Damen Purcell, COO of Australian Fund Monitors, speaks with Jonathan Wu, Executive Director at Premium China Funds Management.

Premium China was started their first fund in 2005 and have grown to offer 4 actively managed specialist Asian equity and fixed-income funds to both Australian and New Zealand investors. Their Premium Asia fund, which was started in 2009 has returned 12.97% per annum since inception outperforming the Asia Pacific Ex Japan benchmark by over 8% per annum.

Funds operated by manager: Premium Asia Fund, Premium Asia Income Fund, Premium Asia Property Fund, Premium China Fund

How will the recovery influence risk and returns?

Mark Burgess, Chairman of the Advisory Board at Jamieson Coote Bonds

As the macro risks associated with COVID-19 have loomed over global markets and economies for almost a year now, changing expectations of the shape and strength of the recovery will be important in influencing returns and volatility for 2021. We recently sat down with Mark Burgess, Chairman of the Advisory Board at Jamieson Coote Bonds to discuss this and other important issues on investors' minds.

Navigating the economic recovery

This recovery is unique as we've seen one of the most dramatic interventions in markets in history, to the credit of central banks and governments who took immediate action last year and we are now beginning the see the consequences of that. Will it take traction in the economy? How will the virus develop? These are critical issues which are raising serious question marks about the style and nature of the recovery. Financial markets are looking through this - at some of the beneficial aspects of low rates and at the rising liquidity aspect of central bank intervention. The economic environment is rather unclear, relative to financial markets, which are taking a forward looking view.

Inflation risks on the rise

I'm always reminded of what I believe is the right approach to risk and look to a range of scenarios, such as economic growth. Inflation should be one of those scenarios. How does inflation play out? Is it a rising risk? We're likely to get an uptick in inflation as the year-on-year comparisons turn positive. There are a couple of factors that have helped keep inflation low in the past, such as globalisation, that appear to be changing and therefore the ability to keep inflation at low levels is changing at the margin. On the flip side, we have very slack labour markets, we have an output gap that's quite wide, and at these low interest rates, capacity can be added quite quickly across the world. With this in mind, my expectation is that perhaps inflation will uptick but we're unlikely to get the kind of embedded or serious inflation that we saw say in the 1970s. Competition caused by excess investment as a result of low interest rates could cause deflation in parts of an investor's portfolio, and the inflation-deflation combination should be assessed across the assets that go into a well-diversified portfolio. Watch the video to hear more.

Constructing fixed income allocations - the risk of chasing yield

Yields are going to be low generally and the most important risk is not to chase yield for yield sake. If you're chasing yield with risk attached to it, those risks will be lurking in the background more over the next two to three years than they have in the past. As bond yields are marginally moving back up, they're getting ready to be a defensive asset again. Markets are experiencing this combination where yield is becoming available in some places and in other places there's certainly a lot of competition for yield. Investors should be cautious as risk attached to yield is one of the most important things to watch out for. We've long advocated this; one example is separating corporate credit from high grade sovereign bonds. High grade government bonds provide safety, while corporate credit will have other risk and return characteristics. Most importantly, as we come out of the COVID-19 environment, we'll find out which corporates are safe and which are in good shape as we see that part of the cycle play out.

"The most important risk is not to chase yield for yield sake."

The important role of high grade government bonds in diversifying some of the unknown risks that remain

High grade government bonds were defensive during the downturn, playing the important diversifying role that they have always played in portfolios. As government bonds edge slightly higher again, they will provide that defensive characteristic and diversification within a portfolio. We believe they will always be a good asset to hold. Australian investors haven't held a large position in government bonds historically, and a key lesson from the events of last year proved the diversification characteristics of the asset, at a time where diversification was difficult to find. There are a couple of other places to find diversification, but high grade government bonds are certainly one component of that. Watch the video to hear more.

Australian Fund Monitors' CEO, Chris Gosselin, speaks with Dean Fergie from Cyan Investment Management about the Cyan C3G Fund's recent and long-term performance.

Since inception in August 2014, the Fund has risen +16.52% p.a. versus the ASX200 Accumulation Index's annualised return over the same period of +6.81%. The Fund has also achieved a down-capture ratio (since inception) of 58.2%, indicating that, on average, it has significantly outperformed during the market's negative months.

Funds operated by this manager: Cyan C3G Fund

The AIM GHCF investor presentation briefly covers how the Fund performed in 2020; Charlie Aitken (CIO) and Etienne Vlok (PM) also discuss where they see opportunities in 2021 and how they are thinking about market risk. The stock discussion focuses on a relatively unknown Japanese vision sensor business that is incredibly high quality with a concrete runway for growth.

Summary
1:15 CY2020 performance summary
9:47 Top 10 holdings at 31 Jan 21
11:43 Sector allocation at 31 Jan 21
13:10 Geographic revenue allocation 31 Jan 21
14:24 Portfolio characteristics
16:10 Stock discussion: Keyence
27:20 Biggest risk for markets this year
36:54 Where we are seeing opportunities
39:11 Our focus: returns on capital
45:59 Our views on currencies
48:00 Are markets speculative at present?
50:28 What are the policy risks under a Biden administration?
53:49 Why doesn't the Fund invest in banks?

AIM Global High Conviction Fund

Australian Fund Monitors' CEO, Chris Gosselin, speaks with Robert Swift from Delft Partners about the Delft Global High Conviction Strategy. Since inception in August 2011, the Strategy has risen +14.93% p.a. with an annualised volatility of 11.78%. Over that period, the Strategy has achieved Sharpe and Sortino ratios of 1.08 and 1.97 respectively, highlighting its capacity to achieve good risk-adjusted returns while avoiding the market's downside volatility.

Longlead was founded in 2014 and is a specialist long/short equity manager with a core focus on Asia & Australia. The team at Longlead have recently released and Australian Domiciled Wholesale Unit Trust based on their existing Longlead Absolute Return Fund.

The Longlead Absolute Return Fund was started in July 2017 and has returned 29.24% per annum since inception. For most investors the proof of an absolute return manager is in their performance during down markets, and Longlead have provided investors with a positive return 64% of the time when Asian Pacific markets are negative, generating significant outperformance.

Damen Purcell, COO of Australian Fund Monitors, speaks with Chris Wheldon, Portfolio Manager at Magellan Asset Management

The Magellan High Conviction Fund follows an unconstrained, highly concentrated long only strategy investing in global large cap stocks...with the fund investing in just 8-12 of Magellans best ideas. The fund also has the ability to take a cash exposure of up to 50%.

Australian Fund Monitors' CEO, Chris Gosselin, speaks with Michael Frazis from Frazis Capital Partners about the Frazis Fund what drove the Fund's significant outperformance over the past 12 months. Michael also shares his thoughts on the current state of markets around the world.

The Frazis Fund has risen +109.74% over the past 12 months vs AFM's Global Equity Index's +2.59%. Since inception in July 2018, the Fund has returned +35.74% p.a. vs the Index's +10.54%.

Charlie Jamieson, Chief Investment Officer at Jamieson Coote Bonds, discusses the market and performance of high grade bonds in January 2021.

Chief Investment Officer, Steve Johnson, is joined by Alex Shevelev, Senior Analyst on the Australian Shares Fund, as they discuss the factors contributing to a strong start to the year for Australian retailers including JB Hi-Fi and Super Retail.

Forager Australian Shares Fund

Forager International Shares Fund

Transcript:

Steve

Hi everyone and welcome. It's Steve Johnson here, Chief Investment Officer at Forager Funds, bringing you our first video for 2021. I'm joined by Alex Shevelev, Senior Analyst on the Forager Australian Shares Fund. Hi Alex, how are you?

Alex

Hi Steve, hello everybody.

Steve

It's been a bumper start to the year for Australian retailers, lots of them out early in 2021 talking about some very buoyant Christmas trading. We saw JB Hi-Fi, Super Retail, a couple of stocks that we own small positions in our portfolios such as Shaver Shop and Michael Hill pretty consistent across the retail industry, making lots of money.

Alex

It's been a great time to be a retailer. All that money that we saw that's not going towards international travel and a lot of the money that's coming from government stimulus is ending up in the coffers of some of these businesses and the revenue growth has been absolutely staggering for what are already some pretty large businesses. Supercheap and JB Hi-Fi group grew 23% and 24% in total revenue and that's including the fact that some of these stores were shut down for a period during that half.

Steve

I remember doing an analysis of JB Hi-Fi probably 10 years ago, questioning whether it could ever get to $10 billion of sales given the amount they Australians spend on electronics. But we've seen through this past period, they just keep taking market share and also the market keeps growing. The big thing though, has been profit. You talk about sales up 20%, but profit numbers are up a lot more than that.

Alex

In some cases they're up 80% plus and the reason here is twofold. Firstly, we've got increasing gross margins. So the retailers have managed to tick up the sales prices of their products ever so slightly relative to their costs. That might only be a couple of percentage points and you may not see it necessarily in your purchases but for a retailer that makes maybe a high single digit margin that is a really big change.

Secondary to that, you've then got all those extra sales, all that extra gross margin coming through and the operating costs of these businesses have stayed largely similar. So you're getting a double benefit there.

Steve

I think as a well-run retailer, you might be talking sort of 6% to 8% margins at the bottom line. So as you can add 2% at the gross margin level, that's having a fairly dramatic impact on your profit. Maybe a bit counter-intuitively retailers are talking about it being difficult to get goods into the country, from China in particular, with lots of capacity constraints in shipping. It's probably been a good thing net for them because there's less competition and lots of demand and it's enabled them to put those gross margins up a little bit. Now the share price reactions have been muted using profit here up 80% and 90% on stocks that were not trading on crazy multiples to start with.

Yet we've seen share prices, maybe up 5% or a bit more on the day and retracting a bit over the days after that. What's going on with the bumper results coming out way above everyone's expectations and share prices not really moving?

Alex

These retailers had run up to some extent already. There was already an expectation that there was going to be more revenue flowing in. However, it is higher than people expected, but that increase is limited, or appears to be limited in investor's minds, to this first half of the year and potentially subsequent couple of months. These businesses are not necessarily getting credit for this level of profitability continuing.

We're going to really get to see that in the first half of next financial year, how these businesses end up relative to the half they've just had.

Steve

I'd probably say we agree with that. That's a sensible reaction from the market to say this is clearly unsustainable, both at a sales level, people are going to start spending money on travel and other things again, towards the back end of next year. Probably most importantly, you would assume these to come back to something more normal eventually.

Alex

That's right. There are some things that have changed though for some of these retailers and Shaver Shop is a good example of this. There has been a transition to online and the businesses that have really been able to seize the opportunity in online and transition some of their offline sales to online should be better positioned for that come next year.

Shaver Shop for example, has seen its online sales percentage tick up from 10%, two years ago, closer to 30%. Now that's a big change for a business like that.

Steve

Yeah and I think you've seen some of these businesses manage that transition well. Shaver Shop is up to more than a third of its sales through its own website online. They're delivering those through the store network. But it says to me that all of that brand awareness they have, when you think I want to buy a shaver, where do you go? The money that's been spent on that over all these years is worth something. As long as you can get your offering right online, you're not actually seeing the likes of Amazon kill these businesses. In fact, they're doing quite well online.

Alex

That's not the only thing that's happening though. There's a secondary aspect of it and that is that this period has really been a shake up for a lot of these industries.

So you've got, for example in the jewellery space, some competitors that might struggle more than the listed player Michael Hill. In that situation you might be taking sales off competitors. Eventually, like we had seen with someone like Baby Bunting, over a long period of time those competitors might fold and you might capture more of those sales.

In other situations that shake up has really been a COVID affected shakeup, but with implication over a long period. So personal travel on motorcycles for example, is likely to be a bigger feature going forward as people remain a little bit hesitant of public transport, and that's really feeding into a Motorcycle Holdings result, which probably is not going to be quite as good as our bumper first half of 2021, but has a good chance of being better than the prior years as that industry is really shaken up.

Steve

I think people are actually underestimating how difficult the environment was for the three years leading into this COVID meltdown. Retail in Australia has been really hard. You've had costs marching up slowly while revenue has not been growing at all across the whole sector and this leakage to online going on at the same time. I think you've seen some of those businesses do a great job of consolidating in their industries and I don't think we're going back to 2019 levels of profitability.

There's no doubt that this year is going to be an anomaly on the high side. But I think people are looking back and saying, well I'm going to apply a multiple of 2019 earnings. In my view, that might be a bit too conservative given where share prices are at the moment. So still some really interesting opportunities out there in the space and still a meaningful part of our portfolio.

We're looking forward to hearing those and other companies give us further updates through February as our Australian portfolio reports results. Thanks for tuning in, and we'll be back with some regular updates over the next month as we get all of those results.