ALPHA Structured Investments
Alpha POWER Shares (Aegis) Portfolio - September 2008

Alpha POWER Shares (Aegis) Portfolio - September 2008

Monthly Stock Returns (including dividends)

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Aegis Market Commentary

The domestic share market resumed its downward trend with a vengeance in September, with the S&P/ASX 100 Accumulation Index down 9.4% for the month (or 3.0% for the period to 25 September, the POWER shares review date). Materials (-23.5%) was the worst-performing sector and Energy (-13.5%) also fell significantly. These two sectors were impacted by falling metal and energy prices as the worsening international financial crisis increased the risks of a prolonged global economic slowdown. Utilities (-13.8%) also suffered a large decline as highly leveraged business models remained out of favour with the market. Information Technology (+1.1%) was the only sector to record a rise for the month, although this is a relatively small segment of the market. Financials (ex-Property) also performed relatively well, with a fall of just 1.8% for the month. Global financial conditions deteriorated rapidly during September and market volatility hit a six-year peak. A number of large financial institutions teetered on the brink of collapse and we saw the bankruptcy of Lehman Brothers, along with a number of forced mergers and government bailouts. The US government’s US$700B rescue package was eventually passed by congress, however this has failed to calm market nerves. The RBA lowered official rates by 0.25% in September and by a further 100 basis points (1.00%) after month end in recognition that domestic economic conditions are likely to deteriorate further given the worsening international financial crisis. The US Federal Reserve lowered its Federal Funds rate by 50 basis points following month end, with a number of central banks around the globe also lowering their lending rates in an effort to help ease the financial crisis. Overall, we retain a cautious view of the market and expect volatility to remain high. Despite reduced expectations for economic activity in Australia we believe, on a relative basis, the Australian economy will fare better than most leading developed countries globally. Despite the slowing global economy, we expect reasonable growth in the key Asian economies to drive demand for Australian commodities, particularly bulk metals such as coal and iron ore. However, given the change in market sentiment towards the sectors, we maintain a close eye on China and its demand for resources.

Aegis’ Comments on Portfolio Stock Performance

Main outperformers

  • QBE Insurance Group – QBE (14.6%). QBE built on a strong August performance and was the best performing portfolio stock in September. There was no specific news from QBE in September, but in August the group reported a solid 1H08 result with underlying earnings up 7% on pcp on the back of an 8% rise in premium income. However, the headline result was down 7% on pcp due to lower returns on the group’s investment portfolio. The interim dividend was increased by 7% on pcp. Despite the difficult financial market conditions, the outlook for QBE remains favourable. The benefits of its US acquisitions will be a key factor behind earnings growth in FY09 and FY10. QBE is very adept at managing risk and rebalancing its portfolio of businesses towards those that offer greater profitability.
  • Commonwealth Bank – CBA (+3.9%). CBA was another stock to build on its solid August gains making further good gains in September. The only announcement from CBA during September was the revelation that CBA has a $150M exposure to Lehman Brothers, although this is manageable in the context of CBA’s earnings outlook. Following month end, CBA announced it had agreed to acquire BankWest for $2.1b, funded by a $2B share placement. With the purchase price below net asset value, this is a good deal for CBA and demonstrates its position of strength in the current environment. The bank also provided a business update and noted it is comfortable with analysts’ estimates for FY09 earnings.
  • Westfield Group – WDC (+2.5%). WDC also built on its strong August share price gains. In August, the group reported a solid 1H08 result, with comparable shopping centre income up 3.2%. The group also reaffirmed its FY08 distribution guidance of 106.5 cents per security. Although the outlook for some of the key economies where WDC operates is uncertain, WES is well placed to handle an economic downturn. It has a high quality shopping centre portfolio, a solid pipeline of new developments and is well capitalised. As the sector leader, we see WES as having good defensive characteristics.

Main underperformers

  • BHP Billiton – BHP (-10.9%). After strongly outperforming in the first half of 2008, BHP has come under significant selling pressure in the past three months as concerns rise that a slowing global economy will impact demand for resources. While some metals and energy prices have declined, prices for BHP's core iron ore and coal production are locked in via contracts out to April 2009. However, we think it likely that prices for these products may fall when these contracts come up for negotiation. Despite these short-term pricing impacts, we expect medium- to long-term demand for BHP's energy and metal products will remain strong due to continued rapid growth in the Asian region, particularly India and China. Despite the global slowdown, the IMF is still forecasting China to grow by 9.3% in 2009. We remain comfortable with BHP on a medium- to long-term basis.
  • Goodman Fielder – GFF (-7.1%). GFF reported its FY08 result in August and, while the reported number was in line with management guidance, the quality was weak and included one-off gains. Removing these gains, adjusted profit was down 16% on the previous year. In addition, the group incurred a $170M impairment charge for its New Zealand business. Margins fell due to higher commodity and distribution costs. We have since removed GFF from the portfolio.
  • WorleyParsons – WOR (-6.4%). WOR shares have been sold off on the back of a significant decline in the oil price. This decline is disappointing given the company’s earnings, as a service provider to the oil and gas industry as well as other sectors, are not directly tied to oil prices. WOR reported a very strong FY08 result in August, with earnings up 53% and dividends up 41%. The company also commented that it expects the markets for its services to remain strong. We retain a positive view of the medium-term outlook for WOR.
IMPORTANT NOTE:
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 (now closed for new investments but still actively being managed for existing investors) and the Alpha Customised Portfolio Service Product Disclosure Statement dated 3 March 2008 (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.