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[Introductory music]
Hi. I am Michael Courtney, Portfolio Manager of the Zurich Investments Small Companies Fund.
In this update I will explore:
Asia's place in the portfolio and why we believe it makes sense to invest in the region
An example of one of our Asian investments
Current performance and the outlook for the fund
One of the key differentiating characteristics of the Fund
is the ability to invest up to 20% of the portfolio in the Asian
ex-Japan small companies market
By investing opportunistically in Asian small caps
the fund can offer investors direct access to
the region's emerging middle class and their rising GDP per capita
At Ellerston we take our domestic expertise in looking at companies
and apply it to less developed countries and markets Ellerston have been investing in
Asia successfully for the last decade
As risk management is such an important part of our investment process
we only want to invest in Asian stocks where we have a deep understanding of both the industry and the company
One such example is our position in the.
Indonesian pay TV operator Bhakti Investama
Bhakti's major assets include holdings in the country's largest
free to air TV network and the largest Pay TV operator in the country
and a lot despite say they operate in the country
When purchased we were only paying for the free to air assets
and getting the pay TV for free.
For a number of years we researched and owned of pay TV operators Australian pay TV operator Austar,
and as such had a strong understanding of the business model of pay TV operators
We identified Bhakti as a potential opportunity to invest in the Indonesian market.
As unlike Australia, TV advertising rates are growing strongly,
at over 15% per annum, and due to low internet penetration,
satellite Pay TV continues to grow in popularity,
with subscriber growth running at over 20% per annum
After numerous company visits to ensure comfort with the management team
and the business model Bhakti was added to our portfolio in October 2010.
The following chart tracks the relative share price movement of our Austar holding compared to Bhakti Investema -- showing how strong
the relative performance can be in Asia
Bhakti was one of our staple Asian positions in the Fund
and we have recently exited our position in this stock due to its strong performance and high valuations
We purchased the company for 140 rupiah back in October 2010 and recently completed exiting the position at over 400 rupiah
The fund has returned 4.3% p.a. since inception
while the broader market has fallen 11% p.a. ; an impressive outperformance of over 15% p.a. on an after fees basis
Despite mixed performance of the markets we are investing in,
we have been very successful in adding value in the Asian portion of the portfolio
The total net contribution of our Asian positions on performance has been 2.7% p.a since inception
This shows the value of having the flexibility for opportunistic allocation to high quality Asian companies
Identifying Companies with strong upside potential is certainly important;
however a focus on risk assessment is also an integral part of the strategy
A deep understanding of both the macro and the micro risks associated with
each company is vital in avoiding losing money
Avoiding the losers is one of the most important aspects of building wealth over time,
as just a few bad decisions can undo the benefits of numerous good ones
Stock markets around the world
are currently hostage to macro headlines making investment decisions difficult on a short term basis
However, volatility creates opportunities in the small caps space when taking a three to five year view as
valuations are at historically lower levels
We continue to focus on companies with strong business franchises, high dividend yields and cheap valuations
We see Asian growth as the standout in the world
and as such will be looking to boost our Asian holdings opportunistically
We have trimmed our overweight positions to oil and gas in the march quarter
following strong performance over the previous year and half
Following large sell-offs in small resources during the June quarter
we are adding selected high quality names
with sustainable earnings and attractive valuations.