Performance commentary

The Trust returned 0.1% for the quarter, reflecting good performance from international equities and property and somewhat soft performance across most other asset classes.

The Australian equity market had a steady quarter, with the S&P/ASX 300 Index (Total Returns) excluding property falling 0.6%.  Australia lagged global markets, which generally performed well.  Local economic data was weak, with the June quarter GDP release showing a record 7.0% fall.  The August company reporting season was another key focus and delivered earnings around 20% lower than the prior year, albeit somewhat better than expected.  The Australian Government 10-year bond yield fell 8 bps to close at 0.79%.  Commodity prices were generally improved, including for iron ore, base metals and gold.  The AUD also strengthened against the USD.  Looking at performance by sector, Information Technology (+13%) was strongest, followed by Consumer Discretionary (+10%) and Materials (+4%).  Energy (-13%) was weakest, followed by Utilities (-8%) and Financials (-6%).

The Trust’s Australian equities holdings returned -1.9%, below the benchmark.  The portfolio’s energy holdings, including overweight positions in Origin Energy (-25%), Woodside Petroleum (-17%) and Ampol (-17%), was the key driver of underperformance.  As noted above, Energy was the worst performing sector for the quarter, which was somewhat puzzling given a steady spot oil price and some improvement in oil futures.  We continue to view current oil prices as unsustainably low and hence see significant value amongst our energy holdings.  Very strong performance from hyper-PE technology stocks, to which we have no exposure, was the other main detractor from performance (costing approximately 40 bps).  The key names were Afterpay Touch Group (+31%), Xero (+12%) and NextDC (+24%).  Needless to say, we continue to view these stocks as extremely expensive.  The three stocks mentioned have a combined market capitalisation of more than $40bn and only one of them made a profit last year – Xero with $3m.  Many of our out-of-favour value holdings performed well over the quarter.  Our overweight position in Boral (+20%) was a key positive contributor.  Whilst delivering a weak financial result in August, the market reacted positively to some early strategic commentary from the new CEO and an equity raising is looking increasingly unlikely.  The company subsequently announced major changes to the Board, giving further evidence of support for an aggressive turnaround.  Our overweight position in Nine Entertainment Group (+28%) also performed very well.  Whilst current earnings are being impacted by a weak advertising market and structural issues in traditional TV, its digital platforms are growing quickly, cost discipline is strong and it will eventually benefit from a cyclical advertising recovery.

International equities had strong quarter, with the MSCI AC World Index returning 8.1% in USD-terms.  Of the major regions, Asia ex-Japan (+11%) performed best, followed by the USA (+10%), Japan (+7%) and Europe (+4%).  The stronger AUD reduced the return of the AUD-denominated MSCI AC World Index benchmark to 3.9%.  The Trust’s international equities holdings returned 4.1%, outperforming the benchmark.

A-REIT’s performed very well, with the S&P/ASX300 A-REIT Index (Total Returns) rising 7.4%.  The Trust’s
A-REIT holdings returned 1.6%, underperforming the benchmark due to our higher exposure to retail REITs.

Fixed interest was sound, with the Bloomberg Australian Composite Bond Index rising 1.0%.  The Trust’s fixed interest holdings returned 0.7%, below the benchmark.

The Trust’s exposure to alternative assets, through its holding in the MBA Global Listed Infrastructure Fund, returned -3.4% for the quarter.  This was below the 0.1% return of its benchmark, the RBA cash rate, with underperformance reflecting the material appreciation of the AUD.

Downloads
Quarterly update
Fund fact sheet
Monthly commentary

The rates of return and movement in the benchmark as at 30 September 2020 are as follows:


Trust
 (after fees)*
%
Benchmark**
%
Since inception 31/05/1988 p.a.8.5N/A
15 years p.a.5.14.7
10 years p.a.5.96.4
5 years p.a.3.85.3
4 years p.a.3.25.0
3 years p.a.1.74.3
1 year-7.5-3.2
3 months0.11.7

*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 as at 30 September 2020.

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

Asset sector performance summary (pre-tax returns)


Trust quarter return
%
Benchmark
quarter return
%
Trust
 year
 return
%
Benchmark
year
 return
%
Trust
 3 years return
% p.a.
Benchmark
3 years return
% p.a.
Trust
 5 years return
% p.a.
Benchmark
5 years return
% p.a.
Australian equities#-1.9-0.6-19.4-9.5-0.35.03.97.5
Overseas equities4.13.94.83.96.510.48.09.9
Fixed interest0.71.02.43.23.06.02.84.5
Alternative assets-3.40.1-13.90.51.51.15.11.3
REITs1.67.4-30.2-15.8-4.94.12.06.0
Liquidity0.00.00.60.61.51.41.81.6

# 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
30/09/2020*
%
Australian equities25654034
Overseas equities10302323
Fixed interest10502014
Alternative assets01056
REITs01556
Liquidity025716

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 25.1% of its overseas equities, or approximately 6.2% of the total Trust.

Principal transactions

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

PurchasesSales
MetcashMBA International Equity Trust
Scentre GroupCommonwealth government bonds
South32Boral
BramblesAGL Energy
Charter Hall Social Infrastructure REITBHP Billiton

Commentary on selected portfolio holdings

  • BHP Billiton (BHP) continues to benefit from its diversified position in large, low cost mining assets. Group EBITDA was down just 5% for the year despite the impact of COVID-19 restrictions on operations, driving an impressive underlying return on capital employed of 17%. Whilst copper and oil prices were impacted by a weaker post-COVID demand, iron ore prices continued to recover from the cyclical lows seen in 2015. Steel demand in China has been boosted by stimulus efforts focusing on infrastructure and housing construction, supporting iron ore. This iron ore price strength saw a continuation of BHP’s strong cash flows, which resulted in further strengthening of the balance sheet and a pleasing dividend. BHP’s net debt is now just $12bn, down from more than $25bn in 2016, bolstered by around $8bn in free cash flow generated during the financial year. While there are tentative signs of recovery in the prices of copper, nickel and coking coal, the outlook remains uncertain. Nonetheless, BHP offers a strong balance sheet and diversified commodity position with a ~8% free cash flow yield and a discount to the market price earnings multiple, making it a preferred name in the commodity space.
  • Nine Entertainment Co (NEC) is a leading Australian media company offering upside through the cyclical recovery of the advertising market and structural improvements through the transformation of traditional media platforms into quality digital businesses. The management team is well respected and has acted swiftly to manage the cost base inline with an advertising downturn which was exacerbated by COVID-19. Similar to global peers, NEC is well placed to enjoy a revival of the newspaper business through subscription revenue growth and regulatory reform offering meaningful upside to digital advertising revenues. NEC is also set to regain share lost to online classifieds as Domain Holdings Australia Limited (in which NEC is a majority owner) tackles market leader REA Group Limited. While free-to-air television remains challenged, NEC has pivoted to create successful digital video businesses through its 9Now and Stan video platforms, which have been a significant beneficiary of COVID-19 related directives forcing people to spend more time at home. With roughly 38% of revenues derived from strongly growing digital platforms and an advertising market nearing the end of the cyclical downturn, NEC is a highly attractive investment opportunity supported by a strong sum-of-the parts valuation.
  • We began adding Sims Metal Management (SGM) to the portfolio during the quarter. The scrap steel industry was significantly impacted by COVID-19 at the height of the pandemic. Scrap collection in the north-eastern US states slowed dramatically as those states were locked down. Major scrap customers in Europe saw reduced demand as their economies slowed. By April, the volume of scrap processed by SGM was around 50% of normal level, and ferrous scrap prices were trading at just above $US200/t. This saw SGM report a loss for FY20, putting significant downward pressure on the share price. However, SGM’s net cash balance sheet provides a buffer for these near-term pressures, and gives us confidence that the company can endure an extended period of weak conditions. SGM has a globally diversified position in scrap collection, processing and logistics facilities, making it one of the dominant players in the sector. Scrap prices have since rallied back to around $US290/t, positioning the company for a strong recovery as volumes also rebound. In the longer term, SGM provides exposure to the increasing role scrap metal recycling will play in the goal to reduce carbon emissions in the steelmaking sector.

Analysis of portfolio

Fixed interest

Our modified duration is 2.68 years.

Australian equities

The value, balance sheet strength and growth characteristics of the Australian equity portfolio compared to the market overall at 30 September 2020 are as follows:


PortfolioMarket overall*
Price:Earnings ratio14.819.5
Price:Cash Flow ratio8.411.7
Price:Net Tangible Assets ratio1.62.6
Grossed up dividend yield (%)6.04.5
Balance sheet strength (cash flow/total liabilities)0.220.35
Growth in earnings per share (estimated 2021-2024, % p.a.)11.86.9

* Represents our quantitative data which includes 96.7% 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 internal estimates, Sentieo, and Bloomberg.

The sector weightings (%) in the Australian equities portfolio are as follows:

Overseas equities

The geographical weightings in the overseas equities portfolio 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, led by the US, increased by 8.1% in USD terms during the quarter recovering to pre-pandemic levels as many countries began to unwind social distancing measures. Investors factored in expectations of a prolonged period of low interest rates and a rebound in corporate profitability from the sharp declines experienced during the height of the pandemic. India, China, US and Germany were among the better performing markets increasing by 15.0%, 12.5%, 9.5% and 8.3% in USD respectively.

The International Monetary Fund (IMF) did not provide an update to economic forecasts during the quarter with the next release being due in October. Some market commentators anticipate positive revisions to the last forecast made in June, which expected 2020 economic output to contract by 4.9%. While recent economic data has proven better than originally feared, forecasts will continue to be heavily influenced by the trajectory of COVID-19 infections and resulting government responses.

The US printed the biggest quarterly fall in GDP[1] on record at 31.7% as the country lost control of the virus leading to a temporary shut down of the economy. The unemployment rate improved to 8.4% in August from the highs experienced in April of 14.7%, as economic activity gradually resumed. Unlike many other countries, the US enacted wage support through unemployment benefits rather than wage subsidies which resulted in the data showing higher unemployment rather than fewer hours worked. Unemployment benefits were set at the level of average full-time earnings until July, which meant many workers were temporarily financially better off being unemployed. Having reviewed its monetary policy framework, the Federal Reserve announced it would pursue a flexible average inflation target, increasing its emphasis on achieving maximum employment.

Prolonged below target inflation has prompted central banks to review policies, allowing flexibility for periods of higher inflation to compensate for past low inflation

Europe similarly reported dramatic falls in GDP with declines of 9.7% in Germany, 13.8% in France and 19.8% in the UK. European governments have been pro-active in supporting the recovery phase with the EU announcing additional fiscal stimulus of around 5% of GDP (Next Generation EU Recovery and Resilience Facility), funded through the issue of EU bonds. In addition, the German government announced a temporary 3% broad-based reduction in consumption tax, while the UK introduced temporary VAT reductions of 15% targeted at the hardest hit hospitality, accommodation and attraction industries. Similar to the Federal Reserve, the European Central Bank is currently reviewing its inflation targeting policy objective, amidst a wide debate around central banks explicitly making up for inflation falling below target for prolonged periods of time. Meanwhile the Bank of England highlighted they were considering the possibility of negative policy rates.

Chinese GDP rebounded by 11.5% as the country appeared to successfully contain the spread of COVID-19. Significant government stimulus has been successful in stimulating fixed asset investment and industrial production, which have now returned to pre-COVID levels. Consumption growth lagged as the level of income transfer to households by the government has been modest. Japanese GDP declined by 7.9% as consumption was significantly impacted by the declaration of a state of emergency in April, while exports were impacted by shutdowns of major trading partners. GDP in India declined 25.2% as strict lockdowns led to sharp falls in production and consumption. Ratings agencies downgraded India’s sovereign rating to the lowest investment grade rating, potentially limiting the amount of additional fiscal stimulus.

Australian GDP fell 7.0% as household consumption was heavily impacted by social distancing measures. Since then, consumption has improved due to substantial fiscal stimulus, reduced outbound travel and early access to superannuation. Meanwhile, re-introduced lockdowns in Victoria are expected to impact September quarter GDP by 2%. Unemployment is expected to increase from the current 6.8% level to peak at around 10% later this year as wage subsidies (which are estimated to have supported more than a quarter of all workers) are gradually wound back. The Australian dollar continued to appreciate during the quarter to levels consistent with expectations given the terms of trade and interest rate differentials. During the quarter the Reserve Bank of Australia kept policy rates on hold and reaffirmed the prior package of stimulus measures, including an extension of the term funding facility. The RBA also reaffirmed its commitment to maintain the cash rate at or below current levels until it is confident inflation will be sustainably maintained within the target 2-3% range, on-average over time.

Fixed interest

Australian bonds delivered a solid return for the quarter ended 30 September 2020, with the Bloomberg Ausbond Composite Bond Index rising 1.0%. The performance reflected a decline in yields, with the 10-year Commonwealth Government bond (CGB) yield beginning the period at 0.87% and finishing at 0.79%.

After briefly rising to over 1% in late August, yields progressively declined during September as bonds rallied amid the general ‘risk-off’ sentiment that drove global equity markets lower. Domestically the Federal Government’s financing arm, the Australian Office of Financial Management (AOFM), broke the record for the largest ever bond issue for the fourth time this year with its $25b September 2026 deal. By the end of the quarter the AOFM had achieved $134.5b of issuance since 1 July, well over half way to its planned $240b debt raising target for the fiscal year.

Despite speculation that the RBA might ease monetary policy by cutting the Official Cash Rate (OCR) and lowering the target for the yield on 3‑year CGBs, the Board left monetary policy unchanged during the quarter. The OCR target remains 0.25% and the target yield on 3‑year CGBs also sits at 0.25%. Rounding out the trifecta of key monetary policy tools, the Bank left the rate on the expanded Term Funding Facility – which provides cheap 3-year funding to the banking system primarily to encourage lending to small business – unchanged at 0.25%.

Monetary policy remains highly accommodative

Source: IRESS

The economic outlook remains highly uncertain and as such both fiscal and monetary policy is likely to remain accommodative in the near term. However with yields up to a 3-year maturity now below 0.15%, and below 1.0% across the remainder of the curve, further upside from fixed interest capital appreciation is limited, while at the same time the real yield on offer is negative! We therefore see the risk/return trade-off within the asset class (and long duration strategies in particular) as highly unattractive even if current conditions persist. Should the global outlook actually begin to improve – perhaps through the advent of a safe and effective COVID-19 vaccine – fixed interest returns could be decidedly worse. The duration of the Bloomberg Ausbond Composite Bond index is now >6 years, which implies that all else equal every 1% shift higher in yields will drive a 6% decline in the capital value of a duration-matched fixed interest holding. We consequently retain an underweight allocation and significant duration discount in our fixed interest portfolios.

Australian equities

We have written extensively regarding the absence of any change in market leadership during the recent bear market and subsequent recovery.  Last quarter we highlighted that, not only had there been no change in market leadership – the market had in fact seen a further significant expansion of the valuation differential between the most expensive and cheapest stocks (as reflected in price earnings multiples).  This has been most clearly seen in stocks that have any element of Tech aura but healthcare and other select industrials have seen also significant “premiumisation”.  During August we witnessed one of the most interesting reporting seasons in decades as a fairly normal half year to December was in most instances decimated by a poor second half reflecting the impact of COVID-19 and associated lock-downs and disruptions (with full year market earnings declining ~20%).  Given the record dispersion in valuations between stocks, the assumption would naturally be that the premium rated stocks enjoyed the best earnings outcomes and the cheapest the worst.  This was not the case as illustrated in the chart below.

Tech stocks trading on average >50 times price earnings multiples
Yet EPS downgrades far worse than most other sectors

As can be observed, the market has seen some of the largest downgrades in the Tech sector which on average trades on price earnings (PE) multiples of more than 50 times.  The other market sector to really struggle was Industrials (the GICS sector rather than the industrial market as a whole) which includes many premium rated stocks including Transurban, Sydney Airport and Qube Holdings.  Healthcare fared somewhat better than the market although the sector was also significantly impacted.  Whilst recognising that COVID-19 has brought about an exceptional set of circumstances it seems to beggar belief that many of the most expensive stocks have the largest profit downgrades but have generally sailed through from a stock price perspective.  The value in these premium stocks lies largely in the outer forecast years but analysts seem to have less ability to forecast even the shorter term than for many other stocks, giving us little confidence as to their ability to forecast the longer dated earnings necessary to justify current (excessive) valuations.

It has been of some encouragement during this quarter to see a selection of the value names performing well, often despite shorter term earnings travails.  Corporate activity has begun to play a role in some instances too (e.g. Boral and Healius).  Notwithstanding this, it has again been a challenging quarter for those investors with a strong valuation focus as valuation spreads for industrial stocks have remained exceptionally wide.

Exponential increase in PE spreads multiplies risks
Premium stock multiples inflate despite earnings downgrades

The PE multiple spread between the most highly rated quintile of industrial stocks and the cheapest quintile is the key pillar in the underperformance of value, although it is not the only one.  The chart highlights that the valuation spread has recently traded in a three to four standard deviation range from the twenty year average.  Most investment professionals acknowledge this extreme divergence between growth and value but have tired of calling the end of an extraordinary cycle for growth investors after having had a few too many attempts already!  Taking a “neutral” view on value at the time of a one standard event might be sensible but when it is a three to four standard deviation event this seems unduly cautious!

Given the current extremes might this be the turning point for value?  Of course no one knows but if it is not the turning point it is likely to be exceptionally close.  It is not only the extreme valuation differentials that give us this confidence but also what we observe with the movement of mandates in the market.  It may be interesting to debate how far PE multiples might expand further under some circumstances or how Tech can continue to disrupt – but for investors perhaps this debate is of limited value.  The money has largely moved already!  It is not only growth portfolios that have benefitted from these trends, it is across the spectrum – growth, index, style neutral and ESG portfolios are often well represented in the same names given the index weighting and popularity of these stocks.  Portfolio correlations are likely to prove to be exceptionally high when the cycle turns.  In gambling terminology, “all the money is on red”.  As George Soros once noted; “profits are achieved by discounting the obvious and placing capital in the direction of the unexpected”.  Current investor positioning could not be further from this principle.

With the extreme underperformance of value it is understandable that there is so much focus on the question of when the turn might come.  However, we think there is a far more important question that investors should be focused on and which receives almost no attention.  And that is this – what is the potential size of the opportunity when value turns?  If this opportunity is outsized then the debate around whether a three or four standard deviation PE multiple spread provides sufficient encouragement that a turn might be within immediate sight, pales into insignificance.  There are a number of ways one might seek to address the size of the opportunity;

  • A review of MBA’s rolling 3 year performance (alpha) highlights that the deficit is currently as large as it has ever been (this is a fairly similar picture across our value peer group).  That is not to say that the deficit cannot expand further but there is strong encouragement that the differing market conditions that have created these deficits over time, do reverse.  Given that the 2015 deficit only had a short-lived recovery during 2016 before continuing on, we are of the view that the recovery is likely to be at least as meaningful as we saw post the GFC and then also during 2014. 

Performance relative to benchmark suggests significant upside

  • The forecast alpha of our portfolio (over 4 years) is the highest on record and indicative of numbers well in advance of those suggested by the chart above.  The forecast alpha assumes many of the valuation excesses currently reflected in the market unwind. Clearly not everything is going to occur as forecast; nor will the changes occur simultaneously. Nevertheless, the potential upside for value fully reflects the current extreme dislocation.
  • The outperformance of growth relative to value has been extraordinary (US data highlights that this is both the deepest and longest drawdown for value in ~60 years – and by a huge measure[2]) and a comparison of the performance of the two styles is very useful in informing the potential upside for value.  Over the past decade growth has outperformed value in approximately two thirds of monthly periods.  Looking at the S&P ASX 200 style indices shows that over the 3 years to September growth has outperformed value by 14.8% p.a. and over 10 years by 5.2% p.a.  MBA also creates our own style indices as a check using averages of suitable managers and we derive similar numbers.  These numbers highlight an exceptional period for growth which is reflected in the +3 SD difference between the PE multiples of the highest rated stocks and the lowest rated stocks.  This is seen in the chart below where we have overlaid the S&P ASX 200 Growth Index divided by the Value Index.  As can be observed, the unprecedented expansion in the PE spread is replicated in the “purple patch” for growth and a very significant retracing of both series outcomes seems more than a reasonable expectation.

Exponential increase in PE spreads multiplies risks
Extraordinary outperformance of growth style driven by expansion of PE spread

Most investors acknowledge that the value style is deeply out of favour and has very significant upside when conditions improve.  However, given the extended “hibernation” that value has been in, investors are fearful of calling the turn in advance of it happening.  Inevitably the question is, what is the catalyst for a turn?  History teaches that predicting catalysts is usually fraught with difficulty.  Do we know today what precise catalyst turned the Tech Bubble or brought on the GFC?  In the end excess valuation folded in on itself as it always does.  Are we at that point now?  When Apple is capitalised at more than the whole of the FTSE 100 or Tesla (having never really turned a profit) is briefly capitalised at nearly US$500bn after having traded in a price range of $44-$502 over the past year – we think we might be close!  However, that is not really the point – value has in many ways become a niche strategy in the face of all-conquering growth. This leaves so much upside for the strategy when performance does turn that the timing thereof is largely inconsequential. “All the money is on red”, and the when the turn comes it will be very significant.

Overseas equities

Overseas equities rose strongly over the quarter, building on the rebound seen in the second quarter of 2020. The MSCI AC World Index rose 8.1% in USD. Ongoing AUD strength served to dampen returns during the quarter such that the AUD reported return in the quarter was 3.9%. Despite the upheaval caused by COVID-19, the benchmark return for the calendar year to date return is virtually unchanged (-0.6% in AUD terms).

All major regions posted positive gains, with the Asia ex-Japan region performing best, up 6.3% in AUD. At a stock level, the trends seen in the local market are being replicated globally, that is market leadership continues to be narrow with technology related stocks driving markets higher. Company reporting season proved generally better than expected which has supported the ongoing rally while a falling case fatality rate of COVID-19 (despite rising second wave infections) has also improved sentiment and risk appetite. As the economic recovery continues, we ultimately expect a change of market leadership into the more cyclical and value-oriented names which is likely to benefit the portfolio.

The underperformance of Value as a style (relative to Growth) has been a thematic in markets worldwide since the Global Financial Crisis. Falling interest rates and weak macroeconomic conditions leading to a scarcity of growth have seen a polarisation within the market. In short, higher growth companies have been bid up while the more cyclical and value-oriented parts of the market have been de-rated. The unique nature of COVID-19 saw this phenomenon accelerate considerably, with low starting valuations providing little downside protection to the market upheaval experienced earlier in the year. With no change in market leadership over the last several years, the trailing 3-year difference in returns between the Growth and Value cohorts now sits at more than 20-year highs.

MSCI AC World Growth vs Value 3 year trailing returns

While it is true that the earnings of the more Growth oriented companies have held up better than their Value compares, widening valuation dispersions have accentuated this dynamic. However, on a medium-term basis, earnings will recover in those areas which have been hit more severely such as financials and other cyclical companies. These segments also stand to gain from higher valuation multiples as growth rates improve. Unfortunately, the timing of the reversal can never be known in advance however what can be said is that this kind of disparity in markets is extreme and unlikely to last. When the pendulum does start to swing in Value’s favour, the upside to portfolio returns will be a significant.

REITs

The S&P/ASX 300 A-REIT Index delivered a total return of 7.4% for the quarter ending 30 September 2020. The quarter was packed with earnings updates during reporting season and COVID-19 related news flow.

Reporting season largely focused on rent collection, operating cashflows, and balance sheet strength. Industrial and Office sub-sectors saw strong cash collections, while Retail lagged due to significant rental waivers provided to tenants. Going into reporting season, rent collection and gearing were two main concerns for one of our key holdings, Scentre Group (SCG), with speculation of a capital raising keeping a lid on the share price. Pleasingly, SCG reported a resilient set of operating metrics at its interim results. Rent collection was (and remains) above peers, with 86% of monthly gross rental billings collected in the month of August, up from 82% in July, 80% in June and the low of just 28% in April. In an effort to address the second concern of elevated gearing, SCG issued US$3.0bn (A$4.1bn) of hybrid notes, 50% of which will receive an equity credit from the rating agencies, reducing gearing below the mid-30%s target and alleviating any balance sheet concerns in the short term.

Scentre Group rent collection remains above peers

While Office portfolios were relatively resilient in terms of rent collection in FY20, a combination of social restrictions, the impact of working from home, and the risk of rising vacancies contributed to investor sentiment turning negative towards the Office sector during the quarter. Our portfolio performance benefitted from not having any exposure to pure play Office stocks.

The Industrial sector remained well supported as a key beneficiary of the shift to e-commerce as supply chains adapt and logistics operators adjust to changing consumer behaviours. Our portfolio remains exposed to the Industrial sub-sector through the diversified REITs.

Government stimulus drove strong momentum in the Residential sub-sector, with residential sales increasing to 3 times the monthly run rate, benefitting both Stockland (SGP) and Mirvac (MGR), two stocks that we hold.

From a valuation perspective, the A-REIT sector finished the quarter at 18.2x forward earnings, above its 25-year average of 13.9x, but is trading at a near record PE multiple discount relative to the ASX Industrial Index at just 0.75x versus the 25-year average of 0.96x. 

Although the relative valuation appears attractive, there is a great deal of uncertainty regarding the duration and impact of COVID-19 and hence we maintain our neutral A-REIT exposure.

Alternative assets

Global Listed Infrastructure (GLI)

At 30 September the Fund held 31 high quality infrastructure securities across 11 countries.

The largest individual country exposure remains the United States of America at 48%, which had increased over the quarter. The United Kingdom (12%) was our next largest, followed by France (10%), which had increased over the quarter.

From a sector perspective, our largest holdings continue to be in regulated assets (57%), which increased during the quarter as we continued to rotate the fund into regulated utilities. Our holdings of contracted assets were reduced at 19%, whilst our transportation concessions (such as airport and toll-road assets) was little changed at 19%.

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

Responsible investment

Over the last quarter Maple-Brown Abbott’s (MBA) ESG capabilities have been recognised by two ESG industry governing bodies, the United Nations-supported Principles of Responsible Investing (PRI) and the Responsible Investment Association Australasia (RIAA). 

In June the PRI published their 2020 Assessment Reports. As the global benchmark for responsible investment activity, the PRI assesses each signatory for its approach to the six principles which underpin commitment to ESG best practice.

MBA again retained the highest rating of “A+” for our ESG Strategy and Governance, and “A” ratings for each of our ESG Integration and ESG Engagement categories for our key asset class, listed equity.  These results continue the trend of strong performance since MBA first became a PRI signatory, as highlighted in the charts below.

PRI - strong report card

Source: MBA PRI Assessment Report for period 1 January 2019 – 31 December 2019.

PRI historical scorecard
Highlights strong absolute and relative MBA performance over time

Source: UNPRI Assessment Reports 2015 to 2020.

This assessment reinforces MBA’s position as a leader in both absolute terms and relative to our peer group, scoring at or above median results for all asset managers globally. In an arena where the bar is raised each year and PRI signatories are expected to achieve continually improved standards of ESG integration, policy and disclosure, MBA is pleased to have our approach to responsible investing recognised by the well-respected global PRI benchmark.

MBA’s ESG capabilities have been further recognised in RIAA’s 2020 Responsible Investment Benchmark Report for applying a ‘Leading’ approach to ESG integration in our principal responsible investment approach. In the study, which covers the calendar year to 31 December 2019, RIAA scored investment managers against its Responsible Investment Scorecard, which rewards managers not just for being strong stewards and accounting for ESG factors in investment decisions, but also for transparency (RI policies, holdings, stewardship activities and outcomes), avoiding harm and allocating capital towards solutions.

In total, 165 Australian and international investment managers were assessed, with the ‘Leading’ group comprising 29 Australian and 15 international investment managers with significant presence in Australia. The result places MBA in the top 30% of managers assessed, and is further evidence of the deeply embedded approach to ESG across the firm. This is the third year MBA’s ESG capabilities have been recognised as ‘Leading’ in RIAA’s Benchmark Report.

[1]  GDP data is based on June quarter-on-quarter growth rates.
[2] Reports of Value’s Death May Be Greatly Exaggerated – R. Arnott, C. Harvey, V. Kalesnik and J. Linnainmaa.  Research Affiliates Publications August 2020
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