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Market Commentary

These articles provide commentary on specific aspects of the market both local and international. 

The entertainment industry paints a glamous picture of the exciting world of trading securities, full of shouting, villans, greed and coloured shirts with white cuffs and collars. However  the reality is far more measured, quieter and with fewer cigars and braces. In this piece we are looking to give some insight into how we trade the portfolios on a daily basis. 

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Currently investors are being deluged by new IPOs (initial public offerings), as the sponsoring investment banks and their predominantly private equity owners look to capitalise on the current strength of the Australian equity market and have these placements done before Christmas. As every day seems to bring a new thick IPO prospectus (and sometimes three!) and glowing broker research on the new company about to be floated, this week’s piece is going to look at the hot topic of the moment: IPOs!

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This week marked the end of the reporting season for Australia’s banks with the four major banks delivering a combined $27.3B in profit for the 2013 financial year. In this piece we are going to look at the common themes coming out of the results and hand out our reporting season awards.

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The media, sections of the market and the companies themselves pay close attention to how analysts at the large investment banks rate individual companies, with “Buy” calls greeted with cheers, “Sell” calls causing concern and “Neutral” calls resulting in ambivalence. Earlier this week a senior financial planner asked me how closely we, as portfolio managers, follow the stock calls offered by analysts at investment banks. In this piece we are going to run through the strengths and weaknesses of stockbrokers and how we as investors can best utilise their work to improve portfolio returns. 

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During the week the US Indices (S&P500 and the Dow Jones) hit record all-time highs and the ASX 200 marked a 71% recovery since the dark days of March 2009. Accompanying these moves have been investing magazines with breathless cover articles like "Double your Money" and "Summer Scorchers: Five Red Hot Momentum Plays", and the three separate IPOs that landed on my desk yesterday. Whilst the aim of all equity investors is to seek gains from the market, in this piece we are going to look at seven reasons that can cause both individual and institutional investors to lose money in the market.

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Term deposits (TD) are often considered relatively straightforward investments that investors believe they can effectively manage on their own.  For most people, this is choosing the highest rate from a bank they are comfortable with. Unlike stocks, the face value of a TD does not change during the life of the deposit, as there is no 'mark-to-market' or revaluations unlike other fixed income securities like bonds which trade on markets. As we saw during the GFC, even high-grade fixed income securities can experience high price volatility. TDs experience no such observable volatility. This encourages investors to treat them as passive 'set and forget' investments.

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Over the period 2004 to 2007 when China began to seriously compete with Japan and South Korea for Australia’s minerals, a successful investment strategy was either to own companies with vague plans to mine undeveloped deposits or indeed high cost miners that were previously pretty marginal. Furthermore the commodity itself did not seem to matter, as China was seen to want everything Australia could dig out of the ground.  This time has clearly passed and in this piece we are going to look at what minerals are in demand to feed the Dragon and how the Core Equity Portfolio is positioned.

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Last night in Chicago the CEO of US agricultural company Archer Daniels Midland (ADM) said that she expects that the company's $3.2 billion dollar takeover of Australian grain handler GrainCorp will be completed by the end of 2013. This implies that ADM expects the Foreign Investment Review Board will approve the deal; after it had been held up by both the election and opposition from the National Party. In this note we look at the extent to which opportunities for investors to get exposure to listed agricultural companies has been diminished by recent takeovers and the breath of foreign interest in ASX-listed agricultural companies.

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Probably the biggest question that any Australian equity fund manager faces is what weight in a portfolio to allocate to the banks. Over the past few years, the Australian banking sector has grown to represent 32% of the ASX100 on the back of record bank profits, weakness in other sectors and a chase for yield by investors globally as monetary policy settings across Europe, Japan and the US have pushed interest rates to multi-century lows. All of this has contributed to all 4 of the Australian banks now being in the top 15 banks globally by market capitalization.

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When you look at the collection of stocks in any portfolio; it is statistically improbable that all the stocks in any portfolio at one point in time will be outperforming the benchmark. In the Core Equity Portfolio we focus on buying quality companies stocks that we believe are undervalued by the market. Consequently we accept that some stocks we own may underperform for a time, before a catalyst occurs that causes the stock to re-rate upwards. Whilst investors should primarily focus on their overall portfolio return (+15.1% in 2013!), in this piece we are going to run through the securities that are performing well in 2013 and those that are lagging.

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