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SQM Research Ratings Update -  Monday February 15, 2016
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SQM Research
Ratings Update February 2016

 Peters MacGregor Global Fund has been awarded a 3.75 star-rating by SQM Research as part of our 2015 Equities Review. 

The Peters MacGregor Global Fund (the Fund) is a high conviction, value style global equities strategy with an emphasis on capital preservation. Thus cash weightings tend to be high in a range of 0-30 % but are managed dynamically as stock opportunities arise. Cash is generally held at call with AAA rated Australian or overseas banks.

The Fund Manager is a privately owned and modestly profitable firm based in Bondi Junction, Sydney, established by Wayne Peters in 1999 with the other major (20%) shareholder Michael Haddad joining the firm in 2002. Peters is the Chief Investment Officer (CIO) and is Co-Portfolio Manager with Haddad. They are supported by a small research team of two senior researchers and one assistant. 

Overall, the Manager is benchmark unaware and aims to return 7-10% nominal at a volatility lower than market over the longer term (five to ten years). Relative to the index, the manager believes that it can add 2% net of manager fees. 

The investment objective in the PDS (product disclosure statement) is more general, that is, to: ‘outperform the MSCI ACWI IMI Net Return (AUD) Index over the long term (five years plus) net of fees, while reducing the risk of permanent capital loss.’

Over the ten years to 31 December 2015, the Fund has exceeded its benchmark relative objective (returning 3.15%) and met the nominal objective (returning 8.23%) but has underperformed the benchmark over the last one,three and five years. This was the period of the post GFC global equities bull market which was generally difficult for value style managers. Peters MacGregor also was carrying a cash weight well above peers so did not participate fully  in the upside compared to peers.

Relative to the PDS objective of ‘reducing the risk of capital loss’, the Fund performance was disappointing during the 2008-09 GFC period when currency hedging was mis-managed during a period of excessive currency volatility and the Manager had a ‘greater than market’ exposure to financial stocks. Subsequently, the Manager has tightened up its currency management process and use of cash and some financials stocks held in the portfolio (particularly Wells Fargo) eventually performed well.

The Fund invests in a concentrated portfolio of 15 to 30 stocks that trade at estimated 20% (at least) discount to assessed valuation as as estimated by the Portfolio Manager. These stocks are drawn from a broad universe that includes all cap and emerging markets. Australian and New Zealand stocks have been included in the portfolio at times. At a stock specific level over the last three years, significant detractors were JC Penney, Rolls Royce and Tesco. Value adding stocks included Bank of America, AIG and Howard Hughes.

There is a well established research process that is summarised by the Manager as being focussed on great companies, great management at a great price. As stated by the Manager, this specifically means that  ‘We look for businesses with durable competitive advantage, run by people who will maintain and/or improve on that advantage. In order to assess these attributes, we focus on businesses we can understand. We place a heavy weight on high probabilities and do not diversify our share holdings into industries and companies we do not understand.’

The process is underpinned by careful analysis at all stages of the process including highly specific quantitative screening (via Capital IQ), industry and company assessment (50 + point checklist) and valuation (that utilises normalised free cash flow analysis). The Peters MacGregor investment team also draws on research insights from Boyar which is a North American value style research service. This means that a potential universe of 4,700 stocks is effectively reduced to around 200-250 that is placed on a watch list for detailed analysis. 

In assessing stocks for investment, the Manager is mindful of industry opportunities, for example the recent Liberty Media investment. The portfolio is characterised by significant industry biases (eg financials) and has long standing talismatic holdings such as Warren Buffet’s Berkshire Hathaway inc. Berkshire is a conglomerate and the Manager takes account  of duplicate positions in the portfolio such as Precision CastParts which was recently acquired by Berkshire.

Stock valuation methodology is typical of most value Managers. It is based on a discounted cash flow (DCF) model after normalising for the long term earnings power of a business. A conservative 10% discount rate is used for all stocks which facilitates ranking of investment opportunities against assessed intrinsic value.

Portfolio construction is given a greater degree of attention than is the case compared to other concentrated managers. In particular, the manager has a well thought out co-portfolio manager system that  means there is a cross-check adjusting for position size. Note that the Manager runs an all cap strategy and historically has had a mix of both mega and micro caps. Despite very wide risk limits (for example, 100% of the portfolio can be held in non-index stocks), the Manager has run the portfolio conservatively as shown by the tracking error averaging 5.02% over the last three years. The investment universe contains stocks with a market cap greater than A$1bn. Given the long term approach to investing, portfolio turnover is relatively low at 20-30%.

As of 31st December 2015, Peters MacGregor managed approximately AUD $182 m. This is a mixture of the pooled trust, IMA’s and SMA’s. The manager estimates capacity at $1bn - $2 bn. There is a well-articulated product strategy in place and this is supported by some favourable retail ratings.

The Fund has received a 3.75 star rating.

This is classified as a ‘Favourable’ star rating and reflects SQM Research’s opinion that the Fund is Approved for APL inclusion.

To read more of this report, please click HERE
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Research Methodology

In general, the assessment approach adopted by SQM Research incorporates a combination of qualitative and quantitative research techniques to assess property investment products.
Information generated is passed through the SQM Research assessment model at the completion of the assessment process. The assessment model generates a product score, which correlates to a specific star rating (out of a maximum of five stars). Each star rating covers a scoring range, allowing products to be ranked within quarter star increments.
Following are descriptions for each of the star ratings, which have been developed as a guide for dealer group research teams and investment committees:

4.5 stars and above – Outstanding. Highly suitable for inclusion on APLs.
4 stars to 4.25 stars – Superior. Suitable for inclusion on most APLs.
3.75 stars – Favourable. Consider for APL inclusion.
3.5 stars – Acceptable. Consider for APL inclusion, subject to advice restrictions.
3.25 stars – Caution required. Not suitable for most APLs.
3 stars – Strong caution required. Not suitable for most APLs.
Below 3 stars – Avoid or redeem. Unapproved.
Hold – The rating is currently suspended until SQM Research receives further information. A rating is typically put on hold for a period of 2 days to 4 weeks.
Withdrawn – The rating is no longer applicable.
Significant issues have arisen, and investors should avoid or redeem units in the fund.

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