Founder Evidente. Top rated quantitative analyst, Evidente

Sam Ferraro

Founder Evidente. Top rated quantitative analyst

Evidente

Evidente is an independent financial education firm that delivers innovative financial advice to wholesale investors, including active long only funds, hedge funds, pension funds, and sovereign wealth funds, in Australia and globally.  Drawing on academic research in asset pricing, behavioural finance and portfolio construction, Evidente provides wholesale investors with commercial solutions to stock selection and asset allocation decisions across equities and other asset classes.

Thematic (Sector/Industry)

<ul><li>Most active funds tout their ability to discriminate between good and poor quality management, and accordingly weight their portfolios towards businesses that they consider to be well managed.&nbsp; In the past decade, portfolio managers have also boasted of their ability to identify and invest in companies that score strongly across environment, governance and social (ESG) dimensions.</li></ul><ul><li>In the second instalment of Evidente's Dissecting Quality series, I show that management quality and corporate governance matter more for complex companies, where shareholders face high monitoring costs. To that end, I develop a systematic model of complexity and agency costs for the ASX200 based on eight company specific factors.</li><li>Some of the industrials that make up the top 20 complex stocks include: Qantas, Amcor, Computershare, Seek and Brambles. Investors can use the model to integrate their assessments of company management and corporate governance. In particular, investors should avoid complex stocks that score poorly across management quality and governance practices.</li></ul>

Most active funds tout their ability to discriminate between good and poor quality management, and accordingly weight their portfolios towards businesses that they consider to be well managed.&nbsp; In the past decade, portfolio managers have also boasted of their ability to identify and invest in companies that score strongly across environment, governance and social (ESG) dimensions.In the second instalment of Evidente's Dissecting Quality series, I show that management quality and corporate governance matter more for complex companies, where shareholders face high monitoring costs. To that end, I develop a systematic model of complexity and agency costs for the ASX200 based on eight company specific factors.Some of the industrials that make up the top 20 complex stocks include: Qantas, Amcor, Computershare, Seek and Brambles. Investors can use the model to integrate their assessments of company management and corporate governance. In particular, investors should avoid complex stocks that score poorly across management quality and governance practices.

Dissecting Quality: When Does Management Quality and Corporate Governance Matter Most?

Macroeconomics

<p>In a wide ranging speech delivered overnight in New York,&nbsp;Glenn Stevens, provided more colour on his prior communications in which he has bemoaned the low level of entrepreneurial risk taking across Australia's corporate sector and implored businesses to invest for future growth prospects.&nbsp; Mr Stevens has acknowledged that lower returns on safe assets have not&nbsp;pulled down the cost of capital because there has been an offsetting rise in the equity risk premium.&nbsp;&nbsp; The risk free rate is low due to factors that are restraining corporate investment: low expected earnings growth and a high expected risk premium.&nbsp; I show that the lower risk free rate and lift in the risk premium have contributed to the relative rise in multiples of defensive stocks, and expect their lofty valuations to persist as long as animal spirits remain dormant.</p>

In a wide ranging speech delivered overnight in New York,&nbsp;Glenn Stevens, provided more colour on his prior communications in which he has bemoaned the low level of entrepreneurial risk taking across Australia's corporate sector and implored businesses to invest for future growth prospects.&nbsp; Mr Stevens has acknowledged that lower returns on safe assets have not&nbsp;pulled down the cost of capital because there has been an offsetting rise in the equity risk premium.&nbsp;&nbsp; The risk free rate is low due to factors that are restraining corporate investment: low expected earnings growth and a high expected risk premium.&nbsp; I show that the lower risk free rate and lift in the risk premium have contributed to the relative rise in multiples of defensive stocks, and expect their lofty valuations to persist as long as animal spirits remain dormant.

<p>The Reserve Bank Board meets today, a month after cutting the official cash rate (OCR) by 25 basis points&nbsp;to a multi-decade low of 2.25%.&nbsp; This followed an 18 month period of interest rate stability.&nbsp;&nbsp;&nbsp; There is a compelling case for the RBA to ease policy now to restore the psychology of risk taking in the economy and combat the new capital and cost discipline.&nbsp; But Mr Stevens has previously said that it is important that further cuts do not send a signal to the market that the economy is weak, at a time when consumer and business sentiment remain fragile.&nbsp; Thus, I believe that the May meeting presents the best opportunity to ease policy with the positive narrative of a lower inflation outlook following the release of the first quarter CPI in late April.</p>

The Reserve Bank Board meets today, a month after cutting the official cash rate (OCR) by 25 basis points&nbsp;to a multi-decade low of 2.25%.&nbsp; This followed an 18 month period of interest rate stability.&nbsp;&nbsp;&nbsp; There is a compelling case for the RBA to ease policy now to restore the psychology of risk taking in the economy and combat the new capital and cost discipline.&nbsp; But Mr Stevens has previously said that it is important that further cuts do not send a signal to the market that the economy is weak, at a time when consumer and business sentiment remain fragile.&nbsp; Thus, I believe that the May meeting presents the best opportunity to ease policy with the positive narrative of a lower inflation outlook following the release of the first quarter CPI in late April.

The New Capital Discipline and the RBA's Line Ball Decision

<p><b>As with most macroeconomic releases, there was something for everyone in today’s December quarter CPI. For the doves, the precipitous fall in petrol prices has pulled down the headline CPI which is around 1.6% higher than a year ago. For the hawks, the various measures of core or underlying inflation came in stronger than expected, growing by 0.66% in the quarter. Nonetheless, on a year on year basis, they remain close to the bottom end of the Reserve Bank’s inflation target range of 2-3%.</b></p>

As with most macroeconomic releases, there was something for everyone in today’s December quarter CPI. For the doves, the precipitous fall in petrol prices has pulled down the headline CPI which is around 1.6% higher than a year ago. For the hawks, the various measures of core or underlying inflation came in stronger than expected, growing by 0.66% in the quarter. Nonetheless, on a year on year basis, they remain close to the bottom end of the Reserve Bank’s inflation target range of 2-3%.

Tame Inflation data and the bond market signal that the yield trade is yet to run its course

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<div>
<p>Since Victorian electricity operator <a href="https://www.smartkarma.com/entities/ausnet-services" target="_blank" data-smartkarma-citation="entities:10293:1" rel="noopener">AusNet Services (AST AU)</a> <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02423286-3A576179?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">announced</a> it would grant Brookfield due diligence access after receiving a revised non-binding Offer of A$2.50/share, up from $2.35/share on the 30 August, there has been a knotty backdrop involving competing bidder <a href="https://www.smartkarma.com/entities/apa-group" target="_blank" data-smartkarma-citation="entities:18658:1" rel="noopener">APA Group (APA AU)</a>. A rough timeline is as follows.</p>
<table class="table table-striped">
<colgroup> <col> <col> </colgroup>
<tbody>
<tr>
<td rowspan="2" style="width: 84pt;">
<h3>Date</h3>
</td>
<td rowspan="2" style="width: 323pt;">
<h3>Data in the Date</h3>
</td>
</tr>
<tr></tr>
<tr>
<td style="text-align: left; width: 84pt;">1-Sep-21</td>
<td style="width: 323pt;">APA approached AusNet with a non-binding proposal of A$2.32</td>
</tr>
<tr>
<td style="text-align: left; width: 84pt;">16-Sep-21</td>
<td style="width: 323pt;">APA made AusNet aware it intended to make a revised proposal</td>
</tr>
<tr>
<td style="text-align: left; width: 84pt;">20-Sep-21</td>
<td style="width: 323pt;">Brookfield's exclusive eight-week due diligence</td>
</tr>
<tr>
<td style="text-align: left; width: 84pt;">21-Sep-21</td>
<td style="width: 323pt;">APA announced its "superior proposal", involving a non-binding indicative Offer by way of a Scheme for A$2.60/share in cash and scrip</td>
</tr>
<tr>
<td style="text-align: left; width: 84pt;">23-Sep-21</td>
<td style="width: 323pt;">APA lodged an application to the Takeovers Panel, criticising the exclusivity arrangements with Brookfield</td>
</tr>
<tr>
<td style="text-align: left; width: 84pt;">28-Sep-21</td>
<td style="width: 323pt;">APA extended the deadline to be granted due diligence for as long as the Takeovers Panel application remained under review. </td>
</tr>
<tr>
<td style="text-align: left; width: 84pt;">1-Oct-21</td>
<td style="width: 323pt;">Brookfield lodged its own Panel application contending APA's ASX announcements on the 24 and 29 September contained misleading and incorrect information</td>
</tr>
<tr>
<td style="text-align: left; width: 84pt;">8-Oct-21</td>
<td style="width: 323pt;">The Panel declined to conduct proceedings wrt to Brookfield's application</td>
</tr>
<tr>
<td style="text-align: left; width: 84pt;">15-Oct-21</td>
<td style="width: 323pt;">The Panel declared there were unacceptable circumstances:</td>
</tr>
<tr>
<td style="text-align: left; width: 84pt;">15-Oct-21</td>
<td style="width: 323pt;">AusNet announced it would now engage with APA</td>
</tr>
<tr>
<td style="text-align: left; width: 84pt;">23-Oct-21</td>
<td style="width: 323pt;">AusNet will now provide due diligence access to APA in parallel with Brookfield.</td>
</tr>
<tr>
<td style="text-align: left; width: 84pt;">28-Oct-21</td>
<td style="width: 323pt;">The ACCC commenced its review of APA's bid for AusNet. </td>
</tr>
<tr>
<td colspan="2" style="width: 407pt;"><em>Source: Various ASX announcements</em></td>
</tr>
</tbody>
</table>
</div>
<h3>The New News</h3>
<div>
<p>Brookfield has now bumped its Offer to $2.65/share, in cash, and AusNet has <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02445508-3A579944?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">entered</a> into a Scheme Implementation Deed (SID).</p>
<p>The Offer has unanimous board support. Singapore Power with 32.74% has said it would vote in favour of the Scheme. No word from China's State Grid.</p>
<p>A requirement under the SID is that AusNet cease discussions with other parties. AusNet has terminated APA's due diligence access.</p>
<p>APA is free to make a superior proposal - whose cash/scrip Offer is currently $2.54/share based on last Friday's close. </p>
<p>Brookfield is very much in the driving seat here. </p>
<p>More below the fold.</p>
<p></p>
</div>


Since Victorian electricity operator AusNet Services (AST AU) announced it would grant Brookfield due diligence access after receiving a revised non-binding Offer of A$2.50/share, up from $2.35/share on the 30 August, there has been a knotty backdrop involving competing bidder APA Group (APA AU). A rough timeline is as follows.

   



Date


Data in the Date




1-Sep-21
APA approached AusNet with a non-binding proposal of A$2.32


16-Sep-21
APA made AusNet aware it intended to make a revised proposal


20-Sep-21
Brookfield's exclusive eight-week due diligence


21-Sep-21
APA announced its "superior proposal", involving a non-binding indicative Offer by way of a Scheme for A$2.60/share in cash and scrip


23-Sep-21
APA lodged an application to the Takeovers Panel, criticising the exclusivity arrangements with Brookfield


28-Sep-21
APA extended the deadline to be granted due diligence for as long as the Takeovers Panel application remained under review. 


1-Oct-21
Brookfield lodged its own Panel application contending APA's ASX announcements on the 24 and 29 September contained misleading and incorrect information


8-Oct-21
The Panel declined to conduct proceedings wrt to Brookfield's application


15-Oct-21
The Panel declared there were unacceptable circumstances:


15-Oct-21
AusNet announced it would now engage with APA


23-Oct-21
AusNet will now provide due diligence access to APA in parallel with Brookfield.


28-Oct-21
The ACCC commenced its review of APA's bid for AusNet. 


Source: Various ASX announcements




The New News

Brookfield has now bumped its Offer to $2.65/share, in cash, and AusNet has entered into a Scheme Implementation Deed (SID).
The Offer has unanimous board support. Singapore Power with 32.74% has said it would vote in favour of the Scheme. No word from China's State Grid.
A requirement under the SID is that AusNet cease discussions with other parties. AusNet has terminated APA's due diligence access.
APA is free to make a superior proposal - whose cash/scrip Offer is currently $2.54/share based on last Friday's close. 
Brookfield is very much in the driving seat here. 
More below the fold.



AusNet (AST AU) Enters Scheme With Brookfield

Australia

DUET Group invests in energy utility assets located in Australia and New Zealand.  The Group's investment assets include gas pipelines and electricity distribution networks.

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DUET Group (DUE AU)

Dissecting Quality: When Does Management Quality and Corporate Governance Matter Most?

Most active funds tout their ability to discriminate between good and poor quality management, and accordingly weight their portfolios towards...

Sam Ferraro

Beware of bubble talk, for now

In a wide ranging speech delivered overnight in New York, Glenn Stevens, provided more colour on his prior communications in which he has bemoaned...

Sam Ferraro

The New Capital Discipline and the RBA's Line Ball Decision

The Reserve Bank Board meets today, a month after cutting the official cash rate (OCR) by 25 basis points to a multi-decade low of 2.25%. This...

Sam Ferraro

Tame Inflation data and the bond market signal that the yield trade is yet to run its course

As with most macroeconomic releases, there was something for everyone in today’s December quarter CPI. For the doves, the precipitous fall in...

Sam Ferraro

AusNet (AST AU) Enters Scheme With Brookfield

Trading tight at gross/annualised spread of 1.9%/4.8%, assuming late March completion. I would not chase it further. I'm not entirely confident...

David Blennerhassett

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