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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.

Equity Bottom-Up

Commonwealth Bank of Australia / Equity Bottom-Up

<ul><li>Much of the newsflow around Australia's major banks has been negative in the past year.  In addition to the prospect of a further lift in capital requirements, there are ongoing perceptions of excessive CEO pay, allegations of conflicts of interest and misleading behaviour in the provision of financial advice to bank customers, and the launch of court proceedings by ASIC against some of the major banks for rate rigging. </li><li>Against this backdrop, the P/B dispersion between the banks and industrials has increased to close to historical highs, yet there has not been a commensurate rise in the dispersion of consensus ROE estimates.  Evidente believes that the consistently negative news-flow has caused the market to become too gloomy about the growth prospects of the major banks and investors are also under-estimating that shareholders - not just bondholders - benefit from safer banks associated with larger loss absorbing capital buffers.</li><li>The major banks' profitability adjusted P/B ratios - a favored metric of Evidente - remains well below their ASX100 peers.  Drawing on valuation theory, the only feasible alternative explanation for the increase in P/B dispersion is higher expected returns from banks relative to industrials. </li><li>This is the basis for Evidente increasing the size of the active bet in the major banks in its model portfolio.  This post also provides an update of the portfolio's performance since inception on 1 July 2016 and explains the rationale for the three new additions: <a href="https://www.smartkarma.com/entities/14" target="_blank" data-smartkarma-citation="entities:14:1">Commonwealth Bank Of Australia (CBA AU)</a>, <a href="https://www.smartkarma.com/entities/677" target="_blank" data-smartkarma-citation="entities:677:1">Qantas Airways Ltd (QAN AU)</a> and <a href="https://www.smartkarma.com/entities/12350" target="_blank" data-smartkarma-citation="entities:12350:1">Downer EDI Ltd (DOW AU)</a>.</li></ul>

Much of the newsflow around Australia's major banks has been negative in the past year.  In addition to the prospect of a further lift in capital requirements, there are ongoing perceptions of excessive CEO pay, allegations of conflicts of interest and misleading behaviour in the provision of financial advice to bank customers, and the launch of court proceedings by ASIC against some of the major banks for rate rigging. Against this backdrop, the P/B dispersion between the banks and industrials has increased to close to historical highs, yet there has not been a commensurate rise in the dispersion of consensus ROE estimates.  Evidente believes that the consistently negative news-flow has caused the market to become too gloomy about the growth prospects of the major banks and investors are also under-estimating that shareholders - not just bondholders - benefit from safer banks associated with larger loss absorbing capital buffers.The major banks' profitability adjusted P/B ratios - a favored metric of Evidente - remains well below their ASX100 peers.  Drawing on valuation theory, the only feasible alternative explanation for the increase in P/B dispersion is higher expected returns from banks relative to industrials. This is the basis for Evidente increasing the size of the active bet in the major banks in its model portfolio.  This post also provides an update of the portfolio's performance since inception on 1 July 2016 and explains the rationale for the three new additions: Commonwealth Bank Of Australia (CBA AU), Qantas Airways Ltd (QAN AU) and Downer EDI Ltd (DOW AU).

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