2012: Portfolio Digest

By David Dittman • January 3, 2013 • Pacific Digest

The 24 Holdings that currently comprise the AE Portfolio generated an average total return–capital gain or loss plus dividends paid–of 25.5 percent in US dollar terms in 2012.

By comparison, the Standard & Poor’s/Australian Securities Exchange 200 Index posted a US dollar total return of 22 percent. The broader Australian Stock Exchange All Ordinaries Index was up 20.6 percent in US dollar terms.

The S&P 500 Index returned 16 percent for US-based investors, including dividends, while the MSCI World Index was up 16.6 percent.

In Australian dollar, price-only terms AE Portfolio Holdings posted an average gain of 17.8 percent. The S&P/ASX 200 was up 14.6 percent, the All Ordinaries Index 13.5 percent.

Including two positions that we opened and closed during 2012–Aggressive Holdings mineral sands producer Iluka Resources Ltd (ASX: ILU, OTC: ILKAF, ADR: ILKAY) and iron ore producer Grange Resources Ltd (ASX: GRR, OTC: GRRLF)–the average US dollar total return is a less impressive 20.8 percent.

Iluka lost 37.5 percent for 2012, Grange 31.6 percent. Of the 26 positions we occupied during the year these were the two worst performers.

Among those stat remain in the Portfolio, gold producer Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY) was the biggest drag on average performance with a negative total return in US dollar terms of 23 percent.

Coal producer New Hope Corp Ltd (ASX: NHC, OTC: NHPEF) at negative 17.6 percent, integrated energy company Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY) at negative 8.1 percent and energy, contract crushing services provider and iron ore producer Mineral Resources Ltd (ASX: MIN, OTC: MALRF) at negative 5.8 percent and mining engineering services firm WorleyParsons Ltd (ASX: WOR, OTC: WPGPF, ADR: WPGPY) at negative 4.7 percent were also in the red for the year.

The top performer in the AE Portfolio for 2012 was biopharmaceutical and immunotherapy developer and Conservative Holding CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY), which generated a total return of 74.7 percent in US dollar terms.

Aggressive Holding GrainCorp Ltd (ASX: GNC, OTC: GRCLF), Eastern Australia’s biggest grain handler, a key player in the emerging Asian food chain and now a takeover target of global agribusiness giant Archer-Daniels-Midland Co (NYSE: ADM), posted a total return of 71.1 percent.

Our 14 Conservative Holdings made an average total return of 37.8 percent in 2012, while our 10 Aggressive Holdings were 8.2 percent to the positive. Accounting for the impact of jettisoned Iluka and Grange the average return for the year was 1.1 percent.

The Aussie

Appreciation of the Australian dollar versus the US dollar helped our cause during the year. The aussie closed 2011 at USD1.0209. It closed as high as USD1.0809 on Feb. 7, 2012, as low as USD0.9701 on June 1. The aussie ended 2012 at USD1.0399, up 1.9 percent versus the buck.

The currency has surged in early 2013 trade to USD1.0519 as of midday Thursday, Jan. 3, in the US. The aussie is responding to positive news on China manufacturing as well as the resolution of the “fiscal cliff” act in the US’ continuing federal-government-inspired economic drama.

Also contributing to aussie strength is a continuing uptick in commodities prices. The Reserve Bank of Australia (RBA) reported Thursday in Sydney that preliminary estimates for December indicate that its Index of Commodity Prices rose by 0.8 percent on a monthly average basis in special drawing rights (SDR) terms after rising by a revised 1.7 percent in November.

(The SDR is an international reserve asset created by the IMF, the value of which is based on a basket of four key international currencies, the US dollar, the euro, the Japanese yen and the British pound.)

The biggest contributors to December’s increase were higher prices for iron ore, thermal coal and aluminium. Other base metals prices also increased in the month, while the price of gold fell.

One of the main points of our long-term thesis for investing Down Under is the fundamental strength of the Australian dollar versus the US dollar. As we’ve noted recently, however, the RBA is concerned about the impact of a persistently high aussie on the domestic economy.

The RBA currently maintains one of the highest benchmark interest rates in the developed world at 3 percent. This level actually matches the all-time low for what the RBA calls its cash rate target, which was first reached during the depths of the Great Financial Crisis in April 2009.

The RBA boosted its benchmark to 4.75 percent by November 2010, but first a slowing global economy and threats to growth from a sluggish China and a messy Europe and now the drag on domestic manufacturing, tourism and other non-resource industries wrought by aussie strength have prompted the central bank into five cuts since November 2011 totaling 175 basis points.

The RBA, which meets 11 times a year, or every month except January, will issue its next cash rate target decision on Feb. 5.

In his most recent statement, released Dec. 4, 2012, RBA Glenn Stevens acknowledged “signs of easier conditions starting to have some of the expected effects” but also noted, critically, that “the exchange rate remains higher than might have been expected, given the observed decline in export prices and the weaker global outlook.”

Chinese leaders appear to have engineered a soft landing that looks like it’s turning into a new, albeit modest, takeoff. Europe seems to have put a floor under its periphery, and, for now, drama over the US fiscal cliff has subsided.

Spain’s situation is far from settled, but the euro as a currency and the eurozone as a construct will remain intact. Far less certain is what happens over the next two months in the US, where a debate over raising the federal debt ceiling is almost certain to intersect with another over the fate of “sequestered” budget cuts that was put off for eight weeks in the recent compromise bill that drove a global equity rally during the last trading day of 2012 and the first of 2013.

One area where Mr. Stevens can continue to press is on the differential between the RBA’s cash rate target and prevailing benchmarks for other developed world central banks.

We should expect further rate cuts by the RBA in 2013. Whether these moves will drag the aussie lower is an open question.

China PMI

The HSBC China Manufacturing Purchasing Managers Index (PMI) reading for December was 51.5, up from 50.5 in November. This was the highest HSBC PMI reading since May 2011.

The final reading from HSBC Holdings Plc and Markit Economics compares with the 50.9 HSBC Flash China PMI reading posted on Dec. 14.

PMI readings above 50 indicate expansion; readings below 50 indicate contraction.

China’s economy appears to have rebounded after a seven-quarter slowdown, as Beiijing and local governments boosted spending on infrastructure and accelerated approvals for investment projects. According to Qu Hongbin, chief China economist at HSBC in Hong Kong, “Momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property market conditions stabilize.”

China’s official manufacturing PMI, published by the National Bureau of Statistics, held steady in December at 50.6, matching November’s seven-month high. Official PMI has been above 50 for three straight months.

China’s official PMI focuses on big, state-owned firms. The HSBC PMI targets smaller, private firms.

The Roundup

AE Portfolio Conservative Holdings AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY) and APA Group (ASX: APA, OTC: APAJF) completed limited-recourse project financing for the 242 megawatt Diamantina Power Station (DPS) and 60 megawatt back-up generation capacity at Mount Isa.

AGL and APA are developing Diamantina through a 50-50 joint venture, Diamantina Power Station Ltd.

The total cost of the project, including back-up generation, is expected to be AUD570 million before financing costs.

AGL’s and APA’s respective equity contributions are expected to be about AUD100 million; both companies will fund their contributions from available cash and committed facilities.

Diamantina is expected to come online in the first half of 2014.

AGL, which posted a total return in US dollar terms of 17.3 percent in 2012, is a buy under USD16. APA, which posted a 33.7 percent total return last year, is a buy under USD5.50.

Transurban Group (ASX: TCL, OTC: TRAUF) has issued 16,260,163 stapled securities to superannuation fund trustee UniSuper Ltd at a price of AUD6.15 per security.

The deal was announced Dec. 24, 2012; the AUD6.15 agreed price represents a modest premium to the Dec. 21 closing price of AUD6.09. The securities will be issued on Jan. 7, 2013.

Transurban had announced on Dec. 5, 2012, that the Australia unit of UBS AG would underwrite the company’s distribution reinvestment program (DRP) for the fiscal 2013 interim distribution for an amount of up to AUD115 million, or approximately 50 percent of that distribution.

The deal with UniSuper makes the prior arrangement with UBS unnecessary and it has therefore been cancelled.

Transurban’s DRP–which is not open to US investors–remains in place for the fiscal 2013 interim distribution.

As of Oct. 5, 2012, UniSuper, one of the biggest superannuation managers in Australia, owned 5.1 percent of Transurban.

“Superannuation” refers to the arrangements people make in Australia to have funds available for them in retirement. Superannuation arrangements are government-supported and encouraged, and minimum provisions are compulsory for employees. They are roughly similar to a combination of US-style individual retirement accounts (IRA), 401(k) accounts and Social Security.

This is a strong expression of support for Transurban and the quality of its underlying assets. The proceeds from the issue of securities to UniSuper and the DRP will be used to partly fund the 95 Express Lanes project in Northern Virginia. Transurban Group is a buy under USD6.50.

Here are dates for the next round of reporting season, which for most companies will be for the first half of fiscal 2013. We’ve noted where the reporting period differs.

Please consult the Portfolio tables at www.AussieEdge.com for current advice.

Conservative Holdings

  • Aberdeen Asia-Pacific Income Fund (NYSE: FAX)–N/A (fund, reports holdings on a quarterly basis)
  • AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Feb. 27, 2013 (confirmed)
  • APA Group (ASX: APA, OTC: APAJF)–Feb. 20, 2013 (confirmed)
  • Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Feb. 8, 2013 (full year 2012, estimate)
  • Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–Feb. 18, 2013 (first quarter fiscal 2013, estimate)
  • Cardno Ltd (ASX: CDD, OTC: COLDF)–Feb. 14, 2013 (estimate)
  • CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Feb. 13, 2013 (confirmed)
  • Envestra Ltd (ASX: ENV, OTC: EVSRF)–Feb. 21, 2013 (confirmed)
  • M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Feb. 27, 2013 (estimate)
  • Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Feb. 25, 2013 (estimate)
  • SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)–Feb. 22, 2013 (estimate)
  • Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Feb. 7, 2013 (confirmed)
  • Transurban Group (ASX: TCL, OTC: TRAUF)–Feb. 5, 2013 (confirmed)
  • Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–Feb. 14, 2013 (confirmed)

Aggressive Holdings

  • Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Feb. 25, 2013 (estimate)
  • BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Feb. 20, 2013 (confirmed)
  • GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–May 21, 2013 (estimate)
  • Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Feb. 18, 2013 (estimate)
  • Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Feb. 8, 2013 (confirmed)
  • New Hope Corp Ltd (ASX: NHC, OTC: NHPEF)–Mar. 26, 2013 (estimate)
  • Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Feb. 26, 2013 (full year 2012, confirmed)
  • Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Feb. 21, 2013 (confirmed)
  • Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Feb. 24, 2012 (full year 2012, confirmed)
  • WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Feb. 28, 2013 (estimate)
Following are links to our discussion and analysis of the most recently announced financial and operating results for Portfolio Holdings.

Conservative Holdings

Aggressive Holdings

Stock Talk

Comments Guidelines

Add New Comments

You must be logged in to post to Stock Talk OR create an account