Disclaimer Contango Asset Management Limited (ABN 52 085 487 421) holds an Australian Financial Services Licence (AFSL #237119) restricting it to providing financial products and services to wholesale clients only. This presentation has been prepared for the consideration and use of ‘wholesale’ investors, as defined by the Corporations Act (Cwlth 2001), and may contain information that assumes a level of knowledge and expertise particular to such investors. If you do not meet the criteria of a wholesale investor, you should disregard this information and seek advice from a licensed financial advisor. Forecasts in this presentation are predictive in character, based on numerous assumptions including the forecast outlook for key variables and may be affected by various factors including inaccurate assumptions, risks and unforeseen events. Accordingly, actual results may differ materially from those forecasted. Contango Asset Management Limited (“CAML”), its officers, employees and agents believe that the information in this document is correct at the time of compilation but do not warrant the accuracy of that information. Performance information is historical. Performance returns may vary. Past performance is not indicative of future performance. Performance has been calculated based on cumulative daily returns excluding any allowance for fees, expenses and taxes. Save for statutory liability which cannot be excluded, CAML disclaims all responsibility for any loss or damage which any person may suffer from reliance on this information or any opinion, forecast, conclusion or recommendation in this document whether the loss or damage is caused by any fault or negligence on the part of CAML or otherwise. 1
Contents 1. Overview of Contango Asset Management 2. Macro outlook – challenges persist 3. Are current market valuations attractive? 4. What are the implications for your portfolio? • Large Cap (GARP) Portfolio • Mid Cap (ex30) Income Portfolio • Mic Cap Portfolio 5. Summary 2
1. Overview of Contango Asset Management
Contango Asset Management Limited is a boutique Australian fund manager • Established in 1998 and is a wholly owned subsidiary of Contango MicroCap Limited Contango Asset Management has a (CTN) streamlined ownership structure • Experienced and successful wholesale fund Contango MicroCap Ltd (CTN) manager with a large investment team • Also manage two Listed Investment Contango Asset Management Companies on the ASX Limited 100% • Proven track record in managing funds across all segments of the Australian market • Well known and rated by both wholesale Contango Income and retail consultants Generator Ltd (CIE) 4
Economics is key to determining intrinsic value in the equity market • Intrinsic value is an estimate of ‘fundamental value’ without reference to current ‘market value’ • Intrinsic and market valuations can diverge − Market is not always efficient − Different estimation theories, assumptions and data sources − Cyclical vs structural changes • Understanding and forecasting economic conditions is key to estimating intrinsic value − Economic growth drives company revenue and earnings growth − Growth, inflation, interest rates, exchange rates all important − Interest rates also determine discount rate for future cash flows
Our investment philosophy is based on three basic principles 1. Economic conditions drive earnings and valuations 2. Stocks and sectors perform differently at each stage of the economic cycle 3. These relationships can be exploited in a systematic way to add value to investment portfolios EPS PE 6
Australian cash rates over the long run. Stable and consistent monetary policy signals helps drive economic growth 7
Local equity valuations around long run historical benchmark. Earnings outlook revised lower for FY16 8
Global equity valuations trading below long run historical benchmark 9
Lower cash rates leads to greater demand for dividends 10
Demographic outlook is a significant policy challenge 11
Equity market attractive vs fixed income 12
Lower long bond rates is supportive for equity valuations 13
Interest rates to remain low supporting growth and equity markets • Global growth modest and uneven with limited price pressure − Developed Markets improving but Emerging Markets soft • Underlying US growth improving, employment growth reasonable − Consistent with FOMC delaying rate rises − Global economy remains fragile combined with rising USD and lack of inflation • Growth in Europe recovering but tail-risks re-emerge − ECB’s QE on going • Growth in China is moderating as economy rebalances − Government stabilising transition but risk of policy errors increasing − Commodity prices to remain under pressure • Domestic economy not transitioning as quickly as RBA would like − Continued low rates and lower AUD 14
We group stocks by macro relationships to add alpha at the super sector level Contango Large Cap Fund: SS Active Weight vs ASX300 Market Leverage 3.5 Defensives 2.3 Gold -0.5 Interest Rate Sensitives -1.3 Domestic Cyclicals -1.4 Global Cyclicals -6.8 [Futures] 3.2 [Cash] 1.0 -8.0 -6.0 -4.0 -2.0 0.0 2.0 4.0 15
Strategy enables us to take high conviction positions at the industry level Heavily Moderately Slightly Slightly Moderately Heavily Neutral Underweight Underweight Underweight Overweight Overweight Overweight Global Cyclical Materials Oil Coal Gold Iron Ore Copper Nickel Aluminium Steel Speciality (lithium, graphite) Uranium Mineral sands Domestic Cyclicals Capital Goods Non-Res Construction Building materials Retailing Media IT Commercial Services Market leverage Div Fin Defensives Staples Healthcare General Insurance Consumer services Interest Rate Sensitive Banks REITs Utilities Infrastructure Telcos 16
Large Cap (GARP*) Fund is a diversified portfolio of large cap growth stocks Offers a diversified exposure to the Australian equity market and a higher expected return than investments in cash or fixed income Actively managed portfolio of Australian listed shares on the S&P/ASX 300 Index • Target return of the S&P/ASX 300 Accumulation Index plus 2% • Tracking error of 1.5% - 4% • Broad composition of 25 - 40 stocks Business cycle process • Combines a systematic top-down and bottom-up analysis Fund facts • Size is $152 million • Inception is April 1999 17
Large Cap (GARP) Fund’s performance has been strong since inception Consistent alpha generation in different market conditions Large Cap ASX 300 September 2015 Added Value Fund Accumulation 3 Months -6.0% -6.5% 0.4% 6 Months -13.1% -12.5% -0.5% 1 Year 1.4% -0.7% 2.1% 3 Years pa 10.6% 9.1% 1.5% Since inception (April 1999) pa 8.8% 7.4% 1.4% 18
Large Cap (GARP) stock positions consistent with defensive strategy view Over Under Code Stock Code Stock % % ANZ ANZ Banking Group Limited 3.0 BHP BHP Billiton Limited -2.2 OSH Oil Search Limited 2.4 NAB National Australia Bank Limited -1.9 BOQ Bank of Queensland Limited 2.3 WBC Westpac Banking Corporation -1.9 CSL CSL Limited 2.0 SCG* Scentre Group -1.6 GMG Goodman Group 2.0 RIO* Rio Tinto Limited -1.6 SUN Suncorp Group Limited 1.8 WPL* Woodside Petroleum Ltd -1.5 JHX James Hardie Industries PLC 1.8 WFD* Westfield Corporation -1.4 BXB Brambles Ltd 1.8 TCL* Transurban Group Ltd. -1.4 SHL Sonic Healthcare Limited 1.7 QBE* QBE Insurance Group Limited -1.3 CGF Challenger Limited 1.7 WES Wesfarmers Limited -1.3 19 *Stock not held. September 2015.
Large Cap (GARP) portfolio employing and actively managing risk 20 September 2015
Large Cap (GARP) active risk positions are consistent with the fund’s objectives Contango ASX 300 September 2015 Large Cap Accum Index Price to Earnings Ratio 13.4 14.1 Dividend Yield (net) 5.1 5.3 Dividend Yield (gross) 6.6 6.9 EPS Growth (%) 8.3 2.4 Return on Equity (%) 16.5 15.1 Beta 1.03 1.00 Tracking Error* 1.93 - Source: Factset (next twelve months) * Ex ante. Bloomberg. 21
The Income Generator Fund’s active risk positions are consistent with the fund’s objectives Contango All ASX300 ASX300 September 2015 Income Ordinaries top-30 ex-30 Generator Median market cap ($m) 1,438 397 18,312 636 Price to earnings ratio 13.7 14.1 14.0 14.4 Earnings growth 5.4 3.9 0.1 8.9 Dividend yield (net) 6.0 5.1 5.7 4.3 7.9 6.7 7.6 5.3 Dividend yield (gross) Return on equity 16.0 15.1 15.4 14.4 Beta to ASX300 0.84 0.95 1.04 0.91 22 Source: Contango AM, 12 month forward consensus forecast, Factset
The Income Generator Fund’s performance has been less volatile than the market Monthly Returns: Contango Income Generator vs All Ordinaries 23 Source: Contango AM, Iress, gross of fees, September 2015
The Small Cap Fund is a diversified portfolio of small cap stocks Offers a diversified exposure to ASX listed small companies and a higher expected return than the Large Cap (GARP) Fund Actively managed portfolio of Australian listed shares outside of the ASX 100 • Target return of the S&P/ASX Small Ords Accumulation Index plus 3% • Tracking error of 4% - 10% • Broad composition of 30 - 60 stocks Business cycle process • Combines top-down and bottom-up analysis Fund facts • Size is $160 million • Inception is Feb 2005 • Max cash is 25% 24
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