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Australian Share Fund UpdateMarch Quarter 2008
This update is for the BlackRock Australian Share Fund range (formerly known as the Merrill Lynch Australian Share Fund range). These funds comprise the Australian Share Fund, Professional Investor Australian Share Fund and Wholesale Australian Share Fund. The performance shown in the Fund Update is the gross performance of the fund. To view the net performance of the fund or of the different unit classes of the fund download the Fund Performance Report or visit Fund Performance. Gross performance returns and benchmark performance shown do not include expenses, fees or tax. Net performance returns are prepared on an exit-to-exit fee basis which includes all ongoing fees and expenses. Performance review Performance of BlackRock Australian Share Fund:
Performance of BlackRock Professional Investor Australian Share and BlackRock Wholesale Australian Share Funds:
Past performance is not necessarily a guide to future performance. *S&P/ASX 200 Accumulation Index ^Shows the difference between Gross return and Benchmark return. Long term performance returns show the potential volatility of returns over time. Gross performance figures shown are composite numbers for the Australian Share Fund and make no allowance for expenses, fees or taxes. Composite returns are used for indicative purposes and minor variations may occur. The main drivers of portfolio performance during the quarter were:
Please note that all performance is presented in absolute terms.
Market outlook With the attention of financial markets focussed squarely on the US economy, we believe that there is a battle between two divergent views: 1. Bearish on the US: The housing sector remains in recession, still saddled with excess home inventories and mortgage rates that have not declined much, despite the Fed's rate cuts. The flight from risk in debt markets has pushed up corporate spreads for all borrowers and, in some cases, reduced the availability of credit. It is discouraging that the Fed's aggressive intervention on various fronts has thus far failed to produce material improvement in credit market conditions. The longer this persists, the greater the chance of negative feedback loops with the economy, most directly with asset price deflation. The low US$ raises concerns about inflation, notwithstanding the weak economy. On this view, financial markets may not have reached a bottom 2. Bullish on the US: While the economy is weak, the news is not all bad. Thus far, companies have avoided wholesale job cuts and employment and real incomes are still higher than a year ago. Importantly, corporate balance sheets (financial sector aside) are in reasonable shape, there is modest fiscal stimulus on the way and the weak US$ is giving a boost to the export sector. Policymakers have not exhausted all options and the option of direct fiscal relief to homeowners remains open. The fact that the market held up above the January lows also suggests a bottom may have formed. Sound arguments can be put forward in favour of both these views, suggesting a heightened level of uncertainty, and picking a path between these views is difficult. However, we can draw some conclusions with reasonable conviction:
WOR is a leading provider of professional services to the energy, resources and infrastructure industries. WOR offers a range of services including feasibility studies, design, project services, upgrade services and maintenance services. WOR is a beneficiary of rising labour and capital expenditure costs in the energy, mining and power sectors. We believe market forecasts are too conservative and expect upgrades over time as WOR continues to add employees and pass through higher labour costs. The company is gearing up to maintain its strong growth trajectory through a combination of acquisitions (Colt) and bolt on (Intec) and organic growth through the recruitment of graduates and experienced engineers. WOR specialises in Engineering, Procurement & Construction Management (EPCM), an attractive area in the energy supply chain as it has the highest margins and lowest risk. Margins are high due to a drastic shortage of skilled engineers/project managers and risk is low as the majority of contracts are on a cost plus basis. EPCM contractors are beneficiaries of cost increases as contracts are typically set on a ‘multiplier’ basis which has a leverage effect on the revenue line and on margins. The key constraint on contracting companies is people, given that approximately 70% of an EPCM contractor’s cost base is labour. However WOR has demonstrated an excellent track record in recruiting staff, with employee numbers growing from 9,500 in February 2005 to 27,700 in February 2008. WOR continues to represent an excellent opportunity to gain exposure to a high-quality, long-duration growth stock at a reasonable price. Australian Share Fund Portfolio as at 31/3/2008
The Fund aims to achieve capital growth through investment in Australian shares and other securities and to provide investors with some tax-effective income through the distribution of franked dividends. We aim to achieve this goal by outperforming the S&P/ASX 200 Accumulation Index over the medium to long term. Fund strategy The investment goal of the Fund is currently pursued by investing in a concentrated portfolio of Australian shares. The portion of the Fund not invested in securities will be invested in the money market (‘cash’) through a BlackRock wholesale fund. Designed for investors who…
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