1. The Advice Exchange Market Review
Presented By: Jamie Nicol, Chief Investment Officer November 2013

2. Market Overview Review of potential major risks Valuations
Review of major opportunities
Portfolio positioning
Major new purchases
Active share

3. Potential Risks - QE unravelling
Risk: Unprecedented nature of unravelling the QE is leaving markets nervous that carry trades will unravel as bond yields rise. A sharp rise in bond yields might stunt US growth recovery.
Mitigants: World remains awash with liquidity and US likely to tap the brakes gently.
Progress over the month: The market has waxed and wanned on this issue through the month. However, the Fed appears to be committed to unravelling the QE next year once the Fed budget is settled.
Positioning: Higher bonds and potentially higher US$ would be positive for our current portfolio positioning (QBE, MQG, offshore holdings).

4. Potential Risks - US Budget Resolution
Risk: US Government remains in gridlock regarding the appropriate response to reign in their fiscal deficit. Threats of Government shutdown undermines confidence.
Mitigants: Surely a practical solution will be reached?
Progress over the month: No further progress on this issue and unlikely to be so until January.
Positioning: Short term volatility around this issue could cause difficulties for markets and some of our holdings but ultimately we expect a solution to be found.

5. Potential Risks - Chinese Growth
Risk: A range of issues threaten Chinese growth rates – housing bubble, excess debt, ageing population, corruption.
Mitigants: Government working through solutions to these issues.
Progress over the month: Reforms announced including adjustments to the One Child policy, land rights for farmers and Local Governments to sell bonds to drive greater transparency over their debt.
Positioning: Mild overweight to the major resource companies on expectations cost cutting will improve returns for shareholders.

6. Valuations
Slight pullback in the market this month of 2.5% is a healthy correction following the strong year.
Bank dividends to be paid in December will provide further liquidity.
Market is now trading at 15.1x remains fair to full.
But remains cheap relative to low interest rates.
Future growth to be driven by earnings

7. Growth drivers: Australian Housing
Opportunity: Housing activity is accelerating. Affordability has improved thanks to low interest rates and smaller lot sizes. Reduced Government regulation is accelerating development.
Progress through the month: Lend Lease announced a 20% increase in house sales. Stocklands saw largest uptick in sales for three years in the September quarter. Dulux noted a pick up in trade sales.
Portfolio Positioning: High quality companies with exposure to improvement in house sales – Dulux, Stocklands and Lend Lease.
RP Data Month on Month City Home Values

8. Growth drivers: Funds Flow and Equity Market Activity
Opportunity: An increase in equity flows has coincided with improvement in global growth, an increased risk appetite and an increased likelihood of QE ending.
Progress through the month: Henderson’s noted they received GBP1.2b in net retail inflows in the first quarter compared to broker expectations of around GBP200m and activity levels are clearly picking up. Numerous new IPO’s is positive for Macquarie.
Portfolio Positioning: Henderson’s and Macquarie Bank.

9. Growth drivers: Global Growth
Opportunity: Global growth is showing signs of improvement and earnings will benefit from any potential pullback in the currency.
Progress through the month: Mixed month – confidence following US shut down took a hit but US ISM continues to expand, US non farm payrolls were strong,
Portfolio Positioning: High quality companies with exposure to offshore growth – Brambles, Amcor, Fox
US ISM

10. Broad Portfolio Positioning
Offshore plays (AMC, BXB, FOX, TWE, QBE).
Rotation out of bonds into equities (HGG, MQG, QBE).
Underweight defensive companies (WOW, TLS, Utilities, banks).
Domestic housing related stocks (LLC, SGP, DLX).
Sustainable growth stocks (TME, SEK, CWN, SHL, AZJ, AIO).
Data has been more supportive for resources (RIO, BHP, WPL).

11. Treasury Wines
Thesis: Signs the grape glut may be on the verge of easing as uneconomic producers exit the market and demand picks up. Brands continue to gain in market strength especially in Australia and worst behind it in the US. Further it is one of the best plays on the growing strength of the Chinese consumer.
Valuation: USA business may be sold and may be worth more from selling the assets then operating them. Intrinsic value of inventory as higher quality vintages are held on to longer.
Industry Structure

12. Origin Energy
Thesis: Market concerned around capital expenditure blowouts on its APLNG project well reflected in the current share price. Costs pressures easing and project economics strong. Competitive dynamics in retail improving.
Quality: Vertically integrated retailer with leading LNG project supported by strong gas reserves and management. Entered stock once debt refinanced reducing capital raising risk.
Valuation: DCF of APLNG Project, stress testing for project delays and capex blowouts. Factoring 20% capex blowout still showed strong project metrics
APLNG Key Assumptions:
Origin Sum of Parts:
Train 1 Startup
1/07/2015
Train 2 Startup
1/07/2016
Train 1 Capacity (mtpa)
4.5
Train 2 Capacity (mtpa)
Train 1 Project Life
20.0
Train 2 Project Life
ORG
PE Utility business
12.0x
FY14 EPS
0.746
Underlying value
$9.0
Valuation of APLNG
$7.5
Target Price
$16.5
Current Share Price
$14.4
Upside/(Downside)
14.6%
Capex
Total Project Capex ($A Million)
$ ,700
Spend to 30 June 13
$ ,497
Remaining Capex
$ ,203
Capex Blowout
20.0%
Updated Capex for blowout
$ ,644
Enterprise Value
30,168
Project Debt
8,500
Equity Value
21,668
ORG 37.5% Interest
8,125
Shares Outstanding
1,090
Value per share $

13. Balance Sheet Strength
Wesfarmers
Thesis. Purchases for the Income portfolio on the basis that it has a sustainable growing dividend. Furthermore the wealth effect from improved housing values and share portfolios should result in solid improvements for the retail businesses – Bunnings, Coles, Target, Kmart.
Valuation. Strong sustainable dividend yield of 5.1% fully franked.
Balance Sheet Strength
Is this the best quality business we have in our portfolio? Pick a stock you know back the front in and out.
Can you send me the original so I can make it look pretty with same colours as preso?

14. Active Share Active Share 66% - top 5-10% of concentrated managers.
But tracking error of 4% is below average suggesting we are a diversified stock picker with good ability to deliver excess return on a consistent basis

15. Australian Equities High Conviction portfolio Annualised Performance as at 31 October 2013
Please note: Past performance is not an indication of future performance. No allowance has been made for taxation and fees are not taken into account

16. Australian Equities Socially Responsible portfolio Annualised Performance as at 31 October 2013
Please note: Past performance is not an indication of future performance. No allowance has been made for taxation and fees are not taken into account

17. Australian Equities Income portfolio Annualised Performance as at 31 October 2013
Please note: Past performance is not an indication of future performance. No allowance has been made for taxation and fees are not taken into account

18. Disclaimer
SOURCES:
GoldmanSachs
Macquarie Bank
Deutsche Bank
Morgan Stanley
UBS
IRESS
Bloomberg
DISCLAIMER
IMPORTANT NOTE: While every care has been taken in the preparation of this material, DNR AFSL Pty Ltd (ABN , an Australian Financial Services Licensee, License Number ), makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts.
This material has been prepared for the purpose of providing general information without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this material, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.
Dalton Nicol Reid expressly disclaims any responsibility or liability to anyone who acts or relies upon anything contained in, or omitted from, this material.
Past performance is not indicative of future performance.