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September 2017

Investment insights

From the desk of Kate Howitt

 

Key take outs

Reporting season highlights
  • Two of the largest positions in the Fund are a2 Milk & WiseTech Global 
  • Both of these stocks have done tremendously well and whilst we remain very optimistic in their outlook, there is always a risk that any kind of stumble will be harshly penalised by the market
  • Both of those stocks had great results and gave investors even more confidence about their future prospects and have continued to do well
a2 Milk is your largest overweight holding. Why do you like it and how has it fared this year?
  • a2 Milk is actually the largest milk brand in Australia 
  • a2 Milk has a differentiated product and intellectual property protection around it - it is milk products free of a1 protein
  • They have a foothold into new markets
  • People are most familiar with infant formula into China, but they are also doing fresh milk into Asia, the US and the UK
  • Growth is being funded by their very strong position in fresh milk in Australia 
  • They are highly profitable in this market and able to re-deploy those returns into growing a number of growth alternatives around the world 
Why do you like WiseTech Global? 
  • A pre-IPO opportunity - we were owners a year before IPO 
  • WiseTech Global was operating for decades and paying dividends before it listed
  • We got to know management, go through the financials, to really ‘poke and prod’ at the business model and get a lot of comfort around it
  • When it listed we were confident to take a large position and buy as much of it as we could 
  • We have continued that process of auditing the management team, auditing the business model, understanding the potential of the business 
  • We like the network effects  in the  business 
  • This gave us a lot of confidence in their underlying cash flow capability 
 
 
 

Key take outs

Overall impression of reporting season 16/17
 
Two interesting things:
 

1. Some longer term trends that we have seen driving company outcomes since the financial crisis have largely played out including:

  • Cost -out opportunity 
  • Reductions in capital expenditure 
  • Increase in the payout ratio, boosting dividends

These trends have largely been played out and started to reverse and that’s a big change for the outlook.

2. We have very large companies and business models in our index that are facing longer term strategic challenges and so long term turnaround processes that have to get played through in the market.

How is investor sentiment?
  • “We are still climbing the wall of worry”
  • Concern about valuation levels particularly in the US market
  • But there is no ‘company euphoria’ that would make you really concerned that we are in bubble territory or close to a peak
Are companies focused on reinvestment opportunities or paying dividends?
  • At the margin we are seeing a shift back towards having to re-invest.  There is less ability or willingness to keep increasing the payout ratio to provide greater dividend outcomes
  • The real question for investors case by case on those is:
    1. Is it re-investment to access great growth opportunities or
    2. Is it re-investment to preserve earnings potential? 
  • And there are some companies out there that are running to stand still
 

References to specific securities should not be taken as recommendations. 

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.

© 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited.

 

This website is intended to provide general information only and has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information and consider the relevant Product Disclosure Statement for any product named on this website before making an investment decision.

© 2017 FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340.
Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL limited.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 ("Fidelity Australia"). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International. Prior to making an investment decision retail investors should seek advice from their financial adviser. Please remember past performance is not a guide to the future. Investors should also obtain and consider the Product Disclosure Statements ("PDS") for the fund mentioned in this document. The PDS is available on www.fidelity.com.au or can be obtained by contacting Fidelity Australia on 1800 119 270. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider such matters before acting on the information contained in this document. This document may include general commentary on market activity, industry or sector trends or other broad based economic or political conditions which should not be construed as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be construed as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care no responsibility or liability is accepted for any errors or omissions or misstatements however caused. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity funds is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. References to ($) are in Australian dollars unless stated otherwise. © 2017 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International, and the Fidelity International logo and F symbol are trademarks of FIL Limited.