Fund Update 31 July 2011 OC Premium Equity Fund
The equity markets started the new financial year On a positive note, Village Roadshow rallied
on a negative note with the S&P ASX 200 Index approximately 10% for the month after adjusting for
falling 3.6% in July, its largest decline since May the $1.00 per share distribution that was returned to
2010. The OC Premium Equity Fund was down 2.3% shareholders during the month. The company has a
for the month, slightly underperforming the Small number of solid growth options including domestic
Industrials Accumulation Index which was down expansion of its theme parks division and a possible
1.8% and the Small Ordinaries Accumulation Index expansion into Asia with a joint venture partner (who
which rose 1.4% on the back of a buoyant small is likely to provide most of the necessary capital). The
stock still looks value trading on a FY12 PE multiple
of around 9x and a solid 6% dividend yield.
With most companies in “black-out” ahead of
reporting season there was little in the way of stock OC Dynamic Equity Fund
specific news during the month. Mayne Pharma The OC Dynamic Equity Fund was down 2.7% in the Group advised that the US FDA had rejected its month of July. The Fund holds the same core positions
application for a new dosage of Doryx. While Doryx as the OC Premium Equity Fund with the difference in
passed efficacy and safety requirements, the rejection performance during the month coming as a result of
related to deficiencies within the application. The the Dynamic Equity Fund’s holding in G8 Education.
decision will adversely impact Mayne Pharma’s FY11 During the month G8 announced that the settlement
and FY12 earnings and leads to uncertainty around of its Cherie Hearts acquisition would be delayed
the timing of future FDA approval. We have exited our
and that litigation fees had been accrued as a result
position in the stock as a result of this development.
of a dispute with the vendor. We had reduced our
holding in G8 Education prior to the announcement
Decmil Group, a Perth-based company which which we had been anticipating, although liquidity
provides design, civil and engineering services to was insufficient for us to exit entirely. The stock fell
the resources, energy and infrastructure sectors was 20% post the announcement and we will continue
sold down 17% during the month. Whilst there was to hold our position from this level on the basis that
no stock specific news released by the company, our its Australian business is operating very soundly and
discussions with the company indicate that a number that any forthcoming resolution to the Singapore
of key contract awards, anticipated by the market issue should provide further earnings upside.
for some months, have been delayed. Our analysis
suggests that this will result in a softer than expected
H2 FY11 result and a weak H1 FY12 result. As a result
Fund Inception: OC Premium Equity Fund 08/12/2000. OC Dynamic Equity Fund 20/12/2000. OC Concentrated Equity Fund 30/11/2003.
OC Concentrated Equity Fund
and Italy). It is important to note that this current
The OC Concentrated Equity Fund finished July economic environment is quite different from the
down 3.0%, slightly ahead of the All Ordinaries Global Financial Crisis (GFC) of 2008-09 and is
Accumulation Index which finished the month down driven by the risk of sovereign default as opposed
to the toxic products which undermined confidence
in the global banking system and brought intra-
In the Core Fundamental section of the portfolio, bank lending to a standstill. Unlike 2008, there is
the positive share price performance of Mineral significantly less leverage in the global financial Resources and Monadelphous Group was more than system. Australia, in particular, is well positioned
offset by share price falls of between 2% and 10% with a relatively low national debt (29.3% of GDP),
in Ausenco, M2 Telecommunications and Service strong corporate balance sheets (most companies Stream. There were no material announcements having recapitalised post GFC) and household debt
from any of these companies during the month and trending down.
we are confident about their prospects heading into
Sovereign debt concerns have been a major focus of
the OC Funds Risk Management Committee for more
In the Emerging Leaders section of the portfolio, than a year now and concerns about the associated
our recently established position in Runge, mining refinancing risk is a key reason why many of the
software and consulting business, enjoyed a good companies in our portfolio have little or no gearing.
month (+15%) off the back of a solid trading update As a result, we do not expect that any of our holdings
and outlook. As mentioned under the Dynamic Equity will face debt refinancing issues should debt markets
Fund review, the G8 Education share price suffered deteriorate further and credit be rationed.
during the month after a trading update illustrated
the earnings impact of a troublesome legal dispute The recent softer US economic data was tempered
in relation to its recently announced Singaporean somewhat over the weekend with the release of
the US labour market report that indicated the US
unemployment rate declined marginally and that
The Alpha Plus section of the portfolio was broadly 117,000 jobs were created in the non-farm sector.
impacted by weakening share prices from a range Furthermore, there were some positive revisions to
of holdings including previously strong performing the previous months’ data. This is consistent with our
names such as Atlantic, REVA Medical and Yellow view that the US economy is moving along a winding Brick Road. On a positive note, we saw a good rally path toward a slow recovery. Significantly, the recent
in Queensland coal explorer, Stanmore Coal (+30% corporate earnings season in the US was extremely
off its lows) and took the opportunity to exit the positive with companies reporting all time record
quarterly earnings per share, surpassing the pre GFC
record. These fundamentals are clearly at odds with
Our risk adjusted approach to announced but investor sentiment which remains extremely bearish.
unconsummated takeover bids was further vindicated
during the month with the share prices of both On 5 August, US government debt was downgraded
Austar (regulatory hurdles) and Spotless (bid pricing by Standard and Poors from AAA long-term credit
concerns) trading well below indicative bids levels. rating to AA+. Other ratings agencies (Fitch and
We had earlier exited these positions at much higher Moodys) have maintained their AAA ratings. This is
levels when we weighed up the risk/reward trade off
the first ever downgrade for US government debt
of continuing to hold out for the full indicative bid and has been driven by a build up of US government
price. We also took some short term trading profits debt over the past decade and a view that the Obama
in stocks such as Murchison Metals and Bionomics.
Administration and Congress have not taken adequate
measures to either cut spending or raise revenues in
order to get the debt back to a sustainable level. In
Recent days have seen a major sell-off in global practice, this means that credit costs for virtually all
equity markets and risk aversion has spiked on the American borrowers will be higher over time than
back of concerns that sovereign debt issues in Europe they would have otherwise been.
could undermine the world’s financial system. Euro-
zone lenders and monetary authorities are working It is difficult to gauge how US interest rates (and
on a solution to the debt issues impacting Greece, global rates) will move due to the downgrade given
Portugal and Ireland as we speak (with concerns that it was widely anticipated and only one agency
growing about the contagion spreading to Spain has downgraded. It is unlikely US interest rates will
spike materially higher as its capacity to meet its The OC portfolios tend to experience high levels of
financial obligations is still “very strong”, although it volatility in times such as these when (perceived)
has no doubt added to risk aversion at a time when riskier assets are often sold off indiscriminately. The
global investor sentiment is very poor.
key for investors in an environment such as this is
not to panic. Market conditions will continue to be
On a domestic front, the economy has slowed volatile near term and the irrational selling in a crisis
somewhat recently and the consumer discretionary, such as this tends to throw up outstanding long-term
property and building materials sectors remain investment opportunities. We remind our investors
tough. We own few companies exposed to these of our favourite quote from investment sage, Warren
thematics. At present many of the core holdings in the Buffet: “Be fearful when others are greedy and greedy
OC Funds portfolios are not dependant on a strong only when others are fearful”.
economic environment for growth; some of these
investments include M2 Telecommunications, Slater The ASX 200 has already fallen 20% from its April
& Gordon, REA Group, Cash Converters and Sirtex highs despite Australia having the strongest GDP
Medical. Indeed we think the portfolios are strongly growth, the lowest unemployment rate and the
positioned heading into the August reporting period strongest AAA rated national balance sheet in the
and we expect that the unit price of the Funds should OECD. Investors who make knee-jerk decisions
bounce back strongly when calm is restored to the now and rush to cash at a time when valuations of
Australian equities are historically very cheap (FY
12 PE multiple is now approximately 10.5x versus
We expect the events in financial and commodity a 15 year average of 14.2x) risk leaving significant
markets in recent weeks will hasten the RBAs decision amounts of money on the table when the market
to cut interest rates in Australia. Inflationary concerns inevitably recovers.
are likely to be tempered in this environment and
corporate capital expenditure intentions are likely to
be wound back meaning that wage inflation is less
likely to become an issue. Indeed the bond market
is now pricing in almost three interest rate cuts (25
basis points each) before the end of the calendar
year and a further two rate cuts by April 2012 which
ought to help kick start the domestic economy.
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* Past performance is not a reliable indicator of future performance. The Total Returns of the OC Funds over specified periods are shown in the above table.
This table contains information regarding Total Returns to 31 July 2011. Total Returns are calculated after taking into account performance fees. Where
OC Funds generates a return on The Premium and Dynamic Funds over and above the performance hurdle of 15% in any financial year, a performance
fee of 20.5% of all profits above this level is charged to the Funds directly. Where OC Funds generates a return on the Concentrated Fund over and
above the performance hurdle of 0% in any financial year (subject to a high water mark) , a performance fee of 10.25% of all profits above this level is
charged to the Fund directly. Between 1 July 2004 and 30 June 2009 where OC Funds generated a return on the Concentrated Fund over and above the
performance hurdle of 0% in any financial year (subject to a high water mark), a performance fee of 20.5% of all profits above this level was charged
to the Fund directly. Before 1 July 2004, performance fees were not paid out of the Funds but billed by OC Funds directly to investors. In this table,
the Total Returns for the period prior to 1 July 2004 have been adjusted to reflect the paid performance fees as if the fees were paid out by the Funds.
The Total Return performance figures quoted are historical, calculated using end of month mid prices and do not allow the effects of income tax or inflation.
Total Returns assume the reinvestment of all distributions. The performance is quoted net of all fees and expenses. The Indices do not incur these costs.
This information is provided for general comparative purposes. Positive returns, which the Funds are designed to provide, are different regarding risk
and investment profile to index returns. This document is for general information purposes only and does not take into account the specific investment
objectives, financial situation or particular needs of any specific recipient. As such, before acting on any information contained in this document, recipients
should consider the appropriateness of the information to their needs. This may involve seeking advice from a qualified financial adviser. OC Funds (ACN
092 872 056) is the issuer of the OC Premium Equity Fund (ARSN 098 644 976) (‘Premium Fund’) and the OC Dynamic Equity Fund (ARSN 098 644 681)
(‘Dynamic Fund’), and the OC Concentrated Fund (ARSN 126 537 424) (‘OC Concentrated Fund’). Current PDSs are available from OC Funds, located at Level
33, 360 Collins Street, Melbourne, VIC 3000, (03) 9602 3199. A person should consider the PDSs before deciding whether to acquire or continue to hold
an interest in the the OC Premium Fund, the OC Dynamic Fund or the OC Concentrated Fund. Any opinions or recommendation contained in this document
are subject to change without notice and OC Funds is under no obligation to update or keep any information contained in this document current. OC Funds
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