PM CAPITAL’s Australian equities portfolio manager believes the market is under-estimating the forward strength of the Australian banks and is a buyer/holder at current levels.
“Whilst we were avoiding buying the big four when Westpac and NAB were nudging $40 at the end of FY15 we now believe many market commentators are under-estimating the sustainability of their profits and dividends,” said PM CAPITAL Australian Companies Fund portfolio manager Uday Cheruvu.
“Our view on financial markets, both domestically and internationally, is ‘more of the same’ for the foreseeable future; that is low growth, low yield and high volatility.
“In this environment, solid businesses offering high single digit net returns are attractive additions to a portfolio and the major Australian banks currently meet this criteria.
“With the cash rate at 1.75% businesses that can offer predictable returns off around 9% after franking credits are taken into account are attractive propositions in our view.
“We think the current prices factor in another round of regulator mandated capital raising but we don’t expect the regulator to act on this front until late 2018, by which time we believe the businesses will be in even better shape.
“We are very comfortable owning them at current prices and hold ANZ, Westpac, NAB and investment bank Macquarie Bank, the former two each comprise nearly 10% of the Australian Companies Fund whilst Macquarie accounts around 7.5%.
“There is no doubt the new CEO of the ANZ Bank has inherited some challenges, particularly relating to Asian exposure but we are impressed by his approach do date and believe the market has marked the business down more than warranted.
“Beyond the banks the PM CAPITAL’s Australian Companies Fund includes NextDC Limited, again comprising around nearly 10% of the fund. This is an example of a stock that is not dependent on the growth of the general economy. NextDC is a software and IT services company focused on proving cloud computing. Compared to similar companies offshore it is attractively priced on the ASX.
“It is stocks like this that we offer our investors. These are value stocks, not found in the Index.
“The growth of cloud computing is not dependent on the growth of the general economy – it is a sector that is rapidly changing the face of the IT storage industry globally and is a sector that has not matured, particularly in Australia, “ Mr Cheruvu said.
About the PM CAPITAL Australian Companies Fund
The fund comprises a targeted portfolio of typically 15-25 stock-specific ideas in which the firm has strongest conviction. With value rarely being found among popular or well-known companies, PM CAPITAL disregard short-term ‘noise’ and buy great businesses that are undervalued.
Unit-holders that have been invested in the Australian Companies Fund since inception, have 154%* more capital than if they had invested in the Index. The Fund is managed from an Australian investor’s perspective with consideration for tax and currency outcomes.
*As at 30 April 2016
About PM CAPITAL
PM CAPITAL is a Sydney based specialist equity and income fund manager for private clients, financial advisers and institutional investors. The firm is wholly owned by its staff who are substantial unit holders in the same funds offered to clients. It is focused on achieving absolute after-tax returns. Each fund holds a concentrated number of positions of intensively researched companies trading below their long-term intrinsic value.
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