Financials

QBE - Hold QBE

Under CEO Frank O’Halloran, QBE has pursued a successful strategy of growth through acquisition (most recently announcing the acquisition of North Pointe), while also maintaining a strong insurance margin. However, the company has benefited from an unusually favourable claims environment in recent years. And with a significant portion of the company’s earnings denominated in US dollars, Aussie dollar strength provides an additional headwind. Nevertheless, given the quality of both management and the underlying business, QBE will remain held in the Fat Prophets Portfolio.

Suncorp-Metway – Hold SUN

Along With IAG, SUN has not been a good recommendation. A series of storms, leading to large claims, have seen near term profit diminished. In addition, concern over the credit crisis hasn’t helped given SUN’s banking division is exposed to higher credit costs. But the market’s reaction has been overdone in our opinion. SUN currently trades on a consensus 2008 PE of around 10.6 times and a fully franked dividend yield of over 7%. Provided the Promina acquisition progresses smoothly, we believe SUN represents very good value at these levels. We are looking to see the stock price begin to trend in the right direction before recommending further buys however.

Insurance Australia Group - Hold IAG

As the stock price performance will attest, our original entry into Insurance Australia Group was simply too early. CEO Michael Hawker’s strategy of international expansion has so far been disappointing, with a weaker than expected performance from the UK acquisitions. Meanwhile, an unusually high number of severe weather events here in Australia has increased claims at a time when strong competition is restricting IAG’s pricing power.

Even so, we believe it is currently too early to judge the success or otherwise of Mr Hawker’s strategy. Furthermore, the prospect for QBE to move in on its rival should limit further share price weakness.

Tower Australia - Hold TAL

A strong first full year result as an independent entity helped justify Tower Australia’s split from the New Zealand business. Moreover, the company’s maiden 4 cent dividend is scheduled for payment later this month (Jan 21). Moving forward, CEO Jim Minto’s focus is very much on retaining earnings to expand the business, rather than maintaining a high dividend yield. And as long as top line expansion does not come at the expense of deteriorating profitability, we will continue to support this strategy.

Platinum Asset Management - Hold PTM

Platinum enjoyed a stellar stock market launch mid last year, which saw the stock immediately trading significantly above the original offer price of $5. In stark contrast however, investor enthusiasm has steadily fallen in the months since, with the stock now trading below the offer price. Abnormally weak investment performance led by the company’s weighting towards Japan is behind the fall, which has resulted in reduced funds under management and therefore fee revenue.

Nevertheless, such out of favour periods are expected for contrarian value managers such as Platinum. Indeed, Platinum remains a high quality manager in our view and we believe the spate of investor redemptions will not become a long-term trend.

Hunter Hall - Hold HHL

Investment Manager Hunter Hall has been a long-standing feature in the Fat Prophets Portfolio, over which time the company’s outstanding investment performance has driven strong share price growth. Looking forward, the company’s value based investment philosophy is well suited to a potentially more challenging market environment. Indeed, while absolute performance could slow, the company’s funds should continue to outperform their respective benchmarks. As a result, we expect fee revenue and therefore earnings to remain robust.

Australian Wealth Management - Hold AUW

Our holding in Australian Wealth Management has its roots in the June 2005 recommendation for Select Managed Funds, as a buy up to $4.20. The following day however, the stock opened up above this level and never looked back. As a result, Select never actually made it into the Fat Prophets Portfolio. We did provide occasional coverage for Members who bought above our recommended price. The company subsequently merged with Australian Wealth Management and since the merger, the stock has largely traded sideways. AUW continues to remain a play on Australia’s growing pool of superannuation funds and we will look to recommend again when the price is right.

Everest B&B Trust – Sell EBI

Despite trading well below net tangible assets (NTA), we are recommending a sell on EBI from an opportunity cost perspective. The Trust recently disclosed that market volatility has lead to flat returns from its portfolio of hedge fund managers, and that consequently it will not pay a dividend for the period ending 31 December. The Trust’s flat performance is still better than its various benchmarks, which indicates the strategy of capital preservation is being followed. However, we feel that this flat performance could exist for sometime, and as a result, the Trust is likely to continue trading at a discount to NTA. We therefore recommend Members sell around $2.95

Platinum Japan Fund - Hold

An investment in Japanese equities is a deep value play and Platinum Asset Management is among the top contenders to succeed in such an environment. As Fund manager Jim Minto reports in his December quarter commentary though, timing such an investment can be “problematical”. Nevertheless, we share Platinum’s view that the under valuation of Japanese equities will reverse in the future. And while this may prove to be a long-term proposition, we continue to recommend members with a long term view remain invested in the fund.

Property

All property trusts have been hit hard following the credit market turmoil and the news of Centro’s near collapse. Even the Japanese and European markets have been badly hit, despite their asset values being fundamentally stronger than the Australian, US and UK property markets.

APN UKA European Trust - HOLD AEZ

AEZ’s share price has been badly affected by Centro Properties’ woes and the subsequent de-rating of the sector. The share price decline is obviously a major short term setback. However, AEZ houses continental European property assets which we believe are fundamentally more attractive than property values in the US, Australia or the UK. The recent price fall more than accounts for the increase in risks associated with the sector in our opinion. On 2008 Bloomberg consensus earnings, AEZ now trades on a PE of around 8.7 times and a dividend yield of 11.7%.

Babcock & Brown Japan Trust - Hold BJT

After removing some profits from the table through our sell half recommendation early last year, the Babcock & Brown Japan Trust had a disappointing year. Most recently, the fall out from Centro’s near collapse has served to further dampen investor enthusiasm across the sector. In our view though, the underlying investment case for Japanese commercial property remains in place. As such, we will look to recommend increasing exposure to the trust when we determine sentiment has turned.

Macquarie Leisure Trust - Sell MLE around $3.16

Macquarie Leisure Trust has been a standout performer since our initial buy recommendation in 2002. The strong performance is primarily due to the success of the Trust’s flagship asset, Dreamworld. However, management are also driving growth through the development of other divisions such as bowling, marinas and a US expansion.

This strategy has proved successful to date, with the Trust even accredited with reviving ten-pin-bowling’s flagging image as an entertainment option. However, given the consumer discretionary nature of the Trust (and US exposure), future growth will prove far more challenging in our view. As such, Fat Prophets recommend selling Macquarie Leisure Trust around $3.16.

Rubicon Japan Trust - Sell RJT around $0.615

We originally gained exposure to the Trust through a priority allocation to the initial public offering based on our holdings in Rubicon’s European Trusts. We subsequently removed our exposure to the other Rubicon Trusts after they increased their risk profile through a move into mortgage financing. Given our bullish view on Japanese property, and the fact that the Japan Trust did not follow the same model, we retained our exposure to RJT.

In hindsight however, it is clear that Rubicon Japan is not of the same calibre as our alternative Japanese Property Trust, Babcock & Brown Japan Property (BJT). Indeed, we believe BJT will exhibit greater upside once the current negativity towards the sector recedes.

Accordingly, we recommend Members sell RJT around $0.615. In the meantime, we will closely monitor BJT’s price action with a view to allocating the proceeds once sentiment begins to turn.

Westpac Office Trust, Hold WOTCA

Westpac Office Trust is at the low risk end of the Property Trust sector. Given that the Trust’s largest tenant is Westpac Bank, one would have to assume that the rental income is reasonably secure. Although the Trust does not offer significant potential for capital gains, it does offer a strong tax-advantaged yield that is attractive to those investors on a high marginal tax rate. As such, the Trust also has value as a low volatility investment during times of market turmoil.