In this climate of wildly swinging share prices fund managers have to work hard for their money. No longer is a company’s underlying profitability the guiding factor of whether or not its share price will gradually rise over time; macroeconomic factors are taking a bigger toll on the share prices of Aussie companies, especially over the short term.

Weak performing sectors over the past few months have been consumer discretionary, mining, property and financials – reflecting a shift away from cyclical industries and a move towards more defensive sectors such as telecommunications, IT, REITs, utilities and consumer staples.

September and October are traditionally bad months to have money in the equities market and this year has been no exception. Between 1 September and 14 October the market as represented by the S&P/ASX 200 index has fallen by 2% and has exhibited considerable volatility.

Patersons Asset Management thinks that today’s market offers compelling opportunities for astute stock pickers. “Well, if we thought the market was good value last month, then we think it is excellent value this month,” notes Jason Chesters, head of equities at Patersons. The fund manager sees some of the best buying opportunities since the GFC.

The commodities sector has been particularly hard hit over recent months. “We continue to focus on those commodities that have tight supply drivers and strong demand fundamentals over the next few years and where this can be coupled with an over-reaction by the market in pushing down share prices,” it reports.

Interestingly, in its Australian Resources Opportunities Fund, the manager ditched its entire holdings in Origin on the view to reducing its exposure to the coal seam gas industry; although the fund continues to hold Santos. It added to its holdings in Atlas Iron, Ampella, Lynas and Woodside.

As at 30 September 2011, the fund’s top 10 holdings were Santos, Woodside Petroleum, Fortescue Metals, Lynas Corporation, Discovery Metals, Cockatoo Coal, Independence Group, Grange Resources and Extract Resources.

TheBull also took a look at fund manager Perennial Investment Partners. Perennial started buying shares in Transurban Group two months ago in its Growth High Conviction Shares Trust, citing the need to hold investments that perform well in difficult times. “Tollroads have consistently delivered steady growth despite challenging economic environments,” it noted.

This month the fund took advantage of share price weakness in Woodside Petroleum and Newcrest Mining, scooping them up at beaten down prices. Woodside is now the fund’s second biggest holding, marginally behind AMP. The top five is rounded out by CSL, Asciano and Computershare.

In an interesting move, the fund completely sell out of Rio Tinto in August to buy more shares in BHP Billiton. Shares in Sims Metal and News Corporation were also sold – while it increased its stake in JB Hi-Fi.

Top Ten Holdings, Sept 30th 2011

Stock Code Weighting
AMP AMP 8.10%
Woodside WPL 7.80%
CSL CSL 6.40%
Asciano AIO 6.00%
Computershare CPU 5.30%
Brambles BXB 5.20%
JB Hi Fi JBH 5.20%
NAB NAB 5.00%
Oil Search OSH 5.00%
BHP BHP 4.90%
Total   58.80%

  Source: Perennial Monthly Report

Perennial’s Value Smaller Companies Trust holds a diverse range of stocks and although it was down 7.5% for the month it outperformed the index by 3.1% in what was a terrible month for investors. Its top three performing stocks were Virgin Blue (up 10.3%), New Hope Corporation (up 6.1%) and Oroton Group (up 4.1%). “Oroton is a standout in the consumer discretionary sector and is one of a handful of retailers trading well in the current environment,” says Perennial. The fund is underweight materials and energy, and overweight telecommunications and healthcare.

Given the volatility over the last few months, the fund sold half of its shares in Abacus Property in August and switched the money across to FKP Property and Australand as these stocks were trading at a greater discount to their net tangible assets relative to Abacus. The fund also took profits in Fantastic Holdings and NIB Holdings in August, preferring to add to holdings in ToxFree Solutions, Breville Group and Clough.

In September it sold out of its holding in WPG Resources, given that the remaining assets post its deal with One Steel will be below its $50 million market cap requirement and liquidity has reduced to low levels. The fund also exited its holding in Pacific Brands following the stock going ex-dividend, using the funds to buy into Ausenco.

As commodities prices tanked it is hardly surprising that the biggest losers for the fund for the month of September were miners – Horizon Oil (down 26%) Gloucester Coal (down 23.7%), Ausdrill and Aurora Oil & Gas (both down 21.4%), Aquarius Platinum (down 21.3%) and Independence Group (down 20.5%). 

Investors in mining stocks with operations overseas need to keep abreast of any negative geopolitical moves that could swiftly dent profitability, such as Horizon Oil that tumbled following rumours that the PNG government could hand over ownership of the country’s resources to landowners. Fund managers at Perennial contacted management to get the lowdown given Horizon Oil’s significant exposure to PNG, and were confident that the rumours were just that. Nevertheless HZN continues to tumble, down 26% for the month of September and is now down 41% over the past three months. While sovereign risk still remains for HZN, the Managing Director recently acquired one million shares on-market – giving Perennial some degree of comfort in the stock.

7 Stocks The Funds Are Buying

 Company ASX Code  Share  Price*

Target Price Avg (Consensus Broker)

Ausenco  AAX  $2.54  $3.39
BHP Billiton  BHP  $36.86  $49.23
JB Hi-Fi  JBH  $15.10  $17.97
Woodside  WPL  $35.03  $45.09
Newcrest  NCM  $36.50  $46.92
   $  $
Tox Free Solutions  TOX  $2.23  $2.48


7 Stocks The Funds Are Ditching

 Company  ASX Code  Share Price* Target Price Range (Consensus Broker)
Rio Tinto  RIO  $68.30  $102.47
David Jones  DJS  $2.97  $2.87
Pacific Brands PBG  $0.725 $0.831
Transurban  TCL  $5.45  $5.86
Fantastic Holdings  FAN  $2.00  $2.83
WPG Resources  WPG  $0.105
James Hardie  JHX  $5.59  $6.40
 Origin Energy  ORG  $14.28  $17.72


More articles from this week’s newsletter 

18 Share Tips – 17 October 2011

DIY Super: Gain From Sharemarket Loss

Oil stocks look oversold

What is a spot forex rollover?

Understanding The Income Statement

Commodity Prices And Currency Movements

ASX rolling 52-week highs

ASX rolling 52-week lows

Top 10 shorted stocks on the ASX

Breaking News – all the latest Australian stockmarket news

Market Data: Check out TheBull’s market data for charts, quotes and company information

*Share price as at Friday 14th October, Consensus broker data from Invest Smart

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