Sean Sequeira

Australian Eagle Trust Long-Short Fund has been upgraded to a Superior rating from Australia Ratings.

Australia Ratings stated in their announcement: A rating of SUPERIOR is the highest rating on the investment rating scale used by Australia Ratings. A SUPERIOR investment rating indicates the highest level of confidence that the Trust can deliver a risk-adjusted return in line with its investment objectives.

“We are delighted the consistent application of our investment process has been recognised with the upgrade to “SUPERIOR” for our Long-Short fund by the highly respected Australian Ratings. During the last 12 months the market conditions have been incredibly challenging for all, and the consistent adherence to our rigorous investment process has been the cornerstone of our results for investors.

“It is gratifying that the Australia Rating team has recognised the quality of our efforts. We are also pleased to note that both our Long-Short and Long only funds continue to have increased traction with FUM increasing by over a $100 million in the last 12 months,” said Sean Sequeira, CIO, Australian Eagle Asset Management.

Australia Ratings also noted that since its inception in 2016 (launched as a retail fund in April 2019), the Trust has focused on investment in Australian equity using a combination of long-short, high alpha: growth, bottom-up, medium capitalisation, and high-conviction investment styles.
The Australian Eagle Trust Long-Short Fund has outperformed the ASX 200 by 9.86% p.a. since start.

By Sean Sequeira CFA, CIO

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Sean Sequeira

HUB24 has approved the Australian Eagle Trust Long-Short Fund for its superannuation and IDPS platforms. This follows Netwealth’s recent introduction of the Fund for its super platform.

The Fund invests in liquid Australian equities and has delivered 20.61% per annum since inception in June 2016 to the end of Nov 2019.

A focus on change

“Australian Eagle believes the Australian market is inefficient at assessing business change beyond twelve months and that this represents a fundamental investment edge.

“The investment process focusses on identifying potential significant change in businesses and then searches for a Trigger; objective information that confirms that this change is happening. Viewing all of our universe companies through this change prism allows us to differentiate the higher and improving quality companies versus those with the opposite characteristics. This advantage allows us to build portfolios that take advantage of the earnings momentum within companies as change manifests.  The result for clients has been very strong risk and return outcomes across the past three and a half years.

“We are thrilled that we have placement on the Superannuation section of two of the fastest growing platforms in Australia. Now advisers can conveniently allocate client assets to our product as part of a balanced wealth accumulation strategy,” said Sean Sequeira, CIO, Australian Eagle.

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Barry Littler

SQM has completed its inaugural rating of the Australian Eagle Trust Long-Short Fund, awarding its superior rating category of 4.25 stars.

The rating indicates that SQM believes the Australian Eagle Fund has substantial potential to out-perform over the medium to long term and that management is of a very high calibre.
SQM also stated that it considers the fund to be suitable for inclusion on most Approved Product Lists (APLs).

Barry Littler, CEO of Australian Eagle Asset Management, said the inaugural rating was very pleasing and that he believed there is a growing market appreciation for long-short strategies that are backed by a solid investment process.

The report noted that the Australian Eagle investment philosophy for long-only investing has been in practice since 2005 when the manager commenced managing institutional mandates and has performed well above benchmark.

Barry Littler also noted that “the long-short product represents a sensible evolution of our long-term process which gives clients access to both outperformance from long stock positions as well as value add from short positions. It is good to see that SQM agreed that the fund displays defensive characteristics and should be a good portfolio diversifier”.

Performance:

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Barry Littler

Alleron Investment Management has relaunched as Australian Eagle Asset Management to differentiate from its wholesale and institutional past.

“As Alleron, we worked exclusively in the institutional space but now feel that we have the track record and team to also offer ourselves to the retail sector.

“The name Australian Eagle captures something essential about our approach and philosophy of taking a panoramic view before swooping on an opportunity. We wanted the name change to also herald the completion of the ownership transfer to staff.

“Strong retail interest is expected to concentrate on its Australian Eagle Long Short Fund which can now accept smaller contributions and will appeal to SMSF and advised clients.

“More advisers wanted access to our proven track record for their SMSF clients and individual investors who want diversification from traditional Australian equities.

“We think this will translate into 50-70% of inflows coming from retail investors over the next year or so,” said Barry Littler, CEO, Australian Eagle Asset Management.

Fund performing at approximately 20% per annum for the last three years

“Performance of 20% per annum or 8.2% above benchmark over the nearly three years of the Fund’s life is a pleasing result and highlights that our successful process and team can implement both Long Only and Long/Short strategies from the same research set,” said Sean Sequeira, CIO, Australian Eagle Asset Management.

Australian Eagle Long Short Fund

The Fund typically maintains a 150% long securities exposure funded by short selling 50% of the securities.

Australian Eagle seeks to buy superior quality stocks with a sensible risk buffer and hold those investments so that the longer-term advantages of those companies manifest in a superior rate of return. The Australian Eagle investment process is designed to identify those stocks that have the most characteristics of a superior company, whilst also offering a valuation edge.

On the short side, Australian Eagle seeks to sell companies that do not display these characteristics or rank poorly on such characteristics compared to the superior companies and exhibit poorer technical characteristics.

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Sean Sequeira

Portfolio Overview

The Fund returned +1.76% net of fees for the month of March 2019, outperforming the ASX 100 for the March 2019 quarter by +1.12%.

The portfolio’s largest positive contributions for the month came from a long position in Fortescue Metals Group and short positions in AMP Ltd and IOOF Holdings Ltd while largest detractors were long positions in Commonwealth Bank of Australia and ANZ Bank and a short position in Harvey Norman.

The Fund had 33 long positions and 20 short positions with largest exposure to medical devices & services and technology stocks. There was less exposure in the major banks and income stocks.

Portfolio Performance

Performance figures are net of fees and expenses, *Inception date is 1 July 2016, ** Performance benchmark, S/I – Since Inception

Fund Strategy

Established in July 2016, the Australian Eagle Trust Long-Short Fund aims to achieve strong double digit returns by allowing clients to access Australian Eagle’s demonstrated historical strength in constructing Australian share portfolios applied to a long-short product.

Modelling a combination of Australian Eagle’s actual long investment performance since 2005 in conjunction with a short selling discipline, suggests that this product can provide strong investment returns along with an alpha performance that is negatively correlated to the broader Australian equity market. Australian Eagle’s investment process seeks to deliver significant outperformance by identifying mispriced stocks with changing growth profiles and building concentrated portfolios of those stocks.

Australian Eagle Trust Long Short Fund – Net Monthly Returns

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Sean Sequeira

The Australian Eagle Trust Long-Short fund returned +3.70% net of fees for the month of February 2019, maintaining positive outperformance over 1 year and 2 year periods.

The portfolio’s largest positive contributions for the month came from long positions in QBE Insurance Group, Altium and Commonwealth Bank of Australia while largest detractors were short positions in IOOF Holdings, Janus Henderson and a long position in Cochlear.

The Fund had 34 long positions and 19 short positions with largest exposure to medical devices & services and technology stocks. There was less exposure in the major banks and income stocks.

Performance figures are net of fees and expenses, *Inception date is 1 July 2016, ** Performance benchmark, S/I – Since Inception

Fund Strategy

Established in July 2016, the Australian Eagle Trust Long-Short Fund aims to achieve strong double digit returns by allowing clients to access Alleron’s demonstrated historical strength in constructing Australian share portfolios applied to a long-short product.

Modelling a combination of Alleron’s actual long investment performance since 2005 in conjunction with a short selling discipline, suggests that this product can provide strong investment returns along with an alpha performance that is negatively correlated to the broader Australian equity market.

Alleron’s investment process seeks to deliver significant outperformance by identifying mispriced stocks with changing growth profiles and building concentrated portfolios of those stocks.

By Sean Sequeira, CIO

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Alan Kwan

Xero has recently transitioned to a new CEO, experienced global technology executive Steve Vamos to lead the company in its next phase of global growth.

Founder Rod Drury remains with the company as a non-executive director and major shareholder who intends to focus on product development.

Recent announcements such as the strategic alliance with US company Gusto to provide full-service payroll and the acquisition of Hubdoc, a leading data capture company that automates the collection of bank statements, bills and receipts give an indication of Xero’s intention to accelerate growth in the US.

This would support Alleron’s change argument that Xero can replicate the success of its market leading platform in Australia and New Zealand in other geographies.

We expect an update at Xero’s AGM on the 16th of August on their progress in the two important markets of the UK and US, as well as new growth opportunities that were highlighted in the 2018 result of Asia and Canada.

Here is what we said about Xero in June 2017.  Since then, it has reported an installed revenue base of nearly $500m and 1.4 million customers giving confidence that its target of $1 billion in revenue is achievable.

Xero Limited (XRO) – Long Position

Energy Argument: Xero is one of the only truly cloud based accounting software packages available for small businesses. The market reach is now extended through multiple continents and jurisdictions including the significantly larger UK and US markets. The founders of Xero, through their experience with founding competitor MYOB, developed a superior product that has taken the lion’s share of the cloud-based accounting market in Australia and New Zealand. Further, the benefit of the cloud system is that it allows Xero to create an ecosystem of suppliers and clients and app store in which they are the hub and for which they manage the data which could be of tremendous value to the company.

Trigger: A trigger event may indeed be a single piece of information that grounds our thesis in reality.  However, it may also be a mosaic of information that together has the same effect, as is the case with Xero. We initiated a position in the company in 2015 after it had demonstrated continued growth in customers to 593,000, and raised new equity to cover costs of growth. Further, National Australia Bank had also announced the linking of the bank’s and Xero’s data platforms to enable faster approval for business loans.

Outlook: When Alleron entered the stock, Xero had fallen over 70% from its share price high as expectations of the Company’s growth exceeded its actual growth profile and certain management changes were considered disruptive. The execution of our triggers highlighted that the business momentum was intact. The first target for the company post its recent 1 millionth customer milestone is that of $1bn in revenue. With the installed revenue base of about $360m and +30% customer growth profile, the $1b revenue base target is achievable. More importantly, should its growth in the UK be similar to that of Australia, it confirms management strategy and provides some confidence for US market growth.

By Alan Kwan CFA, Senior Portfolio Manager

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Portfolio Commentary

Alleron’s Long Short Fund produced a return of +1.50% for the March 2018 quarter compared to the -3.90% fall in the ASX 100. This is the second quarter since inception the Fund has produced a positive return in a falling market and was also the Fund’s 4th consecutive quarter of outperformance. Net return after fees since inception has now reached +41%, compared to the market return of +18.43% over the same period.

The Australian market fell in the March quarter as international markets experienced increased volatility from trade war tensions between China and the US. The US economy continued to grow strongly with the Fed increasing interest rates by 25bps and the Chairman confirming at least a further 2 hikes in 2018. Subdued Chinese construction activity after the Lunar New Year break resulted in volatility in the iron ore price and other related commodity prices. The big banks were under pressure from constant negative media attention surrounding the Royal Commission into bank misconduct.

The Long side of Alleron’s portfolio performed very strongly, driven, during reporting season, by stocks with earnings growth and positive outlook statements. NextDC upgraded its FY18 outlook from increasing contracted utilisation and operating leverage. Treasury Wine Estates’ Asian growth continued to impress the market while Lovisa’s UK store rollout made strong progress towards its 100 store target. Altium’s strong performance across all regions and product divisions produced an impressive 50% increase in EPS.

The Short side of the portfolio contributed to performance as some stocks missed guidance and reported increasing margin pressure. Short positions in Vocus and TPG Telecom added as both increased debt levels and reported lower profits from significant industry headwinds. Domino’s Pizza downgraded its same store sales guidance for FY18. Short positions in income stocks contributed due to the interest rate hike during the quarter.
 

Australian Eagle Trust Long Short Fund – Net Monthly Returns

Portfolio Highlights

Positives:

Altium Ltd (Long) – Double digit revenue and profit growth at the HY18 result with strong contributions from China and recent bolt-on acquisitions have shown steady momentum towards their 2020 goal of $200m revenue and 35% EBITDA margins.

Lovisa Holdings Ltd (Long) – The Company’s strong same store sales growth above the company’s own expectations has carried through to the beginning of 2H18, adding to the expansion of pilot stores in new territories in the US and continental Europe.

Cochlear Ltd (Long) – The successful launch of the new Nucleus 7 Sound Processor and a strong performance in developed markets have laid a platform for solid future organic growth. Management reaffirmed FY18 profit guidance at $240-250m.

Negatives:

Coca-Cola Amatil Ltd (Short) – The share price rose despite the FY17 result showing negative growth in the core Australian soft drinks division. The Company expects all other divisions to grow modestly in FY18.

Fortescue Metals Group Ltd (Long) – The share price fell as the lower grade iron ore price discount widened in excess of the Company’s own expectations. Management has been using its strong free cashflow to continue repaying debt to lessen the interest expense burden.

Graincorp Ltd (Short) – The share price rallied despite the Company downgrading FY18 earnings guidance to be 50% below pcp. Significantly lower grain stock from prolonged hot and dry weather has more than offset the US corporate tax rate benefit.

Market Overview

The Australian market fell as US tax cuts were offset by trade war threats and global tech stock sell offs. QBE’s new CEO reset expectations on the existing businesses after selling its Latin America division. With the ongoing AUSTRAC investigation, CBA named its current retail banking boss as new Group CEO. Japara Healthcare acquired 4 aged care facility sites, adding $4m to FY19 EBITDA. Treasury Wine Estates announced a new route to market strategy to increase efficiencies whilst growing its new French wine portfolio in Asia.

Portfolio Changes

Increased Exposure:

Computershare Ltd (+1.50%; New Long): A share registry and business services company. Strong revenue growth and economies of scale in US & UK mortgage services divisions are providing a solid platform for future organic growth.

Sims Metal Management Ltd (+1.50%; New Long): A scrap metals and electronics recycling company. A strong US economic outlook and internal efficiency enhancements have improved the Company’s outlook.

Santos Ltd (+0.75%; Exit Short): A natural gas company. Continual cost cutting and divestment of non-core assets has reduced the Company’s risk profile in an increasingly volatile oil price environment.

Decreased Exposure:

Nanosonics Ltd (-1.85%; Exit Long): A manufacturer and distributor of ultrasound probe disinfectors. The Company’s international growth has shown signs of slowing with negative US growth and sluggish adoption rates in newer territories.

Downer EDI Ltd (-1.00%; Exit Long): A mining services and infrastructure construction company. The Company’s loss of key mining contracts and its takeover of Spotless have decreased potential for earnings growth.

Spark Infrastructure Group Ltd (-2.50%; New Short): An electricity infrastructure provider. The business’s high gearing leaves the dividend vulnerable to a potential rise in interest rates.

Quarter-End Position & Portfolio Exposures

As at 31 March 2018, the fund had a net exposure of 95.49% and gross exposure of 194.68% to equities. Cash was 4.51%.

Major portfolio exposures were to medical devices & services and resource stocks with less portfolio weight in major banks and income stocks.

Stock Highlight

QBE Insurance Group Limited (QBE) – Long Position

Energy Argument: As we have suggested in past reports, part of our competitive advantage is to look back further in a company’s history to determine its potential today. QBE historically were able to roll-up niche insurance businesses where they had some advantage in pricing risk. All of that changed after buying Winterthur in the US. This, along with a change of management seemed to have resulted in a loss of that advantage. Alleron believes that a simplified smaller company provides an opportunity to improve risk outcomes and returns to shareholders.

Trigger: Having spent 3 years as CFO and successfully rectified problems in 2017 as Australia and New Zealand division CEO, Pat Regan was the natural replacement for the outgoing CEO. The new CEO has started his tenure with a methodical approach, reviewing the entire business and subsequently selling its troublesome Latin America division for a $100m profit above book value of $309m. With the new CEO’s indications along with his initial actions, Alleron believes that the company is beginning the process of change that we have been waiting for, opening the opportunity for a change in earnings growth.

Outlook: While the initial trigger to invest in QBE was new management’s focus on simplifying the business, there are a number of potential tailwinds that could also benefit company earnings in the next few years. Firstly, the core underwriting business profitability will be helped by improved insurance premiums after the worst year of natural disasters since Hurricane Katrina in 2005. Secondly, the US Fed expects to raise interest rates a minimum 3 times in 2018, making the $26bn short duration fixed interest investment book a major beneficiary of this interest rate tail wind. With the company trading at under 1.2X book value, Alleron sees minimal downside from here with the opportunity of  much larger upside should our Energy argument be confirmed.

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Barry Littler

A 150/50 structure can be an efficient solution for extracting the best risk/return from an approach that tends to be long high-quality stocks and short low-quality stocks.

For equities fund manager, Alleron, a 150% geared long portfolio funded by a 50% short sold portfolio, “150/50”, provides a sensible compromise between maximising returns and minimising portfolio risk and, we believe, will deliver a better risk return outcome for investors than a long only portfolio or a market neutral portfolio.

“Market neutral paradoxically can be more exposed to drawdown risk than a 150/50 structure when low quality stocks run hard,” said Barry Littler, CEO, Alleron Investment Management.

Alleron’s investment process identifies stocks with superior quality characteristics, sensible valuation upside and the potential for transformative change backed up by tangible evidence of that change – a “trigger” event in Alleron’s lexicon.

The Australian Eagle Trust Long-Short Fund marries Alleron’s long-only portfolio with a portfolio of shorts of generally poorer quality, overvalued equities. Based on simulations back to 2005, the shorts exhibit a negative alpha correlation to the Alleron long portfolio which assists in improving the risk/return characteristics of the long-short portfolio in falling markets.

For wholesale clients only. Not to be relied on by any other person or seen as advice.

by Barry Littler, Chairman/CEO

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Australian Reporting Season Update – September 2017:

Positive contributions from the reporting season came from Long positions in Treasury Wine Estates, medical device company Cochlear and fast fashion retailer Lovisa. All three companies were favourably assessed on their strong, sustainable growth forecasts for the coming years, consistent with our process.
Alleron’s Short portfolio also added to performance with notable contributions from short positions in Telstra, Healthscope and Domino’s. Telstra’s larger than expected cut to dividends, as they retain more earnings to invest into new businesses, along with minimal growth from Healthscope’s main Australian Hospital division and slowing growth from Domino’s, were all sold down by the market.

We appreciate your ongoing interest in Alleron and look forward to keeping you informed of our progress.

Alleron Australian Eagle Trust Long-Short Fund nominated in Best Emerging Manager category for The Australian Alternative Investment Awards
Hedge Funds Rock (HFR) & The Australian Alternative Investment Awards has today announced the nominees for its 2017 awards event.

Alleron Australian Eagle Trust Long-Short Fund has been nominated in Best Emerging Manager category in 2017.

By Sean Sequeira CFA, CIO

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