International Equities Portfolio Manager, Nathan Lim, provides this month’s update:

The US is still expanding

US rail traffic has taken a noticeable downturn because of lower coal volumes and traffic tied to shale oil & gas development. We suspect this is symptomatic of the weak economic activity we have been observing. The collapse in the oil price last year arrested oil & gas development that previously was having a sizeable, positive impact on the economy. An impact likely larger than most had calculated. As a second derivative impact of all that previous drilling, the abundance of natural gas has again pushed down prices to the point where power stations are switching to natural gas from coal to make electricity. The loss of coal volumes should naturally weigh against this portion of the mining sector as well. That said, we continue to see steady US expansion but perhaps at a slightly slower rate.

Is the EU recovery finally extending past Germany and the UK?

Europe’s recovery remains muted; however, the expansion in the May Europe-wide Purchasing Manager Index (PMI) despite a fall in the Germany PMI signals to us a widening in the recovery effort. To date, we believe it has largely been Germany and the UK driving growth, but perhaps this is changing. A sign of broader strength in the region is that the total number of people employed in Spain reached a new multi-year high. We continue to assess employment conditions in the region positively which is a strong basis for continued expansion.

On alert for a downgrade to China…

Our China indicators continue to deteriorate. We lowered our assessment on Fixed Asset Investment and Shipping Traffic to ‘Negative’ which has our overall indicator nearing contraction levels. Last month we highlighted that shipping rates were falling at an alarming rate suggesting economic activity was stalling. Rates continued their decline in May, which has us on alert for a downgrade to our China assessment.

…same goes for Japan

Export air traffic is flat-lining, the total number of employed persons is falling and the Manufacturing PMI is directionless. We suspect our next move on Japan is to downgrade our assessment.

Australia still hanging in there

We remain ‘Neutral’ on Australia because our indicators remain range bound. This is consistent with the reported GDP figures that show the economy continues to decelerate. The weak dollar is supporting exports while residential and infrastructure construction activity can be said to be blunting the impact of the loss of investment in the resource sector.

The post China continues to deteriorate. US down but nowhere near to being out appeared first on AdviserVoice.

US automobile industry

The creeping slowdown in both the US and China has broad ramifications for Australia and global equity markets, a leading fund manager warns.

Australian Ethical international equities portfolio manager Nathan Lim says ‘we have kept our economic assessment for China at neutral as it still seems economic growth is only decelerating. Regardless, this does not bode well for Australia’.

‘Similarly in the US, Fed chair Ben Bernanke reminded the market that the Fed’s unconventional monetary policy must have a finite life and stimulus would need to be withdrawn as the economy continues to improve. This has resulted in tempered investor sentiment,’ says Lim.

More specifically, Lim says the US automobile industry is being coerced into selling electric cars at substantial losses to comply with government policy.

‘Whilst we fully support policy that seeks to correct market distortions – such as pricing the societal cost of pollution, we believe this is very poor policy as it creates an artificial economic disincentive to address the unpriced externality of air pollution from vehicles.

‘This is inherently wrong because governments have been consistently very poor at picking technology winners and at its heart is targeting increased electric vehicle sales not air pollution per se.

‘In our view emissions reduction targets and economic incentives are a far better driver of change.’

The post ‘Creeping slowdown’ in US, China to hit Australia appeared first on AdviserVoice.

The award recognises Australian Ethical’s significant product changes that have benefited its members, including removing up-front fees and improving insurance.

SuperRatings CEO Nathan MacPhee said, “Australian Ethical was awarded our Rising Star award due to its significantly enhanced value for money with reduced fees and an improved insurance offering, while improving client service levels. ”

Australian Ethical Managing Director Phil Vernon said, “We are very proud to be recognised by respected industry researcher SuperRatings as a superfund that is increasingly providing great value for members, not just compared to other ethical or responsible investment options but compared to all the funds that SuperRatings surveys.”

“We have always had the highest conviction to ethical standards and believe our clients also deserve competitive investment returns, products and services. We have been on a path of improving these areas over the past few years and we are pleased that our efforts are recognised.”

The announcement comes on the back of a stellar month for Australian Ethical Investments, having also retained the Lonsec ‘Recommended’ rating for its flagship active Australian equities fund, the Smaller Companies Trust.

The post Australian Ethical wins SuperRatings Rising Star award appeared first on AdviserVoice.

“We have seen the share prices of larger defensive businesses like Telstra, CSL and Ramsay Healthcare rise strongly over the past twelve months.  We have also witnessed the slightly bizarre situation of the Big 4 Australian banks outperforming the wider Australian equity market,”  said Andy Gracey, Portfolio Manager, Australian Ethical.

“The primary reason large banks have outperformed is the singular focus of investors on the yield, with the major banks currently offering a fully franked 6.7% yield on a market cap weighted basis.  We see this share-price out-performance as paradoxical given banks are highly leveraged to the domestic economy, with changes to consumer and business behaviour capable of wreaking havoc on bank profitability. 

“The unprecedented decline in yields on Australian commonwealth government securities together with the cuts in base interest rates by the RBA means sustainable yield is becoming harder to find.  This is highlighted by a risk free investment in 10-year Australian government bonds today offering a paltry 2.8% yield per annum.

“The cash rate which is perhaps more relevant to local investors is predicted to be just 2.9% by December 2012 if the bank bill futures are to be believed.  This may translate to financial institutions offering investors around 4.1% for cash and short term money by the end of 2012 (today the average spread for deposits is 1.2% on top of the 90 bank bill rate).

“Our funds have sought exposure to investments which offer sustainable yield.   These include utilities such as APA, Envestra and Duet. The yields on offer are reasonably attractive with stable contracted or regulated cash flows. The key risks are changes to regulations governing their return on capital and the relatively high level of gearing (albeit the regulator views a 60% gearing metric as appropriate given the stability of the cash flows). The likes of Duet also have an out-of-vogue management contract which means investors pay AMP/Macquarie Bank potentially large performance fees.

“We have increased our holdings of real-estate investment trusts “REITS” such as Stockland, Mirvac, Investa Office Fund and the Commonwealth Property Office Fund. This sector carried too much debt coming into the GFC but post raising new equity capital they now have what appear to be conservative levels of debt at between 20 to 30% of total assets.  The sector still trades at a discount to net tangible assets. Like Duet, Commonwealth Property Office Fund also comes with a management contract that includes a performance fee.

“We also continue to hold the Transpacific hybrids securities which are preference shares trading at 85 cents in the dollar. The health of these hybrid securities rests with the health of the ordinary Transpacific Industries share which today is solely focused on reducing its debt and attaining investment grade status.  We take some comfort that while interest coverage and Debt/EBITDA is not yet investment grade it is heading in the right direction and the debt metrics are not inconsistent with global integrated waste companies,” said Gracey.

The post Australian Ethical seeks sustainable yield from Australian shares appeared first on AdviserVoice.

All 10 resolutions were rejected by comfortable margins.
 
AEI Chairman, Andre Morony welcomed the vote and the outcome.
 
 “A small group of shareholders mounted what could politely be called a “vigorous” campaign against the Board. Despite their negative campaign the group, who with their families and friends control about 20% of shares, were only supported by an average of about 15% of shareholder votes. Voting by shareholders not in the dissident group was approximately three to one in favour of the Board.
 
It is time for the company to heal and continue unhindered on its mission of promoting ethical investment. The dissidents promised in their notice of meeting to “always respect shareholders, particularly their right to know what’s going on and to vote” I call on them now to live up to that promise and respect the will of the shareholders.”  Mr Morony said.
 
AEI Managing Director, Phil Vernon added, “This has been an unfortunate distraction for all concerned and we look forward to getting on with the business of looking after the investments of our 18,000 clients.
 
Australian Ethical has the deepest commitment to ethical standards and this will never change.  Over the past few years, we have been improving our professionalism and competitiveness as well as the efficiency and robustness of our operations in order to deliver an improved service to clients.
 
Financial services is going through one of the most tumultuous times in living memory and without these changes the company could not survive. Our current team not only has a commitment to the ethics and values that the company has long symbolised but also have impressive track records in investments, client service and marketing.
 
We can now get on with fulfilling our vision – that people can save and invest in a way that allows them to have strong investment performance and financial security and also look their grandchildren in the eye and say they have had a positive impact on the planet.”
 
Shareholder participation was high, with almost 75% of eligible votes cast.

The post Australian Ethical board wins against dissidents appeared first on AdviserVoice.

“We are not that surprised that our exposure to a price on carbon is so low. Australian Ethical avoids coal and uranium mining and other industries that are unnecessarily harmful to the environment. However, we know that, like all taxes, it would be hard to completely avoid all carbon-intensive companies.

“The smart players concluded long ago that a price on carbon was inevitable. However, our stock selection process has not changed in any way as the carbon legislation nears, so it is good to see that our approach of only investing in stocks that are positively impacting society is working well,” said Paul Smith, General Manager, Strategy & Communications at Australian Ethical. 

The four stocks in Australian Ethical’s portfolios are:

• DBNGP
• Energy Developments
• Envestra
• Snowy Hydro                     

Australian Ethical expects that over 250 companies will fall under the carbon legislation in the next financial year.

The post Australian Ethical – minimum exposure to carbon tax appeared first on AdviserVoice.

“Steve has been a director of Australian Ethical for the past 12 months and has made an enormous contribution to the business. He has an extraordinary track record in our industry and his greater involvement with us will be invaluable as we look to continue growing our advisor and wholesale client base,” said Australian Ethical’s managing director, Phil Vernon.

“Steve’s appointment reflects our commitment to growth, expansion and development. Despite the significant challenges of an uncertain market and rapidly changing regulatory environment we see more and more investors and advisers demanding ethical and sustainable investment options.” said Mr Vernon.

“Steve brings over 20 years of expertise in marketing and distribution in the financial industry along with significant experience with community and social justice activities. As important to us is that his values are aligned with our company’s Ethical Charter, a set of principles that define our corporate behaviour, as well as our investment philosophy,” said Mr Vernon.

Prior to Australian Ethical, Steve has been involved with growing the distribution capabilities of companies such as Zurich Financial Services, Lonsec and BT Financial Group. He has held positions as chairman of a financial planning dealer group and director of a wrap platform and administration business.

In addition and throughout his career, Steve has worked on homeless shelter support schemes, indigenous fellowship programs, environmental and drought relief projects and mental health awareness initiatives.

“My values, interests and skills are tailor-made for Australian Ethical and I am looking forward to the opportunity of playing a part in this exciting, yet challenging phase of the company’s growth,” Steve said.

The post Steve Newnham joins Australian Ethical Investment appeared first on AdviserVoice.