The Research Monitor - Q4 2019 Performance - Shaw and Partners
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The Research Monitor
March Quarter 2020
inside this issue
Q4 2019 Performance
2020 Outlook for ASX200
The “Melt-up” phenomenon
EFG predictions and preferences
+ stock recommendations
Q4 2019 Performance
The Australian Share Market, as measured by the S&P/ASX 300 Index,
was essentially flat in the December quarter of 2019 following increase
of 9.5%, 7.2% and 1.2% respectively over the previous three quarters.
The December quarter saw returns of -0.03% in price terms and 0.71%
including dividends, with dividends making up over 25% returns since
the start of the year.
The Australian market The largest component of the S&P/ There were once again some
ASX 300 Index is still the Banks spectacular returns amongst small
was driven especially by Sector (down to 20.6% index weight) companies, even as the broader
the shifting sentiment but gaining fast is the Materials Small Ordinaries Index rose only
sector (18.2% index weight) which 0.76% with Perseus Mining (PRU) up
toward two of the biggest rose 4.5%, with bellwether BHP up 65.7%, but the best stock performance
geopolitical issues of 6.0%. Energy sector returns reversed for the quarter came from Virgin Money
2019 being the US/China some of the year’s earlier losses and UK (VUK), formerly CYBG which rose
increased 6.1% following rising oil prices. 67.8%. At the other end of the table was
Trade dispute and Brexit. West Texas Intermediate oil prices rose Smart Group (SIQ) which saw a 43.2%
13.2% in the quarter and this pushed fall following a CEO resignation and
As fears regarding a global recession in the sector higher, but coal stocks such profit warning.
2020 brought about by these and other as New Hope (NHC) and Whitehaven
confidence factors abated, bond and (WHC) once again weighed on the index.
equity markets responded. Firstly, we
saw a steep rise in long term interest
rates in both the United States and Sector Performance Market Cap
Australian bond markets. Aussie rates Pharmaceuticals, Biotech & Life Sciences 17.4% 129,421
went from near to 1% to 1.3% and
Health Care Equipment & Services 6.3% 61,098
US rates went from 1.67% to 1.92%
over the quarter. Energy 6.1% 99,406
Capital Goods 5.8% 15,578
Among Australian equity sectors,
Diversified Financials 5.0% 95,293
performance was extremely mixed.
At one end of the spectrum we have Materials 4.5% 334,916
the Pharmaceuticals, Biotech & Transportation 3.9% 91,986
Life Sciences sector, containing
Consumer Services 2.7% 54,201
heavyweight CSL Limited (CSL)
which saw an increase of 17.4% Commercial & Professional Services 2.6% 46,109
over the quarter and in stark contrast to Software & Services 2.5% 49,037
the performance of the Banks sector Retailing 2.1% 65,544
which fell 11.0% in price terms and
9.3% including dividends as each Utilities 1.5% 33,686
bank seemed to experience more and Telecommunication Services 0.3% 48,951
more bad news regarding dividend Real Estate -0.7% 129,891
cuts, compliance issues, capital raising
Food Beverage & Tobacco -1.0% 36,889
etc. Given that these two sectors make
up 27.6% of the index, investors who Media & Entertainment -1.0% 16,991
avoided the banks and stuck with the Insurance -3.1% 67,011
pharma sector would have handsomely
Food & Staples Retailing -3.5% 66,653
outperformed the index.
Banks -9.3% 378,155
2 | Research Monitor | Mar 2020
Investors who avoided the banks and
stuck with the pharma sector would have
handsomely outperformed the index.
Global equity markets World share markets trended higher Market measures of risk
over the quarter as concerns about the
performed much more outcome of trade talks between the or volatility were also
strongly than Australian United States and China gave way to subdued over much of
optimism, culminating in the decision to
markets in the December sing an agreement on January 15, 2020.
the quarter suggesting
quarter, with the MSCI investors have become
Bond markets struggled on the
World ex Australia Index comfortable with the
back of higher long-term interest
in Australian dollars up a rates with the Bloomberg AusBond likely path of inflation,
robust 7.3%. Composite (0+Y) index down 1.1% interest rates, growth and
and Bank Bills returning a measly
0.2%.
trade.
The spread between 90-day bank bills
and cash remained negligible for most
of the quarter but was volatile – a sign
of the shifting expectations that the
RBA will continue to cut rates and by
how much. Long term interest rates in
Australia hit a record low on the 9th of
October of only 0.87%%.
Research Monitor | Mar 2020 | 3
Martin Crabb
Chief Investment Officer
2020 OUTLOOK
ASX200
4 | Research Monitor | Mar 2020
ASX ALL ORDS Index
This time last year, the market was selling Date
2019
2018
Close Change
6920
5709
21%
-7%
off aggressively as investors feared that the 2017
2016
6167
5719
8%
7%
2015 5345 -1%
combination of the continuation of interest 2014
2013
5389
5353
1%
15%
rate hikes in the United States and escalation 2012
2011
2010
4665
4111
4847
13%
-15%
-1%
of the trade dispute between the US and China 2009
2008
4883
3659
33%
-43%
would cause a global recession. 2007
2006
2005
6421
5644
4709
14%
20%
16%
2004 4053 23%
2003 3306 11%
Because of this low starting point, the Earnings for the Australian share market 2002 2976 -11%
fact that the US Federal Reserve changed peaked in early August 2019 and then 2001 3360 7%
2000 3155 1%
path and the trade dispute is at least fell away toward the end of the year. It is 1999 3109 15%
partially resolved, caused 2019 to be often misleading to look at the Australian 1998 2697 5%
1997 2580 7%
one of the best years for share market share market, since it is comprised 1996 2405 10%
investors on record. The 21.3% rise in of three, large and quite independent 1995 2189 16%
1994 1892 -12%
2019 in the ASX All Ordinaries Index was groups of stocks – Banks, Resources 1993 2153 35%
the 16th highest since 1936! and Industrials. If we look at the picture of 1992 1589 -7%
each of these mega-sectors we can start 1991 1702 29%
1990 1319 -22%
Increases in share prices typically follow to build a more robust outlook for 2020. 1989 1700 11%
increases in company earnings and 1988 1533 13%
1987 1359 -10%
dividends, although this was not the case 1986 1518 47%
in 2019. Our outlook for share prices in 1985 1035 38%
2020 can be thought of in two parts: 1984 748 -6%
1983 799 60%
firstly, what will earnings do in 2020 and 1982 500 -18%
how will the outlook for 2021 evolve as 1981 614 -17%
1980 735 43%
the year progresses, and secondly – how 1979 515 37%
much will investors be willing to pay for 1978 377 14%
those earnings? As mentioned, prices did 1977 332 11%
1976 300 -3%
not follow earnings in 2019. 1975 308 48%
1974 208 -32%
1973 307 -27%
Earnings per share versus PE Ratio 1972 421 20%
1971 351 -2%
1970 359 -21%
326 18.5 1969 455 9%
1968 418 34%
324 18.0 1967 311 34%
17.5 1966 232 4%
322 1965 224 -12%
17.0 1964 256 1%
320 1963 252 22%
16.5 1962 207 -1%
318
16.0 1961 208 9%
316 1960 191 -12%
15.5 1959 217 39%
314 1958 157 14%
15.0
1957 137 10%
312 14.5 1956 124 2%
1955 122 5%
310 14.0 1954 116 13%
Oct 19
Mar 19
Jun 19
Jul 19
Apr 19
May 19
Dec 18
Feb 19
Sep 19
Aug 19
Nov 19
Jan 19
1953 103 8%
1952 95 -18%
1951 116 -8%
1950 126 27%
Earnings Per Share (LHS) PE ratio (RHS) 1949 100 4%
1948 96 -1%
Source: FactSet and Shaw and Partners 1947 97 13%
1946 86 9%
1945 79 10%
1944 72 4%
The 21.3% rise (so far) this year 1943
1942
69
66
5%
12%
1941 59 -10%
in the ASX All Ordinaries Index is 1940
1939
1938
66
67
67
-2%
0%
-5%
1937 70 -2%
the 16th highest since 1936. 1936 71
Banking: Net income estimates & PE Ratio Banking: Cash Profit after tax
$33 bn 14.5 $34 bn
$33 bn 14.0 $32 bn
$32 bn
13.5 $30 bn
$32 bn
$31 bn 13.0 $28 bn
$31 bn 12.5 $26 bn
$30 bn 12.0
$24 bn
$30 bn
11.5
$29 bn $22 bn
$29 bn 11.0
$20 bn
$28 bn 10.5
$18 bn
May 19
Dec 18
Aug 19
Sep 19
Nov 19
Apr 19
Feb 19
Jul 19
Jan 19
Oct 19
Mar 19
Jun 19
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Dec 19
S&P ASX 200 / Banks -IG Net Income
Banks Trailing Profit Next Year Profit Two Years Profit
S&P ASX 200 / Banks -IG PE NTM
Resources: Net income estimates & PE Ratio Resources: Cash Profit after tax
$34 bn 13.0 $35 bn
$33 bn
12.5 $30 bn
$32 bn
$31 bn 12.0 $25 bn
$30 bn
11.5 $20 bn
$29 bn
$28 bn 11.0 $15 bn
$27 bn
10.5 $10 bn
$26 bn
$25 bn 10.0 $5bn
Dec 18
Aug 19
Apr 19
Feb 19
Oct 19
Jun 19
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Dec 19
S&P ASX 200 Reso urces Net Income
Resources T railing Profit Next Year Profit Two Years Profit
S&P ASX 200 Reso urces PE NTM
BANKING: Banks have seen increase in 2021 profits for WBC Prices paid for those earnings were
their net income estimates again due to non-recurrence of fines inverse to this pattern (as is often
downgraded from $33bn at the rather than strong income growth. the case for cyclical companies like
start of the year to $28.5bn at miners), where the PE ratio declined
the end – the largest drop in With a somewhat better Australian from 12.5x to 10.2x in August 2019,
expected bank profits since the economy, lower interest rates and before rising to 12.2x at year end.
GFC. Despite this, PE ratios that increasing housing prices, there
investors were willing to pay for should be some improvement over In terms of the outlook for net
those earnings rose from 10.8x the course of 2020 regarding the income in 2020 and beyond,
at the beginning of the year to outlook for 2021 profits and as such, analysts are expecting a significant
13.4x at the end. we would expect some modest fall for the Resources sector,
improvement (2-3%) in bank share led by anticipated lower iron ore
For the next twelve months, analysts prices in 2020, with returns being prices. Shaw and Partners sees
expect only modest 2% growth in generated mostly from dividend improvement in both industrial
bank profits, with a 12.8% recovery yields which we see in the 6-6.5% metals (copper, nickel) and energy
in NAB profits leading the way, but range for the major banks. prices into 2020 which should
with other banks struggling to grow. underpin profits in those sectors.
Shaw and Partners forecasts a 17% RESOURCES: Turning to
increase in 2020 profits for NAB due Resources, net income estimates We see continued gains in Resource
to the non-recurrence of customer for the sector rose sharply in the share prices in the early part of
remediation charges. For the early part of 2019 as investors 2020, followed by a period of
following twelve months, analysts continually underestimated consolidation ahead of greater clarity
expect net income for the banking the impact of Brazilian iron on the decline in the pace of growth
sector to grow by 4.6%, led by a ore outages and the strength in China and the run up to the US
recovery in Westpac (WBC) up 7.2% of Chinese steel production. Presidential election in November
and the other major banks of 3%, Estimates for net income rose 2020.
with the regional banks expected to from $25bn at the beginning
experience a fall in profits. Shaw and of the year to a peak of almost
Partners is forecasting a significant $34bn in July.
6 | Research Monitor | Mar 2020
Industrials: Net income estimates & PE Ratio Industrials: Cash Profit after tax
$59 bn 19.0 $65 bn
$59 bn 18.5 $60 bn
$55 bn
$58 bn 18.0
$50 bn
17.5
$58 bn $45 bn
17.0 $40 bn
$57 bn
16.5 $35 bn
$57 bn
16.0 $30 bn
$56 bn 15.5 $25 bn
$56 bn $20 bn
15.0
$15 bn
$55 bn 14.5
$10 bn
May 19
Dec 18
Aug 19
Sep 19
Nov 19
Apr 19
Feb 19
Jul 19
Jan 19
Oct 19
Mar 19
Jun 19
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Dec 18
Dec 19
S&P/ ASX 20 0 ex B anks & R esources Net Income
PE (RHS) Industrials Trailing Profit Next Year Profit Two Years Profit
Source: FactSet and Shaw and Partners
INDUSTRIALS: Finishing with Again we see the majority of returns National Australia Bank (NAB)
Industrials, both expected profits coming in the form of dividend
and PE ratios grinded higher income rather than capital growth. South32 (S32)
over the course of 2019. Net QBE Insurance Group (QBE)
Income estimates rose from The top largest contributors to Australia and New Zealand
$55bn at the beginning of the change in profits comprise 64% of Banking Group (ANZ)
year to $58.2bn at the end, while the increase in profits over the next
PE ratios moved from 14.5x to a year, being: Transurban Group (TCL)
loft 18.5x over the same period. Macquarie Group (MQG)
National Australia Bank (NAB)
Amcor Plc (AMC).
The outlook for profit growth for the Woodside Petroleum Ltd (WPL)
next twelve months remains modest, CSL Limited (CSL) In the next year, the collective
but positive. After 7.6% net income Commonwealth Bank of Australia profits of BHP Group (BHP), Rio
growth in the next year, analysts (CBA) Tinto (RIO) and Fortescue Metals
are expecting 7.9% growth in the Group (FMG) are expected
Transurban Group (TCL)
following year. This should help to decline by $950m and the
underpin the 18.5x PE ratio that may Santos Limited (STO) following year by $2.67bn. With
look high by historical standards, but Atlas Arteria Group (ALX) so much dependence on a small
in light of 1.2% 10-year government Newcrest Mining Limited (NCM) number of companies for the
bond yields, is not expensive – if bulk of the profits growth in the
Northern Star Resources (NST)
anything is a bit light. Australian market, it pays to be
LendLease Group (LLC). selective.
Shaw and Partners sees a mixed
period for Industrial shares in 2020, For the following year, the top ten
where we think the supermarket contributors comprise 58.5% of
retailers will struggle to justify their profit growth are:
current valuations, but the Real CSL Limited (CSL)
Estate sector will continue to see Westpac Banking Corp. (WBC)
international capital inflow and
support from low interest rates and Commonwealth Bank of Australia
bond yields. (CBA)
Combining the outlook of the three sectors, we see strong performance
from Resources in the early part of 2020 fade as the year progresses,
banks will struggle in the early part of the year but may look interesting
mid-year and industrials will grind higher with dependence on a small
number of companies and some price volatility along the way. Whilst not
reaching the giddy heights of the investment returns of 2019, 2020 shapes
up to be a positive one for the Australian share market.
Research Monitor | Mar 2020 | 7Martin Crabb
Chief Investment Officer
The “Melt-up”
phenomenon
8 | Research Monitor | Mar 2020MELT UP EXPLAINED: Securities are priced using a capital
asset pricing model which considers the required rate of
return and the expected cashflows implied from holding the
security over time. In the case of fixed income investment
such as government bonds, both the holding period and the
cashflows are known with݁ aൌ high degree
݁ ሺͳ ݃ሻ of certainty and so
it is fluctuations in the required rate of return that dictate
movements in ݁the price of the security. ݁ ሺͳ ݃ሻ
ሺͳ ݃ሻ ݁ ሺͳ ݃ሻଶ ݁ ሺͳ ݃ሻଷ
ܲ ൌ ݁ ڮ ڮ
ͳݎ ሺͳ ݎሻଶ ሺͳ ݎሻଷ ሺͳ ݎሻ
In the case of equities, however, Very elegantly, where g and r are Where rf is the risk-free rate
both the timing and quantum of the constant, this equation becomes: (typically we use the yield on a
cashflows is uncertain and this also 10-year government bond), β
impacts the required rate of return is the relative riskiness of the
݁
(more certain cashflows mean a ܲൌ security against the market, rm is
lower required return, less certain ݎെ݃ the expected return of the market
cashflows mean a higher required and αi is the stock-specific return
return). We are now concerned with the (that part of the return that can’t
appropriate rate of return for these be explained by the market. The
We can use some mathematics
cashflows. What middle term considers the risk of
here to describe this process. ݎ ൌ ݎ ߚ൫ݎdetermines
െ ݎ ൯ ߙ
this?
Again, a mathematical model can the cashflows and is thought of as
Firstly, let’s look at a simple model
help us here. relative risk times the equity risk
for equities which considers a ݁ ൌCalled
݁ ሺͳ the
݃ሻ“capital
asset pricing model” or CAPM for premium. So β is relative risk and
company that grows at a constant
short, it suggests we consider the the term (rm-rf) is the equity risk
level, g and for which we require a
risk-free rate (the rate at which we premium.
return of r. The price of this security
can earn on a riskless asset (such
P, is determined by discounting
the future cashflows ܲൌ ei ݁
over
݁ ሺͳ ݃ሻas a݁AAA
the
݃ሻଶbond
ሺͳ rated
݁or ݃ሻଷ
ሺͳgovernment
So that’s all great, but
ڮ
݁ ሺͳ ݃ሻ
ڮ
ͳ ݎbacked ሺͳ investment),
ݎሻଶ r
ሺͳf, as well
ݎሻଷ ሺͳ ݎሻ
investment holding period, n. That
as the riskiness of the asset. The how does it explain
is, as owners of the equity, we
receive a cashflow each year of ei
second part we can think of as “how “melt up”?
much more return do we want from
which grows at a constant rate of
investing in all risky assets, such as
g, so we can express the future
the share market as݁a whole” and
cashflows as a function of this year’s ܲൌ
“is this investmentݎmore
െ ݃ or less risky
cashflow.
than the market as a whole”? CAPM
is expressed as:
݁ ൌ ݁ ሺͳ ݃ሻ
ݎ ൌ ݎ ߚ൫ݎ െ ݎ ൯ ߙ
The price we are willing to pay
for the security that produces this
ଷ ݁ ൌ ݁ ሺͳ ݃ሻ
݁ ሺͳ ݃ሻcashflow ݃ሻଶ a function
݁ ሺͳ isthen ݁ ሺͳ of݃ሻthe ݁ ሺͳ ݃ሻ
at whichଷ we ڮ ڮ
ͳ ݎrequired
ሺͳ rate of
ݎሻଶ returnሺͳ ݎሻ ሺͳ ݎሻ
discount these cashflows.
݁ ሺͳ ݃ሻ ݁ ሺͳ ݃ሻଶ ݁ ሺͳ ݃ሻଷ ݁ ሺͳ ݃ሻ
ܲ ൌ ݁ ڮ ڮ
ͳ ݁ݎ ሺͳ ݎሻଶ ሺͳ ݎሻଷ ሺͳ ݎሻ
ܲൌ
ݎെ݃
Research Monitor | Mar 2020 | 9
݁The “Melt-up” phenomenon
Firstly, let us look at each of the terms in the Australia
Australia Benchmark
Benchmark Bond
Bond –– 10
10 Year
Year
CAPM. Risk-free rate or rf. If we look at fifty
years of history, we can see that this has fallen 18%
appreciably. As the risk-free rate falls, so does 16%
the required return on all other investments, other 14%
things being equal. So if we held the beta, equity 12%
risk premium and stock-specific risk all constant, 10%
the fall in the risk free rate would see a fall in the 8%
required rate of return for the security and thus a 6%
rise in price. 4%
2%
The Reserve Bank of Australia recently published a
paper titled “The Australian Equity Market over the Past 0%
Jan 00
Jan 07
Jan 14
Jan 21
Jan 28
Jan 35
Jan 42
Jan 49
Jan 56
Jan 63
Jan 70
Jan 77
Jan 84
Jan 91
Jan 98
Jan 05
Jan 12
Jan 19
Century”, which showed the equity risk premium (the
extra return of equities 10.2% less 10-year government
bonds 6.2%) was 4% over that time frame.
Total Returns 1917–2019 Price-to-Earnings Ratio
Total market 10.2
90.00
Resources 10.2
Financials 10.3 80.00
Other 10.4 70.00
10-year government bonds 6.2
60.00
Consumer price inflation 3.9
Source: ABS; ASX; RBA 50.00
We can keep this as a constant in the CAPM, and set 40.00
stock specific risk to zero (for the market as a whole has 30.00
no stock specific risk), then the only variable through
time will be the growth rate of earnings. The compound 20.00
rate of earnings of the Australian market has been 5.32% 10.00
since 1875, in line with the average bond yield over that ݁ ൌ ݁ ሺͳ ݃ሻ
time of 5.55%. If we keep the rate of growth of earnings 0.00
at a constant 4%, for example, we can see how the 1969 1979 1989 1999 2009 2019
“fair” PE for the market would change through time. Source: FactSet and Shaw and Partners
Date 1969 1979 1989 1999 2009 2019 This admittedly overly simplistic example, suggest the
ଶ
݁ ሺͳ ݃ሻ fair݁value
ሺͳ PE݃ሻfor a݁ ሺͳ
stock ݃ሻଷ $10 back
earning ݁ ሺinͳ2009
݃ሻwould
rf 6.00 10.08 12.82 ܲ ൌ ݁
6.92 5.65 1.21 ڮ ڮ
ݎbe worth
ͳ 1.00 ݎሻଶ
ሺͳ $177.15 and theݎሻ
ሺͳ ଷ
same ሺͳ would
stock today ݎሻ be
ß 1.00 1.00 1.00 1.00 1.00
worth $829.19.
rm - rf 4.00 4.00 4.00 4.00 4.00 4.00
Reconsidering the simple valuation model:
α – – – – – –
e0 10.00 10.00 10.00 10.00 10.00 10.00
݁
g 4.00 4.00 4.00 4.00 4.00 4.00 ܲൌ
ݎെ݃
r 10.00 14.08 16.82 10.92 9.65 5.21
P 166.71 99.21 78.03 144.51 177.15 829.19
As the required return, r approaches
PE 16.67 9.92 7.80 14.45 17.71 82.92
the long-term growth rate g, the Price P
ݎ ൌ ݎ ߚ൫ݎ
approaches െ ݎ ൯
infinity. ߙ helps to explain
This
the “melt-up” phenomenon.
10 | Research Monitor | Mar 2020Shaw and Partners is one of Australia’s preeminent investment and wealth
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Research Monitor | Mar 2020 | 11Future Leaders Panel
EFG International
EFG
predictions and
preferences
12 | Research Monitor | Mar 2020Review of 2019 Outlook
Each December, we review the Outlook we presented a year earlier.
In 2019 our predictions proved to be sound. Overall, with two judged
‘partly correct – a half mark’ we scored 9/10.
1. CORRECT Global growth in the US economy. As that seemed healthcare equipment sector, which is
continues; no recession in US or very unlikeIy to us, it was our favoured focussed on disruptor companies did
other developed economies. We US equity market sector. The sector well, slightly outperforming the S&P 500
expected that global gross domestic did outperform the broad market and index.
product (GDP) growth would continue was the third best performing of the
in 2019 and that the US and other ten economic sectors, after IT and 9. CORRECT Europe: another crisis
developed economies would not head telecomms. averted. We thought that the latest
into recession. Some countries were crisis – centred on Italy – would ease.
close to recession – notably the UK and 5. CORRECT Real rates stabilise We expected concerns about Italy’s
Germany – but it was avoided. So, once or fall. We thought that the rise in real credit standing to recede and that “the
again, the global expansion continued. interest rates in the US, measured by yield spread between Italian and German
the yield on Treasury Inflation- Protected government bonds should narrow”. That
2. CORRECT Trump: all out for Securities (TIPS), would “stabilise or did, indeed, happen: Italian 10-year
growth. We expected President Trump maybe even fall”. The real yield on yields fell from 3% in late 2018 to just
to do all he could to stimulate US 10-year TIPS fell Correct from 1% at over 1% in late 2019, with the yield
growth, but recognising the limits to the end of 2018 to just 0.12% on 13 spread over Germany almost halving
what could be done we thought “the December 2019. from 300 to 150 basis points.
emphasis will be on the maintenance
of growth”. In particular, we thought 6. CORRECT Value in US corporate 10. CORRECT China-US cold war.
his criticism of the Fed would lead to bonds. We thought that US investment We thought that tensions between the
“interest rates not rising as far and as grade corporate debt offered good value US and China could ease to some
quickly” as the market was expecting in and would produce positive returns in extent in 2019, but that there was very
late 2018. That, indeed, proved to be 2019. Indeed, the sector produced very unlikely to be a big reduction in China’s
the case, with previous rate increases good returns: 15% in total return terms trade surplus with the US. Longer-
reversed from July 2019 onwards. in the year to 13 December on the basis term, we expected China would pivot
of the ICE BofAML US BBB Corporate towards the rest of Asia. China’s trade
3. PARTLY CORRECT Emerging Bond Index. surplus with the US did narrow a little
markets recover. We thought emerging but its overall trade surplus expanded
markets would grow faster than 7. CORRECT Sterling rebounds. significantly.
developed markets in 2019, which they We thought that sterling would
did. However, they did not grow as fast rebound against the US dollar as Brexit
2020
OUTLOOK
as in 2018. According to IMF estimates, uncertainty receded. It took longer than
GDP growth in emerging markets was we expected but sterling made gains –
3.9% in 2019, weaker than the 4.5% from US$1.27/£ at the end of 2018 to HIGHLIGHTED IN THIS PUBLICATION:
GLOBAL STRATEGIC
ASSET ALLOCATION
GLOBAL SECURITY
SELECTION
REGIONAL
ASSET ALLOCATION
REGIONAL PORTFOLIO
CONSTRUCTION
recorded in 2018. However, emerging US$1.33/£ on 13 December 2019.
Our predictions
market bonds did well in the year (with and preferences
8. PARTLY CORRECT Healthcare
a total return of 12.3% in the year to
disruption. We thought the healthcare
13 December 2019). Emerging market
sector was ripe for disruption,
equities, however, underperformed
particularly with the development of
developed markets (total returns of
new types of digital technology and
15.6% compared to 26.2%, in the year
that the trend would be seen first in the
to 13 December 2019).
US. We said we were “actively seeking
4. CORRECT US industrial sector ways of gaining exposure” to innovative
favoured. We thought that the US companies using digital technology.
industrial sector of the equity market Although the healthcare sector
in late 2018 was pricing in a recession underperformed the S&P 500 index, the
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Research Monitor | Mar 2020 | 13Global growth continues;
world trade recovers
We see global growth continuing at a reasonable pace
(just over 3%) in 2020.1 This will be helped by a recovery
in world trade, after stagnation in 2019. Some economies,
notably the eurozone, will be on the brink of recession
but, even there, it will be avoided.
We see the US economic expansion Fears of a US recession were widely These include the RCEP, Regional
reaching its eleventh anniversary in cited in 2019. Leading indicators of Comprehensive Economic Partnership,
summer 2020. It will be the longest such a dip, especially the slope of in Asia; the AfCFTA, African Continental
expansion since records began in the yield curve, were closely, indeed Free Trade Agreement.
1854. 2 It will comfortably exceed somewhat obsessively, watched in
previous records: the 120-month long financial markets. That nervousness We think that attention will start
expansion (from March 1991 to March will continue, even though we think to shift from US-China relations to
2001) and the 106-month expansion it is a misplaced worry. trade deals that help the more open
(from February 1961 to December 1969). economies, especially as the world
Yet, one important reason for its long The main reason is that shrinking evolves into regional trading blocs.
duration is that it has been subdued. world trade was one of the main Furthermore, outside the US,
causes of a slowdown in world especially in emerging economies,
The UK expansion has been even more GDP growth in 2019 (see Figure 1b). interest rates have come down;
subdued but has now lasted as long as That, we think, will rebound as the and greater fiscal stimulus is being
that in the US. The eurozone and Japanese first phase of a China-US trade deal seen in many economies.
expansions are positively youthful in and other less-well noticed trade
comparison (see Figure 1a). deals move ahead.
1a. Global expansions 1b. World trade
130 7
Index, real GDP at start of recovery = 100
6
125
5
120 4
3
115 %
2
110 1
0
105
-1
100 -2
0 1 2 3 4 5 6 7 8 9 10 11 2017 2018 2019
Years since start of recovery
World trade, % change on year
US UK Eurozone Japan
Source: Refinitiv. Data as at 10 December 2019. Source: Refinitiv. Data as at 10 December 2019.
1
At Purchasing Power Parity exchange rates; that is in broadly line with the IMF’s October 2019 forecast of 3.4%.
2
Source: NBER. https://www.nber.org/cycles.html
4 | Outlook 2020
14 | Research Monitor | Mar 2020Austerity is over
Austerity, restrictions on government spending, will be over
in 2020. The emphasis will be on more, not less, spending.
But don’t expect too much: after years of belt-tightening,
caution will be in order.
After the financial crisis of 2008/9, Other countries are now set to follow.
as recessions set in and banks were Improvements in public services,
bailed out, government spending increased pay for public sector
(see Figure 3) and budget deficits workers and variations on the theme
ballooned. Bringing these deficits of a Green New Deal (see next section)
back under control became the will be the key trends.
emphasis around the world.
‘Austerity’ was the new mantra. In Germany, the change of leadership
of the SPD increases the likelihood
Although it was expressed in different of a material shift towards deficit Announced extra
ways – from Germany’s ‘black zero’
to eliminating the deficit in the UK
and off-balance sheet financed green
investment at the national and
spending plans include:
to troika-imposed measures in the EU level in coming years. Japan has €54bn in Germany on
eurozone – austerity meant essentially recently launched a substantial new
the same thing everywhere: a infrastructure spending plan.
emissions reduction;
reduction in government spending £34bn a year in the UK
and, often, tax increases. In the UK, more spending on the
health service and infrastructure on the National Health
Those measures have been, by and are key aspects of the new Service; and ¥26 trillion
large, successful in cutting government government’s plans.
deficits. But the US notably abandoned in Japan (expected
austerity policies in 2017/8, with large
tax cuts and increased government
to boost GDP by 1.4
spending. The government fiscal deficit percentage points).
is now running at US$1 trillion a year,
similar to that in the 2012 fiscal year.
3. Austerity over?
44
GFC (Global
43 Austerity
Financial Austerity
over?
Crisis)
42
41
% of GDP
40
39
38
37
2005 2007 2009 2011 2013 2015 2017 2019 2021
Advanced economies' government spending, % of GDP
Source: Refinitiv. Data as at 10 December 2019.
6 | Outlook 2020
Research Monitor | Mar 2020 | 15Green light for
green spend
A big theme for 2020 will be more spending on green
initiatives. Tackling climate change will move to the
top of the agenda around the world.
The realisation that action on climate by 4°C above pre-industrial levels by A switch from fossil fuels to solar and
change is needed is rapidly moving 2100 (they have already increased wind energy; investment in carbon
into the mainstream. It will be a key by 1°C since 1900). Emissions of capture and storage technologies; and
theme of 2020. Acceptance of the fact greenhouse gases will need to be cut a phasing out of subsidies on fossil
that greenhouse gas emissions cause significantly if global warming is to be fuels will be the key elements.
global warming and that these need restricted to 1.5-2.0°C (see Figure 4a). The latter amount to as much as
to be curbed will become (almost) US$5 trillion (6% of global GDP) and
universally accepted. Carbon dioxide (CO2) emissions from are largest in emerging economies.
burning fossil fuels account for almost We think that Europe will be at the
Without substantial mitigation of two-thirds of global greenhouse gas forefront of this green move in 2020.
greenhouse gas emissions, global emissions (see Figure 4b) and are the
temperatures are projected to rise most immediately practical to control.
4a. Global emissions and warming targets 4b. Global greenhouse gas emissions
60 Global greenhouse gas emissions from different sources, 2016
Global greenhouse gas emissions, billion tons
F-gases*
55
Nitrous oxide 2%
8%
50
CO2 from coal
Methane 27%
45
14%
40
CO2 from cement
35
4%
30
CO2 from land use
9%
25
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 CO2 from oil
CO2 from natural gas 23%
Emissions on the basis of: 13%
Current policies
*F-gases are fluorinated gases and are used as an alternative to ozone-depleting substances (ODS).
to achieve 2°C global warming to achieve 1.5°C global warming The sharp drop in the use of the latter has helped close the hole in the 'ozone layer' a huge concern in
Source: IMF Fiscal Monitor, October 2019. the late twentieth century. Source: IMF Fiscal Monitor, October 2019.
Outlook 2020 | 7
16 | Research Monitor | Mar 2020Fixed income: capital
preservation is key
The major developed world central banks are set to keep
interest rates at or below their current levels in 2020.
That will make for a tough environment for fixed income
markets in the developed world. Investment grade
corporate bonds offer one of the safest places.
Frozen 2, one of the box-office hits Growth is simply not strong enough a successful Brexit; but that is more
of the winter, could well describe the and inflation pressures not sufficiently Disney fantasy than likely reality.
predicament of central banks in 2020. intense for anything else to be All this makes for a tricky environment
Their interest rates first hit zero or seriously contemplated. We see the for fixed income investors. German
sub-zero in the aftermath of the global Fed, ECB, Bank of Japan and Swiss government bond yields along the
financial crisis. After a few attempts to National Bank leaving their policy maturity spectrum remain negative;
break away, notably by the Fed, were rates on hold in 2020. The Bank of UK 10-year gilt yields are not much
dashed, rates are set to be frozen England may raise rates if economic above recent multi-century lows;
again in 2020. dismay turns to over-exuberance after and in this environment US 10-year
Treasury yields of almost 2% look
5. BBB-rated bonds: yield spread over Treasuries somewhat generous.
600
There are opportunities for yield
500 pick-up in, for example, investment
400
grade corporate bonds (see Figure 5).
Yield spreads over Treasuries could
Basis points
300 compress a little, generating capital
200
gains, making this one of the best
areas on a risk-adjusted return basis.
100 But, overall, 2020 will be a tricky year
0
for developed market fixed income.
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Yield spread: 5-year BBB bonds vs. Treasuries High-low range
Source: Refinitiv. Data as at 10 December 2019.
8 | Outlook 2020
Research Monitor | Mar 2020 | 17Value in emerging
market bonds
We see value in emerging market local currency debt.
With subdued inflation and the US dollar stable, emerging
market interest rates can be cut further in 2020. This should
set the scene for local currency-denominated debt to do well.
In contrast to the main developed Two other key factors lend support
markets, where there are limited to emerging market local currency
prospects for further interest rate debt. First, corporate debt levels have Inflation rates continue
cuts and lower bond yields, emerging generally been reduced relative to
markets are in a much better position. GDP in recent years, so this risk of to trend down across
Inflation rates continue to trend down excess leverage is much lower, we emerging economies
across emerging economies (see Figure think, than in the past.
6a) and this means there is a domestic and this means there
case for lowering interest rates. That
has not been the case in all emerging
Second, there is a broader recognition
of the risks associated with borrowing
is a domestic case for
market countries – as the particular in foreign rather than local currency. lowering interest rates.
problems of Argentina and Turkey Such foreign currency borrowing
demonstrate – but most emerging proved to be a particular problem in
economies are now on a relatively Argentina and Turkey in their recent
firm footing as far as domestic growth crises. Local currency borrowing will
and inflation are concerned. now, we think, be favoured – giving
such markets more depth, breadth
A key risk to investing in emerging and investability. So, after a good year
market local currency debt in the for emerging market local currency
past has been local currency returns in 2019 (see Figure 6b), we
weakness, often as a result of see another solid year in 2020.
generalised US dollar strength.
With the US dollar generally highly
valued, however, we think that is less
of a risk in current circumstances.
6a. Inflation in emerging and advanced economies 6b. Emerging market local currency bonds performance
9 15
8
7 10
6
% change on year
5 5
4
% 0
3
2
-5
1
0
-10
-1
-2 -15
2001 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 2012 2013 2014 2015 2016 2017 2018 2019 ytd
G-7 EM-7
JP Morgan GBI-EM Global Diversified Index, total returns in USD terms
Note: The G-7 comprises: Canada, France, Germany, Italy, Japan, UK and US. The EM-7 comprises: Brazil, China,
India, Indonesia, Mexico, Russia and Turkey. Source: Refinitiv. Data as at 10 December 2019. Source: JP Morgan. Data as at 10 December 2019.
Outlook 2020 | 9
18 | Research Monitor | Mar 2020Banks bounce
We like the bank sector. It has historically offered a high
dividend yield; it has been out of favour for a long time;
but its post-crisis repair is now well-advanced. Cost cutting
and the move from branch-based activity to online platforms
could start to bring rewards.
The bank sector has been under digital platforms to bring big benefits In emerging markets, banks have often
pressure for many years (see Figure to their retail customers. That enables been tainted by the woes of their
7a). Financial innovation has seen branch networks to be pruned, developed world counterparts, but
the rise of challenger banks with new generating cost savings. And more their business case remains strong.
technology; many banks have been aggressive balance sheet adjustment
slow to rid their balance sheets of – writing down the bad loans of the Generally, bank profit margins are
the bad loans of the crisis era; crisis era – is now coming to the banks improving (see Figure 7b). So, after
and a public dislike of banks has who were laggards in this process. many years of underperformance of
been slow to clear. In 2020, European banks will be the wider global equity market, we
allowed to buy back their equity and think the bank sector is due for a
That seems to us to be changing. we see a number of banks being catch-up in 2020.
Mainstream banks are now, in many quick to do this.
cases, very effectively using new
7a. Banks’ underperformance 7b. Banks’ net profit margin
225 30
200
ITotal Return Index, 1 Jan 2007=100
20
175
10
150
0
125 %
-10
100
-20
75
50 -30
25 -40
2007 08 09 10 11 12 13 14 15 16 17 18 19 20 2003 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
MSCI World Index MSCI World Banks US Japan EU
Source: Refinitiv. Data as at 10 December 2019. Source: Refinitiv. Data as at 10 December 2019.
10 | Outlook 2020
Research Monitor | Mar 2020 | 19Small caps recover
Small cap companies are due a catch-up. In the US, the sector
has lagged large caps in four out of the last five years.
Much of the work on long-term stock The largest market capitalisation Second, there is every reason to think
market returns has identified a ‘small in the Russell 2000 is US$16bn, that innovation will still be a strong
cap’ premium. That is, such companies with a median value of US$800m. feature of small cap companies:
produce excess returns, largely in after all, today’s large cap tech
compensation for their higher risk. The S&P 500 is heavily weighted companies started out small
However, such ‘factor premia’ have a in the technology sector, while the (stereotypically ‘in a garage’).
disturbing tendency to vanish once Russell 2000 is more heavily weighted
identified. In the US, small caps have in financial services. Within sectors, Third, societal and environmental
underperformed large caps in four of however, the performance of big and changes mean that big cap
the last five years (see Figure 8a).4 small companies can diverge sharply: companies often attract widespread
This has meant that the gap between large cap technology stocks have criticism, including pressure for
the market capitalisation of large cap recently produced better returns than divestment. Companies that are
and small cap companies has widened small cap companies, for example. ‘boutique’, ‘specialist’, ‘independent’
siginificantly (see Figure 8b). and offer ‘hand-crafted’ products
There are four main reasons why we are the preferred choice of the
Stronger gains have been made in the think this gap in performance is due to millennial generation. Small, for
large cap S&P 500 index than in the reverse, with small caps doing better. many, is still beautiful.
small cap Russell 2000 index.
The difference between the two First, big technology companies are Finally, we think small cap companies
indices is significant: the median increasingly being scrutinised with could well be the target of the large
market capitalisation of companies the result that their business models amount of ‘dry powder’ accumulated
in the S&P 500 is US$23bn with two may not be as sustainable in the by private equity companies, which
companies (Apple and Microsoft) future. Their valuations may suffer has proved difficult to employ in non-
valued at over US$1tr. if this realisation takes hold. listed companies. Small cap companies
could well be the ‘new private equity’.
8a. Small cap versus large cap returns 8b. Large caps have outperformed small caps
40 30
35
30 25
25
20
20
USD trillions
Price returns, %
15
15
10
5
10
0
-5 5
-10
-15 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2008 09 10 11 12 13 14 15 16 17 18 19
Small caps (Russell 2000) Large caps (S&P500) Difference between S&P 500 and Russell 2000 market capitalisation
Source: Refinitiv. Data as at 10 December 2019. Source: Factset. Data as at 10 December 2019.
4
See FTSE Russell, “What have you done with my small cap premium?” 6 June 2019.
https://www.ftserussell.com/blogs/what-have-you-done-my-small-cap-premium
Outlook 2020 | 11
20 | Research Monitor | Mar 2020A tripolar world
Although the trade war between the US and China will
continue, the world is evolving towards a tripolar
arrangement. That trend will become clearer in 2020.
Late 2019 saw the prospect of a Japanese companies, for example,
‘Phase 1’ of a trade deal between the may well be suitable alternative
US and China appear tantalisingly
close; fade away; and then finally be
suppliers in the electronics industry.
And Beijing has ordered Chinese
Signs of the
agreed before new tariffs were due
to be imposed on 15 December (see
companies to remove their foreign
(not just American) PCs and software
emergence of
Figure 10a). That pattern, of course has
been characteristic of the negotiations
within three years.
a tripolar world.
for some time. We think these are just the first signs
of the emergence of a tripolar world:
The reality is that US tariffs on China North America with its (relatively free)
and China’s retaliatory tariffs on trading bloc – the USMCA (the ‘new
the US are unlikely to be completely NAFTA’); Europe, anchored by the EU
reversed. Furthermore, the risk and eurozone; and Asia, dominated by
to China’s industries from erratic China and now extending its influence
changes in tariffs has contributed to across Eurasia and, indeed, further.
‘de-Americanisation’ – an increasingly
heard (albeit ugly) word in late 2019. These changes will benefit some
economies – exports from Vietnam,
It has a number of aspects. Asian for example, are booming – but the
economies, notably China, are now more important point is that there is a
seeking out local suppliers as an fundamental change in the pattern of
alternative to American companies. world trade and growth taking place.
10a. China’s tariffs on the US and the rest of the world 10b. A tripolar world
30
Likely to be lower following Dec. 2019 'Phase 1' deal.
North Europe
25
25.9 Asia
America
21.8
20.7
20
18.3 18.2
16.5
% 15
14.4
10 10.1
8.0 8.4 8.3
8.0 8.0 7.2
6.9 6.7 6.7 6.7
5
0
01 02 01 01 06 23 24 01 01 01 01 15
Jan Apr May Jul Jul Aug Sep Nov Jan Jun Sep Dec
18 18 18 18 18 18 18 18 19 19 19 19
China’s average tariff: On US goods On the rest of the world's goods
Source: Peterson Institute for International Economics. Data as at 10 December 2019.
Source: EFGAM. For illustrative purposes only.
Outlook 2020 | 13
Research Monitor | Mar 2020 | 21Shaw Managed Accounts
Portfolio Performances – November 2019
3 Mth 6 Mth 1yr 2yr Inception
Shaw Income Goal Portfolio Total Portfolio Return 1.74% 5.56% 14.18% 7.50% 8.58%
Objective: RBA Cash +3% Portfolio Objective 0.95% 1.98% 4.23% 4.33% 4.34%
Inception: Sep-17 Excess v Objective 0.80% 3.58% 9.95% 3.17% 4.24%
Shaw Balanced Goal Portfolio Total Portfolio Return 1.87% 5.70% 15.18% 8.35% 9.71%
Objective: RBA Cash +4% Portfolio Objective 1.18% 2.46% 5.23% 5.37% 5.39%
Inception: Sep-17 Excess v Objective 0.68% 3.24% 9.95% 2.98% 4.32%
Shaw Growth Goal Portfolio Total Portfolio Return 6.63% 13.32% 25.34% 13.26% 15.54%
Objective: RBA Cash +5% Portfolio Objective 1.43% 2.96% 6.23% 6.31% 6.31%
Inception: Sep-17 Excess v Objective 5.20% 10.36% 19.11% 6.95% 9.23%
Total Portfolio Return -0.30% 2.74% 6.98% 4.77% 4.72%
Debt Securities Income Portfolio
Inception: Sep-17
Total Portfolio Return -1.08% 1.50% 6.10% 5.24% 6.71%
Hybrid Income Portfolio
Inception: Sep-16
Total Portfolio Return 4.80% 10.27% 30.24% 12.69% 13.74%
Australian Equity (Large Cap) - Income
Inception: Sep-17
Total Portfolio Return 4.19% 8.19% 27.80% 13.46% 14.40%
Australian Equity (Large Cap) - Core
Inception: May-16
Total Portfolio Return 12.17% 21.75% 43.83% 21.03% 22.66%
Australian Equity (Large Cap) - Growth
Inception: Sep-17
Total Portfolio Return 3.53% 10.26% 22.03% 9.26% 11.77%
Australian Equity - Small and Mid Cap
Inception: Sep-17
Total Portfolio Return -2.31% 0.17% 2.17% -0.88%
Shaw Liquid Alternatives Portfolio
Inception: Aug-18
Total Portfolio Return 7.63% 16.96% 33.29% 10.81%
AB Concentrated Global Growth
Inception: Jan-15
Total Portfolio Return -3.28% -6.17%
EFG US Future Leaders Portfolio
Inception: Jul-19
22 | Research Monitor | Mar 2020Shaw Managed Accounts
Click on the images below to download the marketing brochure and
SMA Portfolio Factsheets. Download the marketing brochure here.
Shaw Managed Accounts Shaw Managed Accounts Shaw Managed Accounts Shaw Managed Accounts
GOAL BASED PORTFOLIO GOAL BASED PORTFOLIO GOAL BASED PORTFOLIO ASSET CLASS PORTFOLIO
Shaw Income Goal Portfolio Shaw Balanced Portfolio Shaw Growth Goal Portfolio Shaw Debt Securities Income Portfolio
Investment objective Asset classes and strategies may include Investment objective Asset classes and strategies may include Investment objective Asset classes and strategies may include Investment objective The portfolio will be diversified across the
Model Portfolio Details Model Portfolio Details Model Portfolio Details Model Portfolio Details
The primary objective of the Shaw Income cash, Australian debt securities, and The primary objective of the Shaw cash, Australian debt securities, and The primary objective of the Shaw Growth cash, Australian debt securities, and The model invests in a portfolio of ASX above criteria. A key focus of the portfolio
Goal Portfolio is to provide a regular Australian equities including property Model Portfolio Manager Balanced Portfolio is to provide a regular Australian equities including property Model Portfolio Manager Goal Portfolio is to provide regular and Australian equities including property Model Portfolio Manager listed debt and shorter dated hybrid will be the mix of fixed and floating rate Model Portfolio Manager
and sustainable income stream over the securities, international equities and Shaw and Partners Limited and sustainable income stream and securities, international equities and Shaw and Partners Limited sustainable capital growth over the longer securities, international equities and Shaw and Partners Limited securities, debt based ETFs and debt exposure in order to meet the portfolios’ Shaw and Partners Limited
medium term (3–5 years) whilst minimising alternative strategies (ETF and or capital growth over the medium term alternative strategies (accessed via ASX term (5–7 years). It achieves this by alternative strategies (ETF and or specialist managed funds. These objectives. The portfolio will be monitored
risk to capital. It achieves this by investing managed funds). Benchmark Index (4–6 years), together with some capital listed ETFs and or managed funds). Benchmark Index investing in a diversified portfolio of asset managed funds). Benchmark Index products offer potential diversification against the manager’s expectations of Benchmark Index
RBA Cash rate +3% RBA Cash rate +4% RBA Cash rate +5% RBA Cash rate +1.5%
in a diversified portfolio of asset classes growth whilst minimising risk to capital. It classes and strategies. The strategy is benefits to both Australian equities and equity returns, credit market implied
Continual assessment and risk (Gross Income and Total Return) Continual assessment and risk (Gross Income and Total Return) Continual assessment and risk
and strategies. achieves this by investing in a diversified designed to have a high level of risk. It cash or term deposits. volatilities and underlying interest rates
management of bottom-up and top- Indicative Number of Securities, Stocks management of bottom-up and topdown Indicative Number of Securities, Stocks management of bottom-up and top- Indicative Number of Stocks per Indicative Number of Securities, Stocks
portfolio of asset classes and strategies. achieves this by investing in a diversified Asset Class Based Portfolio in order to ensure it is invested across and/or Funds (ETF and Managed)
The strategy is designed to have a down parameters is a core component and/or Funds (ETF and Managed) parameters is a core component of the and/or Funds (ETF and Managed) down parameters is a core component The model’s return will be generated from
portfolio of asset classes and strategies. 30–100 a range of market cycles to meet its 15–25
medium level of risk. of the model. Changes to the portfolio 40–100 The strategy is designed to have a model. Changes to the portfolio will be 60–140 of the model. Changes to the portfolio a combination of interest payments and
Minimum Suggested
return objective, while adhering to the risk Minimum Suggested
will be made as deemed appropriate Minimum Suggested moderate level of risk. made as deemed appropriate by the Minimum Suggested The strategy is designed to have a high will be made as deemed appropriate capital growth (realised and unrealised)
Investment Time Frame tolerances set. Investment Time Frame
by the investment team in order for Investment Time Frame investment team in order for the portfolio Investment Time Frame level of risk. by the investment team in order for from an actively managed portfolio
Investment Strategy and Approach 3 years 4 years 5 years 3 years
The investment process combines the portfolio to have a high probability Investment Strategy and Approach to have a high probability of meeting the portfolio to have a high probability strategy. The model manager has access to new
Asset Allocation Ranges Asset Allocation Ranges Asset Allocation Ranges Asset Allocation Ranges
quantitative and qualitative criteria and of meeting its objectives in all market Investment Strategy and Approach The its objectives in all market conditions. Investment Strategy and Approach of meeting its objectives in all market issues of listed debt securities and is
Shaw Debt Securities Income 0%–30% Shaw Debt Securities Income 0%–50% Shaw Australian Equity Growth The Shaw Debt Income Portfolio seeks to Debt and hybrid securities 70%–100%
analysis to identify asset classes, markets, conditions. The investment process takes investment process combines quantitative The investment process takes into The investment process combines conditions. The investment process takes (Large Cap) 0%–80% able to include these in the portfolio as it Cash 0%–100%
Shaw Hybrid Income 0%–35% Shaw Hybrid Income 0%–50% provide investors with a predictable level
securities and strategies which have into consideration the risk around asset and qualitative criteria and analysis to consideration the risk around asset quantitative and qualitative criteria and into consideration the risk around asset Shaw Australian Equity Growth deems appropriate.
Shaw Australian Equity Income Shaw Australian Equity Core of income whilst minimising risk to capital. Indicative Cash Holding
a focus toward producing sustainable classes and the underlying securities, (Large Cap) 0%–60% identify asset classes, markets, securities classes and the underlying securities (Large Cap) 0%–60% analysis to identify asset classes, markets, classes and the underlying securities (Small and Mid-Cap) 0%–40% 2%
income as opposed to capital growth. maintaining their income characteristics International Equity 0%–40% and strategies which have a focus toward maintaining their income and growth Shaw Australian Equity Growth securities and strategies which have a maintaining their growth characteristics International Equity 0%–40%
Designed for investors who
whilst ensuring that the risk of a Liquid Alternatives 0%–40% characteristics whilst ensuring that the risk (Small and Mid-Cap) 0%–30% whilst ensuring that the risk of a Liquid Alternatives 0%–40% Investment Strategy and Approach
producing sustainable income and capital focus toward producing capital growth Seek a sustainable income stream over Minimum Model Investment
drawdown is adequately managed. The Cash 0%–100% of a drawdown is adequately managed. International Equity 0%–40% drawdown is adequately managed. The Cash 0%–100%
The portfolio construction is based on growth. over and above income. The model manager aims to achieve the a 3 year + time frame, with a lower risk $5,000
macro-economic and thematic views of Portfolio Managers however manage the Indicative Cash Holding The Portfolio Managers however manage Liquid Alternatives 0%–40% Portfolio Managers however manage the Indicative Cash Holding investment objectives via a qualitative
Cash 0%–100% 3%
of loss than equities, and a higher rate
Shaw’s Research in order to best meet capital value of the portfolio to minimise 3% The portfolio construction is based on the capital value of the portfolio to The portfolio construction is based on capital value of the portfolio to minimise and quantitative investment process. Key of return than cash like investments
Management Fee
the risk and return objectives of the the risk of the portfolio failing to achieve macro-economic and thematic views of minimise the risk of the portfolio failing to Indicative Cash Holding macro-economic and thematic views of the risk of the portfolio failing to achieve criteria and areas of focus are: Investment Fee Nil
its risk and return objectives. Minimum Model Investment achieve its risk and return objectives. 3% its risk and return objectives.
Minimum Model Investment Focus on minimising risk to capital and Indirect Cost Ratio 0.28% p.a.
investment strategy. Shaw’s Research in order to best meet Shaw’s Research in order to best meet $100,000 Credit quality of the issuer
$100,000 low volatility of returns. Performance Fee Nil
the risk and return objectives of the the risk and return objectives of the
The portfolio is a blend of the Shaw and Minimum Model Investment Sector/Industry
Designed for investors who investment strategy. Designed for investors who $100,000 investment strategy. Designed for investors who Management Fee
Partners SMA strategic portfolios based Management Fee Call dates and final maturity details
Seek income as the primary objective Investment Fee Nil Seek a balance of income and capital Seek capital growth as the primary Investment Fee Nil
on their suitability to the income objective. The portfolio is a blend of the Shaw The portfolio is a blend of the Shaw and Indirect Cost Ratio 0.36% p.a. Structure of instrument
and some capital appreciation from a Indirect Cost Ratio 0.34% p.a. growth as the primary objective from Management Fee objective and some income from a
Each goals based portfolio has effectively Performance Fee Nil and Partners SMA strategic portfolios Investment Fee Nil Partners SMA strategic portfolios based Performance Fee Nil
broad range of Australian and Global a broad range of Australian and global broad range of Australian and global Timing and composition of cash flows
its own asset and risk allocation managed based on their suitability to the Balanced asset classes and strategies Indirect Cost Ratio 0.37% p.a. on their suitability to the growth objective.
asset classes and strategies asset classes and strategies Relative valuation of sector as a whole
by the Shaw Portfolio Strategies Team. portfolio objective. Each goals based Performance Fee Nil Each goals based portfolio has effectively
Have an investment horizon of three Have an investment horizon of four Have an investment horizon of five and between relevant securities,
portfolio has effectively its own asset and its own asset and risk allocation managed
years or more years or more years or more including the inclusion of new issues
risk allocation managed by the Shaw by the Shaw Portfolio Strategies Team.
Accept the risk of volatility in their Portfolio Strategies Team. Accept a moderate risk of volatility in Accept the risk of volatility in their Liquidity and potential changes in
investment return. their investment return. investment return. liquidity.
MODEL PORTFOLIO CODE MODEL PORTFOLIO CODE MODEL PORTFOLIO CODE MODEL PORTFOLIO CODE
SP0009 SP0008 SP0010 SP0003
Shaw Income Goal Shaw Balanced Goal Shaw Growth Goal Shaw Debt Securities Income
Shaw Managed Accounts Shaw Managed Accounts Shaw Managed Accounts
Shaw Managed Accounts
ASSET CLASS PORTFOLIO ASSET CLASS PORTFOLIO ASSET CLASS PORTFOLIO ASSET CLASS PORTFOLIO
Shaw Hybrid Income Portfolio Shaw Australian Equity (Large Cap) Income Shaw Australian Equity (Large Cap) Core Shaw Australian Equity (Large Cap) Growth
Investment objective The portfolio will be diversified across Investment objective Continual assessment and risk Investment objective The Investment Process takes into Investment objective The investment process takes into
Model Portfolio Details Model Portfolio Details Model Portfolio Details Model Portfolio Details
The model aims to invest in a portfolio of the above criteria. The portfolio will The primary objective of the Shaw management of bottom-up and top- The objective of the Shaw Australian consideration the yield and capital growth The primary objective of the Shaw consideration the primary objective of
ASX listed debt and preference securities be monitored against the manager’s Model Portfolio Manager Australian Equity Income (Large Cap) down parameters is a core component Model Portfolio Manager Equity (Large Cap) Core Portfolio is objectives of the portfolio and ensures Model Portfolio Manager Australian Equity (Large Cap) Growth capital growth. Although the portfolio will Model Portfolio Manager
that offer diversification benefits to both expectations of equity returns, credit Shaw and Partners Limited Portfolio is to provide a regular and of the model. Changes to the portfolio Shaw and Partners Limited to provide regular income, capital that both are managed simultaneously Shaw and Partners Limited Portfolio is to provide a level of capital generate income, income focused stocks Shaw and Partners Limited
Australian equities and cash or term market implied volatilities and underlying sustainable fully franked dividend income will be made as deemed appropriate appreciation and out performance of the to ensure that the portfolio is not overly appreciation over the longer term will be included if their total return criteria
deposits. interest rates in order to ensure it is Benchmark Index stream over the medium term (3–5 years). by the investment team in order for the Benchmark Index S&P/ASX 100 Accumulation Index over skewed to any style or thematic that Benchmark Index (5–7 years). The portfolio is tilted towards fits the portfolios objective. Benchmark Index
RBA Cash rate +3% S&P/ASX 100 Accumulation Index S&P/ASX 100 Accumulation Index S&P/ASX 100 Accumulation Index
invested across a range of market It achieves this by investing in a portfolio portfolio to have a high probability of the medium term (3–5 years) through would increase the risk of the portfolio stocks that have superior earning growth
The model’s return will be generated from (inclusive of franking credits) Volatility of returns will be managed with
cycles to meet its return objective, while of large-cap Australian listed companies meeting its objectives. The investment investment in large cap shares listed in failing to meet its objectives. capacity and focus is on the total return
a combination of cash (interest payments Indicative Number of Stocks Indicative Number of Stocks Indicative Number of Stocks the objective of a lower standard deviation Indicative Number of Securities, Stocks
adhering to the risk tolerances set. and managed funds. Although the process takes into consideration the risk 15–25 Australia. 15–25 of each stock rather than the dividend and/or Funds (ETF and Managed)
and dividends), franking credits and 10–30 of returns than the benchmark index.
focus is yield generation, the investment around companies growing/maintaining Designed for investors who income as the prime objective. 10–30
capital growth (realised and unrealised) The model manager has access to new process and risk management aims to their dividend characteristics with the
Minimum Suggested Minimum Suggested Investment Strategy and Approach Seek exposure to an Australian share Minimum Suggested Minimum Suggested
from an actively managed portfolio issues of debt and preference securities ensure that risk to capital is minimised result that this portfolio aims for a higher Investment Time Frame Investment Time Frame Designed for investors who
Investment Time Frame Shaw and Partners’ Investment Process portfolio that provides a franked income Investment Strategy and Approach Investment Time Frame
strategy. and is able to include in the portfolio as it 3 years with the goal of some capital appreciation dividend yield than that of the broader 3 years 3 years Seek long term capital growth as the 5 years
deems appropriate. combines quantitative and qualitative stream and capital appreciation The investment process combines
Asset Allocation Ranges via both longer term price appreciation market. The portfolio managers however Asset Allocation Ranges criteria and analysis to identify stocks Asset Allocation Ranges quantitative and qualitative criteria and primary objective from an Australian Asset Allocation Ranges
The Shaw Hybrid Income Portfolio seeks Have an investment horizon of three
Listed Australian hybrid securities 70%–100% and actively locking in gains as deemed manage the capital value of the portfolio Australian Equities 80%–100%
likely to produce above average
Australian Equities 90%–100%
analysis to identify stocks which have a equities portfolio and some income Australian Equities 80%–100%
to provide investors with a predictable The model manager’s institutional Cash 0%–20% years or more Cash 0%–10%
Listed debt securities 0%–80% appropriate to the objectives. to minimise the risk of the portfolio failing earnings growth with positive valuation favourable outlook are likely to produce Those investors in the accumulation Cash 0%–20%
level of income whilst minimising risk to market experience with this asset class Accept the risk of share price volatility.
Cash 0%–20% to achieve its risk and return objectives. Indicative Cash Holding characteristics. Indicative Cash Holding above average earnings growth with phase Indicative Cash Holding
capital. brings specialist knowledge to pricing
Indicative Cash Holding 2% 2% 2%
and liquidity. Active management of the Investment Strategy and Approach positive valuation characteristics. Have an investment horizon of five
2% Designed for investors who The portfolio construction is based on
portfolio will take advantage of relative The investment process combines years or more
Investment Strategy and Approach Minimum Model Investment
macro-economic and thematic views of Minimum Model Investment
The portfolio construction is based on Minimum Model Investment
mispricing between securities and the quantitative and qualitative criteria and Seek franked dividend income as the $5,000 $5,000
The model manager aims to achieve the Minimum Model Investment Shaw and Partners’ Research in order to macro-economic and thematic views of Accept the risk of share price volatility. $5,000
asset class as a whole, while taking into $5,000 analysis to identify stocks and strategies primary objective from an Australian
investment objectives via a qualitative best meet the risk and return objectives Shaw and Partners’ Research in order to
consideration the impact of any micro which have a relatively high dividend equities portfolio and some capital Management Fee Management Fee Management Fee
and quantitative investment process. Key of the investment strategy. Continual best meet the risk and return objectives of
and macroeconomic factors. The ability Management Fee paying capability, and are likely to appreciation Investment Fee Nil Investment Fee Nil Investment Fee Nil
criteria and areas of focus are: Indirect Cost Ratio 0.25% p.a. assessment and risk management of Indirect Cost Ratio 0.00% p.a. the investment strategy.
to lock in gains will be a key feature of the Investment Fee Nil produce above average earnings growth Have an investment horizon of three Indirect Cost Ratio 0.00% p.a.
Credit quality of the issuer Indirect Cost Ratio 0.00% p.a. with positive valuation characteristics. Performance Fee Nil bottom-up and top-down parameters is a Performance Fee Nil Performance Fee Nil
strategy in achieving its objectives. years or more Continual assessment and risk
Sector/Industry Performance Fee Nil core component of the Model. Changes
The portfolio construction is based on Accept the risk of share price volatility. to the portfolio will be made as deemed management of bottom-up and top-down
Call date, conversion dates and final Designed for investors who parameters is a core component of the
macro-economic and thematic views of appropriate by the investment team in
maturity details Seek a sustainable income stream model. Changes to the portfolio will be
Shaw and Partners’ Research in order to order for the portfolio to have a high
Structure of instrument (inclusive of franking credits) over a 3 year best meet the risk and return objectives of probability of meeting its objectives. made as deemed appropriate by the
Timing and composition of cash flows + time frame, with a lower risk of loss the investment strategy. investment team in order for the portfolio
than equities, and a higher rate of return to have a high probability of meeting its
Relative valuation of sector as a whole
than cash like investments. objectives.
and between relevant securities,
including the inclusion of new issues
Liquidity and potential changes in
liquidity. MODEL PORTFOLIO CODE MODEL PORTFOLIO CODE MODEL PORTFOLIO CODE MODEL PORTFOLIO CODE
SP0002 SP0004 SP0001 SP0005
Shaw Hybrid Income Shaw Australian Equity Shaw Australian Equity Shaw Australian Equity
(Large Cap) Income (Large Cap) Core (Large Cap) Growth
Shaw Managed Accounts Shaw Managed Accounts Shaw Managed Accounts
Shaw Managed Accounts
ASSET CLASS PORTFOLIO ASSET CLASS PORTFOLIO ASSET CLASS PORTFOLIO ASSET CLASS PORTFOLIO
Shaw Australian Equity (Small and Mid-Cap) Growth Shaw Liquid Alternatives Portfolio AllianceBernstein Concentrated Global Growth EFG US Future Leaders
Investment objective The investment process takes into Investment objective research into alternative strategies and Investment objective Designed for investors who Investment objective The investment framework is defined by a
Model Portfolio Details Model Portfolio Details Model Portfolio Details Model Portfolio Details
The primary objective of the Shaw consideration the primary objective The primary objective of the Shaw Liquid return streams is a core component The portfolio seeks long term growth Are considered longer term investors (5 To provide a return exceeding the MSCI disciplined investment process consisting
Australian Equity (Small and Mid-Cap) of capital growth. It aims to invest in Model Portfolio Manager Alternatives Portfolio is to provide regular of the model. Changes to the portfolio Model Portfolio Manager of capital by investing in an actively years +) Model Portfolio Manager US Mid Cap Growth TR index over rolling of several checklists. This ensures that Model Portfolio Manager
Growth Portfolio is to provide a level of companies where the share price does Shaw and Partners Limited and sustainable income and capital will be made as deemed appropriate Shaw and Partners Limited managed concentrated portfolio of listed Seek exposure to a concentrated AllianceBernstein 10-year periods. the investment process used by the EFG Asset Management
capital appreciation over the longer term not fully reflect the potential value of the growth over the medium term (3–5 years) by the investment team in order for securities considered by the portfolio portfolio of high quality global equities team is consistent and repeatable. The
(5–7 years). The portfolio is tilted towards underlying business of the company. Benchmark Index whilst minimising risk to capital. It the portfolio to have a high probability Benchmark Index manager to be of very high quality issued Benchmark Index investment process has four key inputs Benchmark Index
S&P/ASX Small Ordinaries Accumulation Index RBA Cash rate +3%
with superior return potential with MSCI World Index
Investment Description MSCI US Mid Cap Growth TR
small and mid-sized stocks that have achieves this by investing in a diversified of meeting its objectives in all market by companies with predictable growth. generally low turnover The US Future Leaders Model is a that determine a company’s overall
superior earning growth capacity and Designed for investors who portfolio of asset classes and strategies conditions. The investment process takes concentrated US stock portfolio, designed ranking and can be applied across all
Indicative Number of Securities, Stocks Indicative Number of Securities, Stocks Indicative Number of Stocks per Indicative Number of Stocks
focus is on the total return of each stock Seek long term capital growth as the that have low correlation with traditional into consideration the risk around asset and/or Funds (ETF and Managed) Investment Strategy and Approach Asset Class Based Portfolio to provide direct equity exposure to sectors to facilitate stock selection: 20–35
and/or Funds (ETF and Managed)
rather than the dividend income as the primary objective from and Australian equity and debt asset classes. This classes and the underlying securities 3–20 The portfolio manager seeks to achieve 25–35 rapidly growing businesses with significant
15–30 1. Company Quality Grade
prime objective. equities portfolio and some income portfolio is designed to act as a volatility maintaining their growth characteristics the investment objective by composing a opportunity to develop into future mid- Minimum Suggested
Minimum Suggested Minimum Suggested Minimum Suggested 2. Stock Technical Timing Grade
dampener and diversifier to an existing whilst ensuring that the risk of a Investment Time Frame portfolio of highly liquid, listed securities of Investment Time Frame or large-cap companies, primarily via Investment Time Frame
Those investors in the accumulation Investment Time Frame
Investment Strategy and Approach 5 years
portfolio of liquid assets. drawdown is adequately managed. The 3 years quality companies from the MSCI World 5 years organic growth. Stocks are selected 3. Short Term Earnings Growth Grade 10 years
phase portfolio managers however manage the
The investment process combines Asset Allocation Ranges universe. These companies are chosen Asset Allocation Ranges through a proprietary in-house systematic 4. Long Term Earnings Growth Grade Asset Allocation Ranges
Have an investment horizon of five Asset Allocation Ranges
quantitative and qualitative criteria and Investment Strategy and Approach capital value of the portfolio to minimise Liquid alternative assets 80%–100% for their specific growth and business International Equities 90%–100% framework. The team’s objective is International Equities 85%–99%
Australian Equities 80%–100%
years or more the risk of the portfolio failing to achieve Cash 0%–20% Cash 0%–10% The team’s investment framework is Cash 1%–15%
analysis to identify stocks which have a Cash 0%–20% The portfolio is a blend of strategies and characteristics, earnings development, to identify the highest quality, fastest
Accept the risk of share price volatility. investments that can be expected to have its risk and return objectives. Indicative Cash Holding financial position and experienced Indicative Cash Holding growing companies and trade them at the basis for portfolio construction. Minimum Model Investment
relatively high dividend paying capability Indicative Cash Holding
a lower correlation to equities, bonds and 2% management. 2% the right time by adhering to a structured This regimented process helps to $100,000
are likely to produce above average 2%
other traditional beta style investments. Designed for investors who investment process. By identifying consistently find and own the best quality
earnings growth with positive valuation Risk level
Minimum Model Investment The portfolio was designed primarily Investors seeking sustainable and lower Minimum Model Investment Minimum Model Investment
these Future Leaders early, they believe companies. Value is added through active
characteristics. Very High.
$5,000 $5,000 $65,000 management by identifying the best
to lower the downside variance of an volatility returns (mix of income and the portfolio will afford investors with Negative return 6 years in every 20 years.
The portfolio construction is based on income, balanced or growth portfolio that the opportunity to earn superior long- companies in the growth universe, then
capital growth) as the primary objective Management Fee Management Fee Management Fee
macro-economic and thematic views of Management Fee
uses a mixture of bonds and equities that will be less impacted by large term returns. Portfolio construction will owning (or adding to) them when they are
Investment Fee Nil Investment Fee Nil Investment Fee 0.55% p.a. Investment Fee 0.55% p.a.
Shaw and Partners’ Research in order to to derive a given long term return. The be rooted in our fundamentally based timely and selling (or trimming) them when
Indirect Cost Ratio 0.61% p.a. moves in underlying asset prices in Indirect Cost Ratio 0.95% p.a. Indirect Cost Ratio 0.00% p.a. Indirect Cost Ratio 0.00% p.a.
best meet the risk and return objectives of strategies and managers chosen for investment philosophy and process – they are not.
Performance Fee Nil traditional investments such as Equities Performance Fee Nil Performance Fee Nil Performance Fee Nil
the investment strategy. the portfolio have a demonstrable track and Bonds with a focus on the four primary growth
record of minimising risk to capital during As a standalone investment option, sectors of the economy (technology, Designed for investors who
Continual assessment and risk
downturns and when blended in the suitable for investors looking for a lower healthcare, consumer discretionary, and Are interested in emerging leader
management of bottom-up and top-down
appropriate weights can significantly risk/lower return exposure that is not financial services). growth stocks;
parameters is a core component of the
reduce the downside potential of a bond correlated with traditional asset class Are sophisticated investors with long-
model. Changes to the portfolio will be
and equity portfolio. returns Investment Strategy and Approach term investment horizons (5+ years);
made as deemed appropriate by the
investment team in order for the portfolio Asset classes and strategies may Blended with a traditional income, The US Growth Equity team employs Have a high tolerance for risk; and
to have a high probability of meeting its include Global Macro, Managed Futures balanced or growth portfolio to reduce a rigorous, disciplined, and repeatable Seek capital appreciation.
objectives. (Trends), Long/Short and Market Neutral, drawdown and smooth returns process that is a combination of both
Commodities and Dynamic Markets. Investors should have an investment qualitative and quantitative inputs. The
MODEL PORTFOLIO CODE MODEL PORTFOLIO CODE MODEL PORTFOLIO CODE basis of the process starts with industry
MODEL PORTFOLIO CODE
horizon of three years or more
SP0006 Only managers/investments that
have daily pricing and liquidity can be
Accept the risk of volatility in their
investment return.
SP0011 SP0012 centric research performed by the sector
experts on the team. SP0200
considered. Continual assessment and
Shaw Australian Equity Shaw Liquid Alternatives AllianceBernstein Concentrated EFG US Future Leaders
(Small and Mid-Cap) Growth Global Growth
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