are very tax effective
High turnover is not a concern for low tax investors 28
*Source : ATO, Plato using 1 July 2020 tax rates including Medicare levy. Pension rate for first $1.6m. After tax value of $1 of pre-tax income.
29
Source: RBA, Plato
Actual
Monetary Policy Decision 3 November 2020. Forecast
“Given the outlook, the Board is not expecting to increase the cash rate for at least three years.” Sep-2023
Feb-2023
Jul-2022
Dec-2021
May-2021
Oct-2020
Mar-2020
Aug-2019
Jan-2019
Jun-2018
Nov-2017
Apr-2017
Sep-2016
Feb-2016
Jul-2015
Dec-2014
May-2014
Oct-2013
Mar-2013
Aug-2012
Jan-2012
Jun-2011
Nov-2010
Apr-2010
Sep-2009
Feb-2009
Jul-2008
Dec-2007
May-2007
Oct-2006
Mar-2006
Aug-2005
Jan-2005
Interest rates even lower for longer RBA cash rate
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Yields on all asset classes are falling Plato Aussie Income Fund (gross normalised)
S&P200 Gross
CashRate
12 Mth Term Deposit
3yr BBB Credit
12.00% 10.00% 8.00% 6.00% 4.00% 2.00%
Jun-2020
Mar-2020
Dec-2019
Sep-2019
Jun-2019
Mar-2019
Dec-2018
Sep-2018
Jun-2018
Mar-2018
Dec-2017
Sep-2017
Jun-2017
Mar-2017
Dec-2016
Sep-2016
Jun-2016
Mar-2016
Dec-2015
Sep-2015
Jun-2015
Mar-2015
Dec-2014
Sep-2014
Jun-2014
Mar-2014
Dec-2013
Sep-2013
Jun-2013
Mar-2013
Dec-2012
Sep-2012
0.00%
Disclaimer: The above chart is intended to compare the income generated by each of the identified products. This is not intended to compare the capital returns (or any other risk) as the risk profiles of each product can and will vary. As an example, equities (including via a managed investment scheme) have a significantly greater risk of loss of capital than a term deposit.
30 Source: Plato, RBA, Bloomberg Plato income normalized to exclude impact of large buybacks in 2018/19
Gross equity income relative to term deposits GROSS INCOME YIELD DIVIDED BY 1 YEAR TERM DEPOSIT RATE
12 10 8 6 4 2 0 Sep-2012
Sep-2013
Sep-2014
Sep-2015
ASX200 as % of TD
Sep-2016
Sep-2017
Sep-2018
Sep-2019
Plato Income as % of TD
Equity income levels now 6 x Term Deposits Disclaimer: The above chart is intended to compare the income generated by each of the identified products. This is not intended to compare the capital returns (or any other risk) as the risk profiles of each product can and will vary. As an example, equities (including via a managed investment scheme) have a significantly greater risk of loss of capital than a term deposit.
31
Source: Plato, RBA
Big Aussie income stocks are doing it tough! % of Gross Dividend Income 2019
Price Performance 1.30 1.20 1.10 1.00 0.90
0.80 0.70 0.60 0.50
Telstra
Big 4 Banks
6 stocks account for nearly half of all dividends 32
Source: Plato, Iress S&P200
ASX200
Jun-20
Apr-20
Feb-20
Dec-19
Oct-19
Aug-19
Jun-19
Apr-19
Feb-19
Dec-18
Oct-18
Aug-18
Jun-18
Apr-18
Feb-18
Dec-17
Oct-17
Jun-17
0.40
Aug-17
Commonwealth Bank NAB Rio Tinto
Apr-17
BHP Westpac ANZ Other
APRA Letter re Capital Management*
â€œâ€ŚAPRA expects ADIs and insurers to limit discretionary capital distributions in the months ahead, to ensure that they instead use buffers and maintain capacity to continue to lend and underwrite insurance. This includes prudent reductions in dividends, taking into account the uncertain outlook for the operating environment and the need to preserve capacity to prioritise these critical activities‌ During this period, APRA expects that ADIs and insurers will seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer. However, where a Board is confident that they are able to approve a dividend before this, on the basis of robust stress testing results that have been discussed with APRA, this should nevertheless be at a materially reduced level. Dividend payments should be offset to the extent possible through the use of dividend reinvestment plans and other capital management initiatives.
* https://www.apra.gov.au/capital-management dated 7 April 2020 33
APRA Update re Capital Management*
“…Uncertainty in the economic outlook has reduced somewhat since then, and APRA has had the opportunity to review banks’ and insurers’ financial projections and stress testing results. Taking these and other developments since April into account, APRA has today written to banks and insurers advising they should maintain caution in planning capital distributions, including dividend payments. In additional guidance for the banking sector, APRA has indicated that for the remainder of the calendar year boards should: • seek to retain at least half of their earnings when making decisions on capital distributions (and utilise dividend reinvestment plans and other initiatives to offset the diminution in capital from capital distributions where possible);
* https://www.apra.gov.au/news-and-publications/apra-updatesguidance-on-capital-management-for-banks-and-insurers dated 29 July 2020 34
Banks • No longer the dividend cash cows?
Cash NPAT down 11%, better than expected
Cash EPS down 42%, around expectations
Cash NPAT down 37%, around expectations
Cash EPS down 62%, slightly below expectations
Final div 98c, 57% lower Final div 35c, 56% lower Final div 30c, 64% lower Final div 31c, 61% lower + No interim dividend CET1 (Tier 1) ratio 11.6% CET1 ratio 11.3%, Bad debts below expectations
CET1 Ratio = 11.5% + 0.3% after MLC sale
CET1 ratio 11.1%, Compliance costs 4x higher, record AUSTRAC fine
Reduced payout (APRA 50% directive) on reduced earnings 35
Source: Plato
Iron Ore / Diversifieds • Benefiting from high iron ore prices & good cost control
#
Underlying EPS down 3%
EPS up 59%
EPS 2% above 2019
DPS $2.16 up 3%
Dividend $1.00 vs $0.24 pcp (up 317%)
Dividend $0.77 down 32% vs pcp
8%+ gross yield*
14% gross yield*
6.5% gross yield*
The new banks / cash cows? Source: Plato, Bloomberg
36
*as at 28/8/2020
Retailers • Some survived and thrived despite Covid-19
#
NPAT up 8.2%
NPAT up 33%
NPAT up 7.1%
Final dividend 95c vs 78c pcp
Final dividend 90c vs 51c pcp
Final dividend 27.5c vs 24c pcp
Strong to start FY21
July LFL sales up 44%
LFL sales up 10% in first 6 weeks of FY21
Some retailers are shining 37 Source: Plato
Healthcare REPORTING SEASON ANALYSIS
• MIXED RESULTS • ELECTIVE SURGERY HIT BY COVID #
Net profit up 10%
Underlying Net Profit up 7%
Core NPAT down 43%
DPS $1.48 vs $1.45 pcp
DPS 51c vs 51c pcp
No final dividend
Challenges in Plasma collection
Benefiting from Covid testing
Reduction in elective surgery (possible catch-up going forward)
Accessing growth, income and avoiding dividend traps 38 Source: Plato
Dividend traps elevated but outlook improving • Average % chance of dividend cuts for the aggregate Australian market
39
Source: Plato
High historic yield can signal a dividend trap 10.00
9.00%
9.00
8.00%
8.00
7.00%
7.00
6.00%
Price
6.00
5.00%
5.00 4.00%
4.00
3.00%
3.00 2.00
2.00%
1.00
1.00%
0.00
0.00%
Price (LHS) 40
Source: Plato, Iress
Historical Gross Yield (RHS)
Historical Yield (%)
Sydney Airport price versus yield
Dividend traps are more common Hist. Annual Yield %ď‚Ş
Stock
Dividend Received *
8.7%
0%
15.0%
0%
12.0%
0%
High historic yield can signal high risk of dividend cut! 41
Source: Plato, Iress ď‚Ş as at 31 March 2020
* Final dividend FY2020
Dividends – the good, the bad and the ugly LARGEST 20 DIVIDEND PAYERS
GOOD
42 Source: Plato, Iress, S&P200
BAD
UGLY
Dividend Outlook – Income If You Know Where To LOOK!!!! OTHER NOTABLE STOCKS (OUTSIDE TOP20)
GOOD
43 Source: Plato, Iress, S&P200
BAD
UGLY
Plato Australian Shares Income Approach
44
Dividend rotation combined with good value quality long term holdings provides income plus growth Dividend capture
+ Franking capture
+ Run up capture
= Sustainable Income
Good value, quality long term holdings: Good Value – Earnings, cash flow, EBITDA High Quality – cash and profitability, avoid red flags Good business momentum – EPS revisions
Predict and avoid dividend traps
45
Plato Australian Shares Income Fund– before and after franking PERFORMANCE TO 31 OCTOBER 2020 BEFORE FEES
Excluding Franking
1 year
3 years p.a.
Since Inception p.a. (9/9/11)
Plato Income
-6.7%
4.1%
9.0%
S&P/ASX200 Accumulation Index
-8.2%
4.1%
8.4%
Active
+1.5%
0.0%
+0.6%
Including Franking
1 year
3 years p.a.
Since Inception p.a. (9/9/11)
Plato Income with Franking
-4.5%
7.4%
11.9%
S&P/ASX200 Tax Exempt
-7.2%
5.5%
10.0%
Active
+2.7%
+1.9%
+1.9%
Active Difference
+1.2%
+1.9%
+1.3%
Past performance is not a reliable indicator of future performance
46
Plato Australian Shares Income Fund DELIVERING HIGH INCOME
Since inception realised yield* 10.0%
9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
RBA Cash Rate
CASH FRANKING
*to 31 October 2020, after fees
47
S&P/ASX 200
Fund
2.0
4.3
6.8
0.0
1.4
2.7
Chart of Plato Income Performance Plato Aust. Shares Income Fund v S&P/ ASX200 Accumulation Series (incl. Franking Credits)
3.30
2.80
2.30
1.80
1.30
0.80 Sep-2011
Sep-2012
Sep-2013 Sep-2014 Sep-2015 Sep-2016 Sep-2017 Sep-2018 Plato Australian Shares Income Fund Total Net Return (incl. Franking Credits) S&P/ASX 200 Franking Credit Adjusted Daily Total Return Index (Tax Exempt)
48
Sep-2019
Sep-2020
Summary • Interest rates to be even lower for longer – Equity income still relatively attractive
• Forecast 30%+ market wide cut in dividends, but not evenly distributed – We expect to deliver 7% gross income
• Case for active fund management never been stronger – Avoiding dividends traps will be more important than ever
49
Disclaimer •
Note: Past performance is not a reliable indicator of future performance.
before making an investment decision.
The information contained in this presentation is for information purposes only and has been prepared for use in conjunction with a verbal presentation and should be read in that context. Plato Investment Management Limited ABN 77 120 730 136 (‘Plato’) AFSL 504616.
Pinnacle Fund Services Limited and Plato believe the information contained in this communication is reliable, however its accuracy, reliability or completeness is not guaranteed and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the Competition and Consumer Act 2010 and the Corporations Act, Plato and Pinnacle Fund Services Limited disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information.
Any opinions or forecasts reflect the judgment and assumptions of Plato and its representatives on the basis of information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. This communication is for general information only. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice relevant to their particular circumstances, needs and investment objectives. Interests in the Plato Australian Shares Income Fund (ARSN 152 590 157) and Plato Global Shares Income Fund (ARSN 608 130 838) (‘Funds’) are issued by Pinnacle Fund Services Limited ABN 29 082 494 362 AFSL 238371. Pinnacle Fund Services Limited is not licensed to provide financial product advice. A copy of the most recent Product Disclosure Statement (‘PDS’) of the Funds can be located at www.plato.com.au/retail-funds/. You should consider the current PDS in its entirety and consult your financial adviser
50
Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Plato. Plato and their associates may have interests in financial products mentioned in the presentation.
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