Performance commentary

The Trust returned 10.2% for the December quarter.  This exceptional performance reflected strength in equity and property markets and outperformance from our portfolios across all asset classes.

The Australian equity market had a remarkable quarter, with the S&P/ASX 300 Index (Total Returns) excluding property rising 13.8%.  Australia outperformed what were buoyant global equity markets, driven higher by positive news around COVID-19 vaccines and a credible pathway out of the pandemic.  Australia’s outperformance was aided by containment of COVID-19, improved local economic data and a further loosening of monetary policy by the Reserve Bank of Australia.  Strength in commodity prices also helped the local market, with iron ore pushing above US$150/t and oil rising sharply.  The Australian Government 10-year bond yield rose 0.18% to close at 0.97% and the AUD rose materially against the USD.  Looking at performance by sector, Energy (+26%) was strongest, followed by Financials (+23%), Information Technology (+23%) and Materials (+16%).  Utilities (-5%) was weakest, followed by Health Care (-1%) and Industrials (+6%).

The Trust’s Australian equities holdings returned 19.7%, materially exceeding the benchmark.  The quarter saw a marked shift in investor sentiment, with optimism around an emergence from the pandemic and an economic recovery driving strong performance from the equity market and a rotation into out-of-favour cyclicals and other stocks particularly impacted by COVID-19.  We hold many such stocks in our portfolio and this shift provided a significant tailwind to our performance and that of the ‘value’ investment style more generally.  Our resource holdings performed well, including Sims Group (+77%) and Alumina (+34%), reflecting improved commodity market conditions.  The shift in sentiment also saw the emergence of private equity and other bargain hunters and a number of our holdings were targets of corporate interest during the quarter, including Link Administration Holdings (+49%), Janus Henderson Group (+43%) and Coca-Cola Amatil (+36%).  Our decision not to hold CSL (-1%) contributed positively, although we note that it has not (yet) de-rated and still sits on a near record 42x forward earnings.  Whilst there was a clear rotation towards ‘value’ during the quarter, many of the hyper-PE growth stocks continued to outperform and our decision not to hold them detracted.  The key names were Afterpay Touch Group (+48%) which has never made a profit and Xero Limited (+46%) which made $3m this year.  Our decision not to hold Fortescue Metals Group (+44%) also contributed negatively, outperforming due to its very high sensitivity to the iron ore price.

International equity markets were universally strong, with the MSCI AC World Index returning 14.7% in USD-terms.  Of the major regions, Asia ex-Japan (+19%) performed best, followed by Europe (+16%), Japan (+15%) and the USA (+13%).  The stronger AUD reduced the return of the AUD-denominated MSCI AC World Index benchmark to 6.5%.  The Trust’s international equities holdings returned 9.3%, outperforming the benchmark.

A-REIT’s performed very well, with the S&P/ASX300 A-REIT Index (Total Returns) rising 13.2%.  The Trust’s A-REIT holdings returned 18.6%, outperforming the benchmark.  This strong performance was supported by many of our retail and diversified REIT holdings, which were seen as key beneficiaries of a prospective emergence from the COVID-19 pandemic.

Fixed interest was steady, with the Bloomberg Australian Composite Bond Index falling 0.1%.  The Trust’s fixed interest holdings returned 0.2%, exceeding the benchmark.

The Trust’s exposure to alternative assets, through its holding in the MBA Global Listed Infrastructure Fund, returned 2.1% for the quarter.  This was above the 0.0% return of its benchmark, the RBA cash rate.

Downloads
Fund fact sheet
Monthly commentary

The rates of return and movement in the benchmark as at 31 December 2020 are as follows:


Trust*
 (after fees)
%
Benchmark**
%
Since inception 31/05/1988 p.a.8.8N/A
15 years p.a.5.54.9
10 years p.a.6.76.9
5 years p.a.5.66.3
4 years p.a.4.66.3
3 years p.a.3.55.3
1 year0.82.6
3 months10.27.8

*The Trust’s performance is based on the movement in net asset value per unit plus distributions and is before tax and after all fees and charges. Imputation and foreign tax credits are not included in the performance figures.

**The Benchmark start date is 1 January 1989. The Benchmark to 31 May 2008 is the Standard & Poor’s Multisector 80 Wholesale Index and from 1 June 2008 is the Morningstar Australia Fund Multisector Growth category average.

Past performance is not a reliable indicator of future performance. Source: Maple-Brown Abbott Ltd, Morningstar.

Our investment objective for the Trust is to outperform, over rolling four year periods, the average of similar balanced funds managed by other investment managers. This 'average' is represented by the Morningstar Australia Fund Multisector Growth category average ('Benchmark').

Maple-Brown Abbott Diversified Investment Trust - cumulative performance

The Benchmark start date is 1 January 1989. The Benchmark to 31 May 2008 is the Standard & Poor’s Multisector 80 Wholesale Index and from 1 June 2008 is the Morningstar Australia Fund Multisector Growth category average.

Asset sector performance summary (pre-tax returns)


Trust quarter return
%
Benchmark
quarter return
%
Trust
 rear
return
%
Benchmark
rear
 return
%
Trust
 3 rears return
% (p.a.)
Benchmark
3 years return
% (p.a.)
Trust
 5 years return
% (p.a.)
Benchmark
5 years return
% (p.a.)
Fixed interest0.2-0.12.64.52.95.42.84.6
REITs18.613.2-17.4-4.0-2.65.84.17.4
Australian equities#19.713.8-2.72.23.16.97.49.0
Overseas equities9.36.56.75.97.510.69.210.9
Alternative assets2.10.0-13.40.32.41.05.51.2
Liquidity0.00.00.50.41.41.31.71.5

# From 01/01/2013 the benchmark is the S&P/ASX 300 Index (Total Returns) excluding REIT stocks with weights grossed up. Prior to that, the benchmark was the S&P/ASX 300 Accumulation Index.

Asset allocation

The asset allocation of the portfolio is:

Asset allocationsLow
%
High
%
Neutral
%
Actual
31/12/2020*
%
Australian Equities25654036
Overseas Equities10302324
Liquidity025714
Fixed Interest10502013
REITs01557
Alternative Assets01056

N/AN/A100100

*Excluding the distribution payable.

During the quarter the overseas equities portfolio was partially hedged. At the end of the quarter the Trust’s hedged currency exposure was approximately 24.9% of its overseas equities, or approximately 6.0% of the total Trust.

Principal transactions

The main purchases and sales in the Portfolio during the quarter were as follows:

PurchasesSales
Commonwealth government bondsCommonwealth government bonds
South32Coca-Cola Amatil
BramblesRio Tinto
Scentre GroupJanus Henderson Group
Mirvac GroupSims

Commentary on selected portfolio holdings

  • The banks enjoyed a very good quarter with both the health and economic outlook in this country now appearing better than feared. Notwithstanding the rally in its share price, ANZ remains attractively priced at a little over book value – a level rarely seen. ANZ started its journey of simplification before its peers (exiting many Asian businesses and low returning corporate and institutional customers) and in our view is less distracted by the disposals and regulatory and compliance issues that are impacting some of the other banks. This provides ANZ with the opportunity to reduce costs once current projects are completed. Whilst near term multiples are no longer cheap we believe it is likely that ANZ will enjoy upgrades to both earnings and dividends in the coming year as bad debt expectations are wound back. ANZ remains a preferred bank holding.
  • Orica (ORI) is poised to enjoy a return to earnings growth as the explosives supply and demand balance in Australia swings back in favour of producers, and several management initiatives to boost earnings come to fruition. Over the next two years it is anticipated that continued growth in demand for ammonium nitrate will lead to an undersupply situation on the East Coast of Australia enabling favourable repricing of contracts back to import price parity or above. Operating leverage will also be boosted by management action to improve production reliability and efficiency, the new Burrup plant scaling up to capacity, and a major cost out program following the commissioning of a new SAP system. The recent acquisition of EXSA in South America will generate strong returns after the realisation of synergies and will also allow a broader rationalisation of the initiating system production network. Finally, encouraging pilot results of new technology trials in wireless detonators and enhanced blast data capture and analysis are expected to drive new earnings streams for the business. Recent share price weakness due to the shorter term impact of COVID-19 on mining volumes, as well as geopolitical concerns between Australia and China should work themselves out, leaving significant value to be realised over the longer term.
  • While the near-term pressures on the telecommunications sector remain, there are signs that the medium-term outlook for Telstra (TLS) is improving. In the near-term, competition in mobile and fixed data remains strong despite increased demands during the COVID-19 period. While competitors have made public comments suggesting that the current level of price competition is unsustainable, they are mostly reluctant to increase prices given the current economic pressures faced by their customers. This has meant that the nascent recovery in mobile pricing seen late in 2019 has been delayed. Encouragingly, comments toward the end of this year by Optus suggest that excessive discounting needs to come to an end. Despite these near-term pressures, we remain confident that TLS can maintain its dividend at or around the current 16cps. The near term capex requirements are reducing, progress on cost reduction has continued, and the asset sales have helped. Our recent conversations with management and board members suggest they are confident in the strength of the balance sheet and their ability to maintain a strong payout.
  • TLS also made some encouraging comments regarding their strategy in November. The company is increasingly eager to realise value from their infrastructure assets, and have sold a number of exchanges and facilities at favourable prices. Their recent comments gave further details about plans to realise value, particularly from their mobile tower assets. We continue to see long-term value in TLS, given the strength of their infrastructure, the continuing favourable performance of their brands, and the imminent recovery in the mobile business.

Analysis of portfolio

Fixed interest

Our modified duration is 3.94 years.

Australian equities

The value, balance sheet strength and growth characteristics of the Australian equity portfolio compared to the market overall at 31 December 2020 are as follows:


PortfolioMarket overall*
Price:Earnings ratio17.122.3
Price:Cash Flow ratio9.713.2
Price:Net Tangible Assets ratio1.82.9
Grossed up dividend yield (%)5.13.9
Balance sheet strength (Cash Flow/Total Liabilities)0.230.32
Growth in earnings per share (estimated 2021-2024, % p.a.)9.85.8

* Represents our quantitative data which includes 97.3% of the index weight of the stocks in the Benchmark, plus non-Benchmark stocks.

These figures shown above are based on estimates for the next twelve months which include assumptions that may not hold true. Actual outcomes may differ. Source: Maple-Brown Abbott Ltd, UBS, Macquarie.

Portfolio sector overweightings and underweightings vis-a-vis the S&P/ASX 300 Index (Total Returns) are as follows:

Overseas equities

The geographical weightings in the overseas equities portfolio compared to the MSCI AC World Index are as follows:

Derivatives

A Derivatives Risk Statement (DRS) in accordance with the parameters set out in Australian Prudential Regulation Authority derivatives guidelines has been issued. We confirm that, to the best of our knowledge, the terms of our DRS were complied with during the latest quarter.

There were no derivatives transactions during the quarter.  At the end of the quarter there was no exposure to derivatives.

Review and strategy

Economic review

The MSCI AC World Index rallied by 14.7% in USD terms during the quarter as positive news of vaccine developments gave hope to a turn in the tide against the pandemic and mitigation of economic downside risks. Major equity markets finished the year in positive territory with the US, Japan and China gaining 20.7%, 8.8% and 28.1% respectively in local currency terms during the calendar year. Remarkably the US S&P500 index finished the year at all-time highs while European markets were mixed as another wave of infections and lockdowns impacted sentiment.

The last twelve months have been a tumultuous time for both humanity and global economic conditions. The International Monetary Fund’s (IMF) world output projections for calendar year 2020 fell from a growth forecast of +3.4% at this time last year to a contraction of -4.9% by the middle of the year. At the peak of social distancing and lockdowns, manufacturing fell by almost 20% and the equivalent of around 400 million full-time jobs were lost. Since then sentiment has improved as economies re-opened and governments enacted unprecedented levels of monetary and fiscal stimulus, leading the IMF to revise growth to -4.4% in October. Fiscal support measures announced by governments in advanced economies add up to more than 9% of GDP with another 11% in the form of various liquidity support measures. Overall the IMF is expecting a fairly rapid recovery with global GDP in 2021 expected to be 0.6% above 2019 levels. However, this is largely driven by the stronger than expected recovery by China (the only country expected to grow in both 2020 and 2021), with most other countries still expected to be below 2019 levels.

While activity is recovering, most countries are still around 4% below pre-pandemic levels, China being the exception

Source: Bloomberg

US GDP rebounded by 33.4% as consumption and exports helped to stage a partial recovery from the halt in economic activity during the prior quarter. The unemployment rate continued to improve to 6.7%, which is 8% lower than the peak in April, but still 3.2% higher than pre-pandemic levels in February. The outlook for the new year looks encouraging following the passing of a $900 billion fiscal package in late December which included stimulus payments of up to $600 per person and an extension of unemployment benefits. The USD  continued to depreciate against other currencies unwinding earlier pandemic gains (driven by its status as a safe-haven currency) and coming under pressure from the Federal Reserve’s sizeable asset purchasing program. As expected, the Fed kept policy rates unchanged at 0-0.25% during the quarter.

Economic activity across Europe also improved with GDP increasing by 8.5% in Germany, 16% in the UK and 18.7% in France as household consumption and exports recovered from depressed levels. UK’s Brexit deal was finalised at the end of the quarter with no increase in tariffs or quotas for the time being, avoiding a potentially negative outcome for the UK. With newfound independence from the EU, the UK signed a new trade deal with Japan and is in discussions with the US, Australia and NZ for new trade terms. Following a resurgence of infection rates, the European Central Bank extended its asset purchasing program and increased the size of its ‘pandemic emergency purchase program’ by €500 billion. The Bank of England also expanded its asset purchase program in November, though kept monetary policy unchanged holding the current bank rate at just 0.1%.

China continued to generate strong GDP growth of 2.7% assisted by fiscal and monetary stimulus and buoyant exports of medical and IT equipment. Household consumption improved as the government sought to improve domestic demand as part of its ‘dual circulation’ strategy. Growth in Japan rebounded by 5.3% with rising consumption and exports helping the country out of recession. Household spending received a boost from nationwide cash handouts. Japanese exports to China were boosted by stockpiling of semiconductors and related machinery by China. The Indian economy also enjoyed a recovery with GDP growing by 21.9%, helped by stronger agriculture, construction and manufacturing sectors while the services sector still languished.

Similar to most other regions, economic activity in Australia improved with GDP growth of 3.3% boosted by an improvement in household consumption. Net exports were weaker with the outlook remaining mixed as geopolitical tensions and import restrictions impact exports of agricultural products and coal to China, though iron ore demand remains strong. Unemployment was lower although hours worked remain 4%  below pre-pandemic levels. Total state and federal government fiscal deficits are expected to be around 15% of GDP in the 2020/21 period. Overall, the base case from the Reserve Bank of Australia is for GDP to recover to pre-pandemic levels by the end of 2021. Due to the significant amount of spare labour capacity the Reserve Bank of Australia noted fiscal and monetary policy support would be required for a considerable period and signalled for the cash rate to remain at current low levels of 0.1% for at least 3 years.

Fixed interest

Australian bonds generated a modestly negative return for the three months to 31 December, with the Bloomberg AusBond Composite Bond Index falling 0.1%. The performance reflected a rise in yields, with the 10-year Commonwealth Government bond (CGB) beginning the period with a yield of 0.79% and finishing at 0.97%.

As expected, the RBA cut the official cash rate from 0.25% to 0.10% (the effective lower bound) at its 3 November meeting. In addition to the cut, the Bank also lowered the target yield on both the 3-year CGB and the Term Funding Facility (which provides banks with access to cheap funding) to 0.10%. Perhaps more of a surprise was the size of the announced quantitative easing (QE) program, under which the RBA will (indirectly) purchase $100b of 5-10 year maturity CGBs (80%) and semi government bonds (20%) over the following 6-months. Putting this into perspective, $100b is ~5% of GDP and once the QE program is complete it will own ~15% of bonds on issue.

 Short end yields have fallen in line with the RBA’s actions. However, optimism around the results of the US election, the announcement of successful COVID-19 vaccines, and prospect of higher inflation (discussed below) have seen long-term yields spike globally, with the 10-year Australian Government yield moving through the 1% level:

Australian 10-year Government Bond Yield

Source: IRESS

Commonwealth government inflation linked bonds, which are not part of the benchmark but a significant portion of the portfolio, outperformed all bond subsectors during the quarter with a return of 1.38%. Inflation expectations have been steadily rising as fiscal stimulus reinforces the massive monetary stimulus that has already been (and continues to be) deployed by central banks around the world. In the US break-even inflation (BEI) spreads (a proxy for market inflation expectations) pushed through 2% in early January, with news of a Democrat-controlled senate further adding to inflationary expectations. In Australia BEI spreads have also rebounded sharply from the March lows to the highest level in over two years:

Australian 10-year Break-Even Inflation (BEI) Spread

Source: Bloomberg

Rising long-bond yields have resulted in a sharp steepening of the yield curve, driving the term premium on the 10-year CGB vs the 3-year CGB to 0.87%, well in excess of both the 5-year (0.59%) and 10-year (0.66%) averages.  Given this unusually high disparity and the low likelihood of short-end rates rising significantly in the near term due to central bank intervention, we took the opportunity to increase the portfolio exposure to longer-dated bonds during the quarter. While this has increased the portfolio duration (to around 4 years), we continue to run a significant duration discount to the benchmark (6.1 years), consistent with our view that in the medium-longer term yields will be significantly higher than current levels.

Australian equities

Dad – are we there yet?

During this holiday season many a parent will hear this question posed by a bored and frustrated child (although given the border closures perhaps a few less than would otherwise have been the case!).  In our September quarterly, we posed the question (admittedly not for the first time) as to whether we had arrived at the point in time when ’value’ was going to awake from its long slumber.  Certainly, there were signs that we might be approaching that point with the price earnings (PE) multiple spread between the most expensive and cheapest industrial stocks running at ~4 standard deviations.  In addition, we had seen corporate activity beginning to unlock value in some of the most unloved stocks – clearly some market participants had begun to see the opportunities on offer. 

As we look back over the past quarter there has been a significant change in sentiment towards the more value orientated segment of the market.  Is this indeed the long-awaited turn that we were questioning last quarter?  It might be.  When the turn came it was “violent” and in November our Australian Equities Trust had its best single day of outperformance relative to the benchmark (also known as alpha) in ~20 years whilst the month of November was amongst our best 5 alpha months in over ~30 years.  In a significantly positive quarter for value, it is however important to note that:

  • much of the performance uplift came from a change in sentiment towards out of favour value stocks, driven by vaccine approvals which have lifted stocks that are expected to benefit from economies opening up.   Thus, over the quarter energy, banks (less bad debt fears), retail related and commodity names were strong (understandably there was then some weakness in these stocks in December as a third COVID-19 wave impacted many countries)
  • we saw corporate activity further recognising opportunities in undervalued names such as Janus Henderson, Link Administration and Coca-Cola – all represented in our portfolios.  Other stocks such as AMP also saw corporate interest.
  • performance benefitted significantly from not holding the highly priced growth stocks.  The critical point here though is that in general these stocks did not experience significant price retreats – they merely held their prices in a market that advanced strongly (~14%).  Thus, over the quarter highflying stocks such as Cochlear, CSL, Goodman Group and Transurban underperformed but saw little if any decline in their share prices.  They sustained the same high valuations that the market had previously attributed to them.  Where there was weakness, it was often attributable to an ongoing strengthening of the AUD as many of the growth stocks have significant offshore exposure.

The chart below highlights how significant this valuation premium is – and that there has been no change.
High PE stocks continue to trade at extraordinary premiums

High PE firms represent the top 40 most expensive stocks in the ASX 200 ex-REITs. Source: Goldman Sachs, data to December 2020.

Last quarter we expressed the view that focusing on the exact timing of a turn in favour of value was to miss the heart of the issue; which is the very significant upside opportunity when value does turn.  It has been greatly encouraging this quarter to see the sharp recovery that value has enjoyed – notwithstanding there being little or no correction in the extreme valuations attributed to the most popular stocks.  Thus, whilst we do think that from a timing perspective this is the turn for value that we have been waiting for – our focus is rather on the very significant relative performance upside that we believe awaits the value style.  Much of that upside will be derived from a de-rating of the premium rated stocks – which as the chart above indicates are trading at 3-4 standard deviations above where they have traded historically.  This valuation over-stretch is generally justified on the basis of the exceptionally low prevailing rates of interest – whilst taking no account of the related economic fundamentals that have brought rates to these levels.  In addition, one of the most consensus investment views currently is that inflation will not put upside pressure on interest rates in the medium term despite the use of extraordinary monetary and fiscal easing.  If nothing else the strength in commodity prices should at least raise a question or two and this consensus view could potentially be calamitous at the first sign of inflation raising its head.  The stated position of key central banks to allow inflation to rise above target levels should reinforce concerns.

It follows that our view is that much of the current enthusiasm for highly sought after growth stocks is nothing more than rampant speculation brought about by loose monetary policy.  This seems most evident in the US with Tesla Inc a great example; a capitalisation of ~US$600 billion on the back of a share price that has increased more than 6-fold this year, with a paltry forecast EBIT of ~US$2 billion for CY20.  Little wonder electric car programmes are being announced by a number of players.  Whilst not quite Tesla, we have our share of valuation extremes in our market with Afterpay having a market capitalisation of ~$33 billion and well into the top 20 largest stocks.  Xero’s share price has also enjoyed an enormous run and now sits just outside the top 20 with a market capitalisation of ~$20 billion.  Neither company is profitable as they invest for the future but this process makes any attempt at determining a sensible valuation extremely challenging – noting that Afterpay is now capitalised within 10% of the capitalisation of Telstra whilst Xero is within similar proximity to the capitalisation of Coles Group. 

Lest there be any doubt that valuations have stretched into the incomprehensible it is worth noting the PE multiples (for those that have earnings!) for some of the most sought after Tech companies in Australia: 

Australian Tech stock valuations beggar belief
Similar valuation trends globally

Companies included in custom index are Afterpay, Altium, Carsales.com, Domain, NextDC, REA Group, Seek Limited, Technology One, WiseTech Global and Xero. Source: FactSet, data to December 2020.

It might appear that value managers expect a Steven Bradbury style victory – to be the last standing when the overpriced, momentum names correct!  Whilst not particularly appealing as a prospect, that is at least partly the case given the extreme valuations highlighted above.  That is however by no means to say that there aren’t stocks/sectors where we see upside relative to the market.  In a market where many stocks are incredibly expensive, resource stocks such as BHP and Rio Tinto are trading at well below historic multiples (admittedly iron ore is trading well above sustainable levels and reversion will see earnings impacted) whilst in our view many other resource producers offer significant upside with commodities trading below sustainable levels.  Energy stocks offer significant leverage to any improvement in the oil price.  We also see banks as a sector with upside as earnings seem set to benefit from a write-back of recent COVID-related provisions that are unlikely to be needed (at least not in full).  In addition, banks trade at a significant discount to where they usually do relative to the average industrial company and we would expect at least some normalisation in this relationship.

Banks trade at a 40% discount to industrial stocks
Significant discount to historic averages

Source: Goldman Sachs, data to December 2020

As we enter into a very uncertain 2021 we remain utterly convinced that better times for value investors lie ahead.  The last quarter of 2020 was a small down payment on the value recovery but the chart below highlights that only a small measure of value’s underperformance has been recaptured.

A great quarter for ‘value’
But only a small blip in the recovery process

Source: Bloomberg, data to December 2020.

Further recapture may lie ahead in the first quarter (“yes we have arrived”) or it may lie further into the future – but undoubtedly the journey will be worth it!

Overseas equities

In an eventful year, it proved a particularly eventful quarter with a US Presidential election, multiple COVID-19 vaccines announced and a last-minute Brexit trade deal. Positive risk sentiment drove international equities higher, finishing the year strongly with the final quarter of 2020 with the MSCI AC World index (benchmark) up almost 15% is USD terms. Currency strength was a feature over the period with AUD denominated returns approximately half this number, though our hedging program served to offset some of this impact. In the context of the largest downturn since the Great Depression, the benchmark rose around 6% in AUD terms in 2020, representing a remarkable turnaround from when markets bottomed in March.

Regional performance was generally supportive of allocations over the quarter, with the Asia ex-Japan, Europe and Japan outperforming North America. US dollar weakness was also a feature over the quarter as health professionals continued to battle rising COVID-19 infections and lawmakers debated another round of stimulus.

The most significant event during the quarter was the rotation seen in markets. The outperformance of growth-oriented companies over value has been a theme in markets for several years. In 2020 this dynamic intensified for much of the year as investors crowded into a narrow subset of mega-cap growth companies which were driving markets higher while the majority of companies languished. One has to go back to the height of the last technology boom to find a period where Value underperformed Growth by such a large margin.

MSCI AC World Growth less Value return, 1998-2020

Source: FactSet

The advent of a COVID -19 vaccine saw this narrative change dramatically. Many of the previously shunned cheaper and cyclical parts of the market which were pricing in a bleak outlook found renewed interest from the wider investment community. Despite the rotation seen during the period, we believe it remains early in the process, as evidenced by relative valuations between the two cohorts still at extreme levels. With the pace of the global economic recovery quickening and valuation dispersions still high, we remain very positive on the outlook for a value-oriented strategy.

REITs

The S&P/ASX 300 A-REIT Index delivered a total return of 13.2% for the quarter ending 31 December 2020. Quarterly updates in October were encouraging, however much of the sector performance was driven by the news of successful COVID-19 vaccine trials in November.

In response to the positive vaccine news, the A-REIT sector posted its 3rd best monthly return in 20 years, led by the Retail REITs. Unibail-Rodamco-Westfield (URW) and Scentre Group (SCG), two stocks that we own, bounced +73% and +33%, respectively, during the month of November. We used this opportunity to trim our position in URW and continue to expect SCG to be a beneficiary of improved retail sales in Australia and drive rent collection rates above peers.

Strength in the Residential sector was fuelled by government stimulus which contributed to a spike in detached home sales. Stockland (SGP), another stock that we own, booked its highest quarterly residential net deposits in three years. SGP had their highest quarterly sales in QLD in a decade and the highest in 5 years in WA, stimulated by the Federal Government Builders Boost along with other state-based incentives.

The average CBD Office occupancy rate in Australia was 59% in October, up 12% over the previous 2 months. Physical office utilisation rates were improving during the quarter, however as the second wave of COVID-19 infections started to sweep over NSW in December, we remain in a wait and see mode. Our portfolio is exposed to the more insulated Office markets of WA and QLD through GDI Property Group (GDI) and we also have some exposure to the East Coast Office markets through the diversified REITs Mirvac Group (MGR) and GPT Group (GPT).

There was more activity than usual in the small cap REITs space, with $1.1bn of institutional capital raised during the quarter. We participated in two equity raisings – Hotel Property Investments (HPI) in November and Abacus Property Group (ABP) in December. HPI raised $40mn to help fund the acquisition of three new assets and ABP undertook a $402mn equity raising to repay debt and fund its acquisition pipeline.

While there is still some concern around the outlook for valuations, we continue to see value in the diversified REITs, especially as rent collection rates improve and provide more certainty for earnings going forward. Against a backdrop of low interest rates, the sector yield spread over bonds is attractive (~3% vs long term average of ~2%) and should support the A-REIT sector in our view.

Historical A-REIT yield spread over AU 10 year government bonds (WAV basis)

Source: Company data, Credit Suisse estimates, IBES, RBA data

Given the attractive yield spread, improving operating metrics, and increasing rent collection rates, we moved to an overweight position relative to our neutral benchmark.

Alternative assets

Global Listed Infrastructure (GLI)

At 31 December the Fund held 32 high quality infrastructure securities across 12 countries.

The largest individual country exposure remains the United States of America at 50%, which had increased over the quarter. The United Kingdom (11%) was our next largest, followed by France (9%), which had both decreased over the quarter.

From a sector perspective, our largest holdings continue to be in regulated assets (55%), which decreased during the quarter as we had trimmed some regulated utilities that had recently outperformed. Our holdings of contracted assets were unchanged at 20%, whilst our transportation concessions (such as airport and toll-road assets) increased to 21%.

The investment team are continually looking on a bottom-up basis for further attractive investment opportunities to add to the portfolio. This we expect will result in a fairly low level of portfolio turnover, as individual stocks fluctuate between being over-sold or over-bought.

Responsible investment

Maple-Brown Abbott has a well-embedded integration and engagement responsible investment strategy. Consistent with our long-term value investment philosophy, our investment horizon enables us to take a long-term view on ESG risks and our often-material shareholdings engenders stable, influential relationships with the Board and management of our portfolio companies which positions us to influence change. The benefit of company engagement is well recognised – whilst it may take time to yield change, it is more valuable to have a seat at the negotiating table than it is to simply divest, where the next investor may not uphold the same responsible investment agenda. In this report we discuss several engagement initiatives we have undertaken during the quarter.

Dominating our discussions throughout the year was our portfolio companies’ response to the COVID-19 crisis. As the pandemic evolved we met regularly with the boards and management of impacted companies, and this quarter we continued the discussion with Metcash (MTS), Link Market Services (LNK), The Star Entertainment Group (SGR) and an AREIT held by our multi-asset portfolios. Our key engagement objective was to assess the governance and management response of companies, with a view to understanding where risks may lie into the future. On the whole we were impressed with the governance and response of the companies we met with, and in particular the common focus on the health and wellbeing of their employees and customers.

We also pursued our engagement focus on modern slavery and labour risk in the supply chain with the companies we met with, as mandatory reporting on modern slavery comes into effect and companies review their governance frameworks. Companies with large and complex supply chains such as MTS, and multi-national operations such as LNK, are particularly exposed to this risk. We were pleased to see progress in mapping and assessing supply chains, the utilisation of collaborative platforms to share responsible sourcing data, staff training and integration into governance structures together form the foundation of the companies’ response.

Continuing our engagement theme on plastics and waste, our engagement with MTS this quarter was focussed on understanding what internal programs have been implemented to support their public commitments on reducing the use of soft plastics. In 2019 the company stated an intent to make all packaging recyclable, compostable or reusable by 2025 and MTS is tracking to this target with an initial focus across their food network. The key challenge for the company is balancing the simultaneous goals of affordable pricing, reduced food waste and sustainable packaging solutions, and we were pleased to see progress in this space.

Over recent years there has been a shift in focus on corporate conduct that has seen an increased premium put on organisations’ social license. As an operator of casinos, SGR’s response to responsible gaming is critical in this regard.  In meeting with the company we were keen to understand what programmes are in place to identify and assist problem gamblers, and how SGR works with community, industry and regulators. We were satisfied with the company’s response to the issues raised, which includes a number of customer-focussed programs, dedicated Responsible Gambling Customer Liaison Officers, mandatory staff training, and regular and detailed board reporting. SGR is also trialling technology solutions for exclusions and will roll this out more broadly over time.

[1] GDP data is based on September quarter-on-quarter growth rates.
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