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Doug Hew Portfolio Manager Kaplan Funds Management 2 May 2013

Doug Hew Portfolio Manager Kaplan Funds Management 2 May 2013. ASX Listed Income . Income equities/securities the default investment in this CHALLENGING ENVIRONMENT. ECONOMY Lacklustre growth response from policy measures Ongoing quantitative easing (QE)-Japan joins the party

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Doug Hew Portfolio Manager Kaplan Funds Management 2 May 2013

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  1. Doug HewPortfolio ManagerKaplan Funds Management2 May 2013

  2. ASX Listed Income • Income equities/securities the default investment in this CHALLENGING ENVIRONMENT. • ECONOMY • Lacklustre growth response from policy measures • Ongoing quantitative easing (QE)-Japan joins the party • Backsliding on fiscal austerity- Europe is mired in recession • Australia’s “growth gap problem” wedged open by a high A$, poor government policy and China’s slowdown. • MARKET • Artificial dampening of market risk creating asset price inflation and negative real interest rates. • Little alternative to chasing yield • How far do investors compress equity yields and the compensation for risk? • Unchartered waters- emphasis on diversification and quality. 2

  3. ASX Listed Income • Income equities/securities the default investment in this CHALLENGING ENVIRONMENT. A well-known Canadian commentator, Tony Boeckh makes the following lucid observations: “The world is still struggling in a contained depression. The antidote, given the current state of economic knowledge and the short term time horizon of politicians is two-fold – backsliding on fiscal austerity and increased debt monetisation. This is becoming increasingly endorsed and even applauded by academics and institutions. It may be some time before consequences are apparent but we will have a rendezvous with them at some point.” 3

  4. ASX Listed Income Sources Over the year – more conservative: Raised weighting to hybrids & progressively reduced buy & writes (25% to 10%) into a rising equity market. Running yield moved from 7.6% to 6.7% against a 1.25% fall in cash rate to 3.0%. 4

  5. ASX Listed Income Sources Sector attributes and positioning • Buy & Writes: high volatility & low equity valuation • Positioning: underweight/low volatility/equity valuation moderate/high • Hybrids: good credit & wide spreads & redeemable structures • Positioning: overweight/good credit/wide spreads/acceptable structures • Utilities: regulated businesses & asset growth • Positioning: neutral/growing regulatory risk/yields relatively high • Property Trusts: leasing model & quality assets & NTA discount • Positioning: neutral/price premium/yields normalised 5

  6. ASX Listed Income Sources Sector attributes and positioning • Hybrids: Overweight High margin floating rate securities have attractive defensive attributes . Won’t shoot the lights out but it will generate reasonable returns. • A high margin helps protect returns as interest rates fall • When rates rise capital is protected by the floating rate structure • Ordinary equity is subordinate to hybrids • Takes advantage of Australia’s yield premium (6.5%-7.0% yields) • Basel III capital buffers are acceptable as Australia’s operating and regulatory environment is healthy 6

  7. ASX Listed Income Sources 7

  8. ASX Listed Income Sources 8

  9. Hybrid Market 9

  10. Hybrid Market Growth & Liquidity • New issuance March Qtr $3.8bn: • -NAB converting pref share $1.4bn, 8 yrs 320bps margin • -WBC converting pref share $1.4bn, 8 yrs 320bps margin • -Healthscope sub note II $300m, 5 yrs 10.25% fixed • -Suncorp sub note $700m, 10 yrs 285bps margin 10

  11. Hybrid Market • S&P reduced equity credit on corporate hybrid instruments from 100% to 50% • Origin Energy impact: • -ORG credit rating lowered 1 notch to BBB • -ORGHA subnote 400bps margin , interest payments subject to financial ratios, • callable 2016 otherwise converts to 100% debt • -ORG shares are subordinate to ORGHA, shareholders at risk of dilution • -Commercial protection of BBB rating. 11

  12. Search for yield 12

  13. Listed Equity Yields - Attractive 13

  14. Buy & Write Conditions Volatility low Volatility Equity valuations high All Ords 14

  15. Performance Fund performance with 1/3rd volatility of S&P/ASX200 Fund volatility 4.1% ASX volatility 13.1% 15

  16. Outlook • Large fiscal deficits • Higher unemployment • Downward pressure on the A$ stymied by currency wars • Lower interest rates as Australia joins the easy money policies of major economies The outlook is for lower interest rates and poor growth as a consequence of the end of the resources boom and debt deflation around the world. 16

  17. Thank you

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