Investment Matters

'Tis the season

Quarterly reporting of company profits has been a central component of US equity markets since 1970.

Third-quarter earnings reporting is well underway in the US – beginning with the banks last week and the technology sector this week.

Things are slightly less regimented in Australia.

Under the Corporations Act and ASX listing rules, the onus is on companies to inform the market of material changes in their businesses in a timely manner (referred to as continuous disclosure).

However, it may surprise some that we have a similar, although somewhat less formal ‘quarterly reporting’ regime as the US.

The financial year in Australia can be split into four key ‘reporting events’:

  • Annual General Meetings (or ‘AGM season’) in October

  • Half-year Reporting in February

  • The Macquarie Australia conference in May

  • Full-year reporting in August

As we approach these events, we often see a flood of announcements from companies under continuous disclosure obligations. We therefore saw a plethora of announcements this week.

Is quarterly reporting a necessary part of capital markets?

That is a topic for another day.

The extent that quarterly reporting encourages people to invest for the ‘long term’ is questionable.

Likewise, it is questionable the degree to which it incentivises what academics call ‘earnings management’, that is, the use of accounting techniques to ‘smooth’ and, in some cases, inflate accounting earnings.

Regardless, quarterly reporting has had its merits recently, during the economic turbulence and ‘lockdown limbo’ we have experienced.

The first of Australia’s four reporting events (AGM season) began this week and gave us some insight into how companies in clients’ portfolios are tracking.

We review these below.

An inflexion point for Barrow?

Perpetual’s announcement showed that its recent acquisitions are well on track, with shares rising by 9% over the week.

Clients have owned shares in Perpetual since August of last year.

A position was established in the company after it completed two large, transformative acquisitions, those of Trillium and Barrow Hanley.

We believed these acquisitions would be accretive in the near term and fund performance would benefit from a broader rotation into ‘value’ stocks.

Trillium is one of the preeminent ESG focused investment managers globally – established in 1982.

Likewise, Barrow Hanley has a history of investing that spans 40 years – a ‘value focused’ manager with strategies that span global equities and fixed income. However, it had, prior to Perpetual’s acquisition, suffered from outflows of funds from its predominantly institutional client base.

Perpetual saw value in that both funds, despite excellent performance histories, had suffered from poor distribution and marketing. The company is currently broadening the marketing and distribution reach of both funds.

The update provided this week indicated this is well on track.

Trillium has seen its assets under management grow by an impressive AU$2.7bn or 48% since it was first acquired.

More importantly, Barrow Hanley, the larger of the two acquisitions has seen outflows stabilise, with net inflows into its global equities strategies offsetting outflows from US Equities and Fixed Income.

At the end of FY-21, Barrow Hanley had $66.1 bn in assets under management (of a total of approx. $100m under management). This is important as a return to positive inflows for Barrow will have a marked impact on the value of Perpetual and a realisation of some of the potential we saw when we established the position.

Barrow Hanley and Trillium: the opportunity ahead for Perpetual

Source: Perpetual Asset Management

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Principal investments performing

Magellan’s update put its share price back on track after a rocky few months (up 7% this week).

The volatility it has experienced began after it reported in August, with the market paying close attention to the drop-in performance fees and equity-accounted losses on principal investments.

Admittedly, FY-21 was not Magellan’s finest year in terms of fund performance: with a decision to hold elevated levels of cash into the November rally hurting the performance of its Global Equities strategy.

However, as highlighted in the AGM – performance fees are variable, what is more important is the fund’s ability to retain and grow its existing assets under management.

There were reassuring words from Chairman Hamish Douglas, who reinforced that Magellan’s Institutional client base has remained strong and that they have not lost “a single client”.

Furthermore, after printing an equity accounted loss, Magellan’s principal investments, that is the investments they have made with shareholder’s funds (Barrenjoey, Finclear and Guzman y Gomez), have been profitable in the September quarter and Finclear has been valued at 3x Magellan’s initial purchase price.

As we commented at the time, we were a little perplexed by the market’s reaction to the accounting loss Magellan booked last year, with the clash between short-term performance and long-term value-creating investment evident.

We were pleased to see its share price begin to correct course this week and took advantage of recent weakness by topping up clients’ positions.

Waiting for an end to lockdown

Endeavour Group’s provided its 1Q sales update. The company’s mix of retail liquor and hotel assets have been supported by COViD on one hand and devastated by COViD on the other. Differences between states, the preponderance of lockdowns and different trajectories of opening up make all comparisons with previous periods difficult.

In total 1Q22 sales of $2.9 billion fell by 1% on the previous year, with retail liquor sales rising, but Hotel sales falling. It appeared that in retail the company increased market share, with the online growth (+34.4%) being the highlight.

We expect retail liquor sales will slow as reopening occurs. The off-premise industry’s sales are 30% higher than two years ago, assisted by forced closure and reduced patronage in café & restaurants given lockdowns, the almost elimination of duty free sales, and customers trading up to better quality products. These effects will moderate.

On the other hand, the rebound in hotel expenditure will be considerable - when restrictions are finally eased – and patrons feel comfortable heading out. Consumers in general have high levels of savings, and we would expect that the hotel industry will benefit from consumers refocusing their spending over the next year.