Alpha POWERS Aegis Portfolio Report

aMail
Research & Education Articles
- Covered Call Strategy Suited to Super
- The Future of Fixed Income
Education
- SMAs – professional share portfolios for every investor
- BlackRock Customised Portfolio Service - Offering your clients a professionally managed share portfolio

Alpha POWERS Aegis Portfolio Report - Dec 07

Aegis Market Commentary

December was another difficult month for the Australian sharemarket, with the S&P/ASX 100 Index down by 2.67% for the month. In terms of monthly sector performance, HealthCare and Energy were the best performers, while Property Trusts and Industrials were the worst performers. The market continued to be driven by volatility in the US markets, with the US subprime fallout and fears of a US recession continuing to weigh on the market. Domestically, there were also a number of issues that helped drag down the market, including: inflation concerns and the prospect of further rises in interest rates; the revelation that Centro was having difficulty in refinancing some of its debt; and a number of profit downgrades. Although the outlook for the domestic economy remains good and there is minimal direct exposure to subprime by Australian companies, we believe the uncertain global outlook and tighter conditions in the credit markets will continue to negatively impact investor sentiment over the coming months.

Aegis comments on major out-performers:

National Australia Bank – NAB (+8.5%). Along with the major bank sector, NAB rallied ahead of the release of its FY07 result. In general, the rally was in expectation of another good profit reporting season for the banks and a belief that NAB would continue to recover from its problems of recent years. NAB did not disappoint and, on 9 November, reported a 12.6% increase in profit to $4.4B. Underlying earnings of NAB's ongoing businesses rose by 17.7%, providing a better indication of the momentum in the business. The result reflected strong lending, deposit and funds under management growth as well as good cost containment. Partly offsetting this, there was a modest decline in the net interest margin and an increase in the charge for bad debts. NAB noted that delinquent assets are up from historical lows, but within expectations. Pleasingly, the final dividend increased by 11cps to 95cps (ff). We expect NAB's FY08 earnings will continue to build on the momentum of the FY07 result.

Orica – ORI (+13.6%). ORI put in a strong performance during December, more than recovering its November fall. The share price rose strongly after competitor Dyno Nobel abandoned plans for the construction of its Moranbah ammonium nitrate plant, which provides the opportunity for ORI to sell excess production into the Australian market. This reduces the chance of oversupply in the ammonium nitrate market. We continue to hold a favorable view of ORI and believe that the company will achieve solid growth rates and increasing dividends over the coming years.

Babcock & Brown Infrastructure – BBI (+4.7%). Although the BBI unit price was flat in December, the stock went 'ex' a 7.5 cents per unit distribution (payable 29 February). Adjusting for this, BBI performed well in December. During December, BBI announced a number of new acquisitions and investments, including a number of port operators in Europe and the US and a natural gas pipeline in the US. BBI also released information confirming its strong financial position, with EBITDA/interest cover of 2x and a well hedged debt position with a long maturity profile (average of 6-7 years). The fund also confirmed its distribution guidance of 15 cents per unit in FY08 (+5%) and 16 cents in FY09 (+7%).

DB RREEF Trust – DRT (+3.5%). This stock performed remarkably well in a market that punished property stocks following the revelation of Centro's refinancing difficulties. The trust has a diversified portfolio of quality office and industrial properties. Nonetheless, we decided to remove all property stocks from the portfolio at the end of December, given our view that this sector is in for a rough ride over the coming months. Since we removed DRT from the portfolio, the stock has experienced a significant price decline.

Aegis comments on major under-performers:

Macquarie Group – MQG (-8.9%). Despite announcing a bumper 1H08 result in November 2007 and a relatively good earnings outlook, MQG shares fell on the back of negative market sentiment. Although MQG has a well-diversified business and a consistent track record of delivering strong earnings growth, sentiment towards the stock has been impacted by the subprime meltdown in the US and flow on effects to US investment banks and the financial sector in general. Although we believe the outlook for MQG’s underlying businesses is strong, we removed the stock from the portfolio at the end of December, given our view that sentiment is likely to remain weak over the next few months.

Macquarie Countrywide Trust – MCW (-7.2%). MCW is a well-managed property vehicle, specialising in neighbourhood shopping centres. It also has a strong financial position, with only a small proportion of its debt facilities due within the current financial year. Despite its relative attractions, the stock’s price fell as the market de-rated the property sector following the revelation of Centro’s refinancing difficulties. MCW also has a large portfolio of US shopping centres, and concerns about the possibility of a US recession also impacted sentiment towards the stock. We have since removed MCW from the portfolio, given our view that the sector is in for a rough ride over coming months.

GPT Group – GPT (-3.0%). GPT was also caught up in the de-rating of the property sector. Although we continue to view the trust’s underlying assets favourably, we have removed GPT from the portfolio, along with the other property stocks.

IMPORTANT NOTICE:Aegis Investment Partners Pty Ltd (ABN 98 096 109 125, AFSL 226 957) ("Aegis") is the stock selector for the Alpha Model Portfolio – Aegis. The information contained in this document is prepared by Aegis for use solely by professional investment advisers and is not intended to be provided to retail clients. In preparing this information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor to determine whether information contained in this document is appropriate to their investment objectives, financial situation or particular needs before acting on that information. Prior to deciding whether to acquire, hold, or sell the Alpha Model Portfolio - Aegis, you should obtain and consider the Alpha Customised Portfolio Service Product Disclosure Statement dated 19 December 2006 (to be read in conjunction with individual financial advice), available on request from Alpha Structured Investments (1300 769 694 or www.alpha-invest.com.au). While all information is provided by Aegis in good faith, Aegis makes no warranties as to its accuracy, reliability, completeness or whether it is free from error or omission. Subject to statutory limitations, Aegis, together with its directors, officers, employees and related body corporates, do not accept any responsibility or liability arising from decisions made relying upon information contained within this document. This document is only to be distributed to Australian residents. All intellectual property relating to this document vests with Aegis unless otherwise expressly agreed.