Alpha POWER Shares (Aegis) Portfolio

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 POWER Shares (Aegis) Portfolio - October 2007

Aegis Market Commentary

During October, the Australian sharemarket continued to build on the September gains and managed to hit record highs, with the S&P/ASX 100 Accumulation Index up 2.63% for the month. In terms of monthly sector performance, Telecom, Consumer Staples and Industrials were the best performers, whereas Utilities and Information Technology were the worst performers. The key drivers for the market were the strong domestic economy; continued demand for Australian resources; and good market liquidity, driven by dividend reinvestment and superannuation flows. Despite the good October performance, the market remains volatile, with a number of negative factors impacting sentiment. The key negatives include the stronger Australian dollar, which has hurt stocks with US dollar earnings, and concerns about US economic growth. Additionally, there are ongoing concerns about the potential fallout from the problems in the US sub-prime market. While we believe the fundamentals of domestic market remain sound, we expect volatility to continue over the next few 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.

Telstra – TLS (+7.3%). October was a good month for TLS, with the stock reversing most of the share price declines experienced after the release of its FY07 result. Following the end of October, TLS held an investor day and increased its previous guidance for a number of key metrics. One of the key messages to emerge from the investor day was that TLS is more than a communications company and is focused on driving average revenue per user across its different access platforms. We like TLS's strategic investments in multimedia products, which target value-added product mixes with the intention of maximising customer revenue. We were also impressed by TLS's progress with its transformation strategy. The company's transformation appears to be running to schedule as the management team continues to pursue the deadlines of key transformation milestones. We continue to hold TLS in the portfolio for its high, fully franked dividend yield.

Westpac Banking Corporation – WBC (+7.2%) also rallied ahead of the release of its FY07 result. The strong increase of the past few months was justified when, on 1 November, the bank reported an FY07 profit result that was above market expectations. Earnings were up by 14%, driven by strong volume growth in deposits and loans, an outstanding wealth management performance and good cost control. The full year dividend increased by 13%. With strong momentum across its core businesses, we expect another strong result from WBC in FY08.

Aegis comments on major under-performers:

GPT Group - GPT (-8.0%). Disappointingly, GPT reversed some of its recent gains through October, possibly impacted by concerns about further rises in Australian interest rates. The only major news for the stock during October was that the joint venture with Babcock & Brown had disposed of an interest in a US regional shopping mall. We continue to hold GPT for its good yield and expectations that distributions will grow as the company diversifies its earnings base by moving into funds management and development.

Babcock & Brown Infrastructure Group – BBI (-5.8%). BBI appears to be another stock impacted by concerns about rising interest rates. However, with an exceptionally high, fully tax deferred distribution yield, we believe the stock remains an ideal candidate for the portfolio. The company continues to make yield-accretive acquisitions, announcing the acquisition of two Finnish port operators in October. At its recent AGM, BBI confirmed it would pay a distribution of at least 15 cents per security in FY08, up 5% on FY07. Based on the current price, this equates to a yield of around 9.5%.

QBE Insurance Group – QBE (-3.9%). QBE's share price has retraced some of the gains made following the release of its outstanding 1H07 profit result. There was no major news from the stock and some of the share price decline might be attributed to concerns about the impact of the rising Australian dollar on QBE's reported earnings. However, with a strong underlying earnings growth profile for the remainder of FY07 and into FY08, in part driven by the recent major US acquisitions, we believe any currency impacts will be minor. In our view, QBE is well placed to continue its long run of strong growth in earnings and dividends per share, driven by conservative risk management and ongoing acquisitions.

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.