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Quarterly Activity Report

Issued January 2016
About this Report
Information Only, No Action Required

As part of our ongoing commitment to being a trusted partner for our clients, Providence reviews a number of products each month, searching for investment opportunities that fit our clients' individual requirements. Being an independent company, each opportunity is assessed solely on its merits regarding risk and return.

True to Providence's promise of transparency and independent analysis, we share the basis of our decisions with our clients in this Quarterly Activity Report. 

• Acceptances - 5

• Declines - 5

• Presentations - 4


Macquarie Group Capital Notes
We have been offered to participate in the recent Macquarie Group Capital Notes offer (MQGPB), which is looking to raise $500m for general corporate funding and capital management purposes.  The new note is being offered from Macquarie Group Limited, which is distinct from Macquarie Bank Limited, as it has 5 operating groups including Corporate & Asset Finance, Banking & Financial Services, Macquarie Asset Management, Commodities & Financial Markets and Macquarie Securities.   The security does not contain a capital trigger event (Common Equity Tier 1) as Macquarie Group is not an authorised deposit taking institution, therefore does not require Basel III compliance.  However, being a new style preference share, MQGPB does feature the risk of a non viability trigger event if APRA determines Macquarie Group would be non-viable.
It is a preference share security which features optional exchange dates of March 2021, September 2021, March 2022 and a mandatory exchange date of March 2024.  We expected the new hybrid would be set at the lower end of the issue margin at 5.15% over 6 month Bank Bill Swap (currently 2.36%) in addition to the 1.00% rebate Providence has secured on behalf of clients.  This equates to a first year running yield of 8.51% which we believe is attractive versus the underlying MQG equity which has a grossed up yield of 5.7% and attractive versus other comparable bank fixed income securities. 
AMP Capital Notes Offer
We participated in the recent AMP Capital Notes (AMPPA) on behalf of Providence clients.  We were attracted to the initial yield of 7.37% and the quality of the issuer, AMP.  AMP is a leading provider of financial advice, superannuation and personal insurance.  With a market cap of $17.4bn, AMP is a top 20 ASX listed company with over 5m retail customers in Australia and New Zealand and $222bn of assets under management. 
The AMP Capital Notes were issued at $100.00.  They listed in early December and are now trading at $102.60 which is pleasing given the current volatility in markets.  Providence clients will also be receiving the fee rebate (approximately 1%) which will reduce the entry price.
Westpac Retail Entitlement Offer
Westpac shareholders were offered new shares through a 1:23 retail entitlement offer, which would raise $3.5 billion in capital, following developments from the Financial Systems Inquiry and APRA recommendations in strengthening the banking system.  New Westpac shares were offered at a fixed price of $25.50, versus the market price of $31.02 at the time of the offer.  We participated for majority of clients that had underweight exposure to banks given the meaningful discount to market.
Transurban Retail Entitlement Offer
Transurban shareholders were offered new shares through a 1:18 entitlement offer, raising $1.03 billion which would be used to acquire Airport Link M7 for $1.87 billion.  Providence owns the Transurban as a core direct equity holding for client portfolios, we believe the Airport Link M7 acquisition supports a positive view on the stock and highlights the benefits and value creation potential from Transurban's monopoly-like, quality assets. 
Shareholders were given the offer to purchase new TCL shares at a fixed issue price of $9.60, at the time of the offer the stock was trading at $9.93.  We participated for majority of clients as we considered the discount to be fair due to the degree of popularity of the offer and sector.  At the time of writing, Transurban is currently trading on market at $10.21.

McGrath Ltd IPO
We participated in a small exposure towards the McGrath Ltd initial public offering (ASX code MEA).  It is a residential real estate service provider operating four business units that provide a range of services including sales, mortgage broking, franchise services and training.  Despite only receiving 10% of what we bid for in the IPO due to the overall high demand, the stock has listed below the issue price of $2.10.  MEA is currently trading at $1.77, trading at 12x PE which compares favourably versus the market of circa 15x PE.  The yield of 4.2% fully franked equates to a grossed up yield of 6%.  The financial year 2016 growth rate is expected to be approximately 15% and margins are a healthy 22%.  McGrath has a very conservative balance sheet with $10m net cash.  We will continue to monitor the stock on behalf of clients and note it is a small holding relative to overall portfolios. 


Absolute Equity Performance Fund
Absolute Equity Performance Fund is a listed investment company managed by Richard Fish and Sam Shepherd, that invests towards large cap domestic equities with a market neutral stance.  The manager Richard Fish is well known for his Bennelong Long Short Fund which has benefited from strong returns since inception of 18.1% pa (since Feb-2002) versus the benchmark ASX 200 Accumulation of 7.4% pa.  Although we like the manager and the strong track record, we dislike the “free option” attached which dilutes potential upside on option expiry, but retains all the downside risk. 
IPH Retail Entitlement Offer
IPH is an intellectual property services firm offering services for the protection, commercialization, enforcement and IP management.  The company announced an institutional placement and retail entitlement to raise $60m which would be used to increase financial flexibility and for potential acquisitions.  The retail entitlement allowed existing shareholders new IPH shares at $7.30 per share to a maximum of $15,000.  We declined on the entitlement offer as IPH share price has markedly increased since listing at $2.10 in November 2014 and we do not want to increase our position at these elevated levels.
360 Capital Retail Fund No.1
We declined participation in 360 Capital Retail Fund No.1 which is an unlisted direct property fund investing in 2 shopping centres in Sydney and Rockhampton.  We do like the income distributions between 8%-8.25% in addition to the strong tenancy from major retailers of Coles, Target and Woolworths and occupancy at 98.3%.  However, fees were on the higher end, with a 20% performance fee over a low hurdle of 10%, in light of the product having a 7 year time frame.  Also, we are concerned on property valuations, retail property and the economic outlook for Australia.
Forza Adelaide Street Fund
We were offered to participate in an unlisted property opportunity, the asset being 333 Adelaide Street Brisbane, a 14 level CBD commercial office building.  Despite being positive on the manager whom we have known for a while and have participated in other property opportunities, we declined participation in this offer.  We are slightly concerned on property valuations; the economic outlook for Australia and had difficulty completing our due diligence in a short time frame.
LJ Hooker Pre-IPO Capital Notes
We declined the opportunity to participate in LJ Hooker Capital Notes.  On the presumption that a listing takes place as planned in the first half of this year, the deal does look attractive.  However, the 5.5% yield is too low and the risks surrounding holding preferred equity in an unlisted real estate business in the event the IPO does not go ahead are too high. 


Ellerston Market Neutral Fund
We have been reviewing non correlated, absolute return, alternative fund managers for potential inclusion in client portfolios to reduce portfolio volatility, whilst generating reasonable returns.  One that has come to our attention is Ellerston Market Neutral Fund which is run by Paul Drzewucki trading a pairs book (relative value) and a smaller special situations book no greater than 20% of the portfolio.  The fund has a strong track record of 13.1% since inception in October 2011 with a low volatility of 3.7% pa.  We are attracted to the fund given the strong risk adjusted returns, also considering their lower average gross leverage for a market neutral fund.  The fund also predominantly invested outside the ASX 20, which we believe is well covered by the market.

Fidelity Future Leaders Fund (ex-50)
We met with James Abela from Fidelity to discuss his fund, the Fidelity Future Leaders Fund, which invests in small and mid cap domestic equities excluding the top 50 (i.e. invests between ASX 50 – 300).  We like the fund as it is backed by Fidelity’s considerable research capability and rigorous company research (industry reviews, sector off sites, 1000 Australian based company meetings).  The fund has only just been released to market with a small fund size of $5m; this is a sweet spot for early adopters which would benefit from the small/nimble fund size.  The fund itself has a ‘quality’ bias towards structural winners, with less exposure towards transition stocks and value.  It is sufficiently diversified with 40-70 stocks and has no performance fees, which is unusual in this space.
Standard Life Global Absolute Return Strategy
We have been reviewing non correlated, absolute return, alternative fund managers for potential inclusion in client portfolios to reduce portfolio volatility, whilst generating reasonable returns.  We have reviewed Standard Life Global Absolute Returns Fund which is managed by Guy Stern, which aims to outperform the Ausbond Bank Bill index +5% at one third of the market volatility (target volatility of 4-8% pa).  The fund is a global macro/multi asset alternatives fund which can invest in a broad range of exposure (equities, currencies, rates, bonds, credit, volatility, duration etc) it can go both long and short and use leverage through derivatives.  We are pleased to see strong performance of 9.3% since inception, with much lower volatility and portfolio drawdown.  Overall, it is a highly diversified, best ideas, multi asset portfolio achieving equity like returns with a strong track record.
Centuria Investment Bond
Centuria is an ASX listed investment manager with $1.7 billion funds under management delivering a range of products and services to investors, advisers and shareholders. A key area they have been focusing on is Investment Bonds, which is a tax effective alternative to complement superannuation.  We are in discussion with Centuria to explore Providence developing an Investment Bond specifically tailored to our high net wealth clients, particularly for those that are restricted in making additional superannuation contributions, or as a way to build wealth over the long term.  This will be a growing area of interest when the government further restricts contributions and/or access to superannuation savings at retirement.

For more information phone (02) 9239 9333 or (03) 9653 6406 
Providence is an independently owned and operated investment advisory group.
ABN 42 003 224 904 | AFSL 245643
DISCLAIMER: Providence Wealth Advisory Group (AFSL 245643) has made every effort to ensure that the information in this report is accurate, however its accuracy, reliability or completeness is not guaranteed. Although consideration has been given as to the appropriateness of information to the recipient, no warranty is made to the accuracy or reliability of neither the information contained nor the specific recommendation for the recipient. Providence Wealth Advisory Group, its subsidiaries, affiliates or employees may have interests in securities or investment opportunities mentioned in this report. This document should only be read by the intended recipients. Providence Wealth Advisory Group, and its employees, disclaims all liability and responsibility for any direct or indirect loss or damage, which may be suffered by the recipient through relying on anything contained or omitted in this report and/or its recommendations.
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