Annual Report 2017

Investment Strategies

Regional Equity Strategies

Australian Equities

The 2017 Financial Year was a very successful year for our Australian equities portfolios, managed by one of the largest and most experienced Australian equities teams in the market.

During the 2017 Financial Year the team delivered strong outperformance across the board, with almost every strategy beating its respective benchmark over the 12 months to the end of September (before fees).

This strong result saw 80 percent of our flagship strategies achieve returns in the top quartile of their respective peer groups over the year, with the BT Wholesale Focus Australian Share Fund, our concentrated strategy, finishing over 8 percent ahead of its benchmark (before fees).

There were several drivers of this strong performance. A number of key overweight positions delivered strong gains and made notable contributions, including some of our non-consensus holdings such as Qantas, Metcash, and Nine Entertainment. These stocks illustrate the stock-level factors, which can be exploited when the market gives up on a sector that is facing disruptive challenges. Our positions within resources have also worked well over the year.

In addition, we have benefited from avoiding many high growth names, particularly in the health care, technology, and telecommunications sectors. These have been among the market’s more popular stocks in an environment of falling bond yields and many of them reached valuations which we believed were unsupported by fundamentals which left them vulnerable to a de-rating. This proved to be the case for several of these stocks, which saw sharp falls on generally quite mild earnings disappointments.

Our portfolios are positioned to take advantage of our insight at the company level. The declining influence of some recent thematic market drivers, coupled with an unprecedented level of disruption from new technologies, competition, policy and regulation, is driving significant divergence in performance between stocks and sectors, despite a relatively muted performance from the market overall.

Our portfolios are designed through leveraging our diverse range of investment expertise, ideas and positions. We continue to see opportunities in resources, supported by reasonable commodity prices and greater discipline in capital expenditure and costs. We believe that the market’s periodic shifts in sentiment towards major industries (including retail and banks) continue to throw up opportunities in specific stocks. We also like several companies that are relatively protected from disruptive forces due to business models that are hard to replicate, as well as companies that are providing disruption in their own right.

We remain underweight bond-sensitive stocks (both defensive and growth) but less so than in the past, given our view that bond yields are unlikely to rise as fast as many expect.

We believe Australian equities will remain in a low return environment for the year ahead, notwithstanding the recent emergence of some positive economic tailwinds. The market’s valuation is above its historical average, but can remain supported by low interest rates and the spread between dividend and bond yields. Liquidity remains reasonably supportive, but could present a risk if we see significant tightening from central banks.

A small pick-up in corporate capital expenditure and a strengthening pipeline of infrastructure projects provides some broad economic tailwinds. However earnings growth outside of resource stocks remains relatively muted which underpins our view that we are moving into a low return environment.

It does, however, remain a good market for active management. Waning thematic drivers and the significant degree of disruption increases the importance of a company’s management and strategy in navigating a challenging environment and in driving ultimate stock performance. We believe our strategy of employing a large team to maximise coverage and gain deep insight at a company level is well positioned to drive returns for our investors.