Selector Funds Management Limited ACN 102756347 AFSL 225316 Level 3, 66 Hunter Street Sydney NSW 2000 Australia Tel 612 8090 3610

SelectorFundsManagement 29
In this quarterly edition we review performance and attribution. We focus on the global gas hub, gas reserves, supply and price differentials and importantly the potential impact on global trade imbalances between China and the USA. Photo of natural gas tanks located at the Henry Hub, a refinery and storage facility operated by Chevron subsidiary Sabine Pipe Line in Erath,Louisiana.
SelectorFundsManagementLimited ACN102756347AFSL225316 Level3,66HunterStreet SydneyNSW2000Australia Tel61280903610 www.selectorfund.com.au
December2011
Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28
DearInvestor, We entered the 20 011 year with h some optim mism that global macroeco onomic event ts would take e a bac ck seat and d allow the more mun ndane domes stic environm ment to shine through. Unfor rtunately as we w sign off for another year, y its safe to say that rather than taking t a back k seat, we remain st trapped into a Formula On ne racing car hurtling arou und at break neck speeds, unabletoshakeof ffthedailybo ombardmentsurrounding Europeseco onomicwoes. Confid dence forms a very important part of f investing. So ome would argue a it is eve erything. It is s one thing to carry y out the due e diligence to o determine whether w a ne ew or existing investment t makesthegradebut b quiteanot thertostepup u totheplateandcarrythroughonthatwork.That t snotwithout triskandsubj jecttoallthe eusualcaveat ts,nonemore eimportantthan t theprice e taskis paid. Today y, investors are again bein ng sorely test ted, evident by b the growin ng stampede of funds into o cash and low yielding governm ment bonds (see Graph 1). The international ratin ng agencies includ ding Fitch Ratings, Standa ard & Poors and Moody s having b been found badly b wanting g leadin ng up to the global financ cial crisis, no ow provide up to minute reporting on n the ongoing g conce ernsoverEuro opesfiscalwoes, w asifinve estorsarentalreadyacute elyawareofthe t dangers. Follow wingonfromFitchslatest twarningofm massiverating gsdowngrade esinEurope,notingthata comp prehensive so olution to th he crisis the ere is beyond reach, loc cal influentia al investment t comm mentatorAlan nKohlertoldhisEurekaRe eportreaders sduringDecemberthathe ewasheading g for th he sidelines for his own n investmen nt portfolio, writing that t On Mond day I will be e signifi icantlyreducingmyalread dyreducedex xposuretoeq quities,possib blytozero. Our sense is that the t market is s pricing in an enormous amount of gloom. The Re eserve Banks s cutinofficialinterestratesfrom m4.75%to4. .25%,whilstbelated b inour rview,willno odoubtassist t many ybusinessownersdealwithamorecom mpetitiveand dbureaucratic clandscape. Yes,thegoingispr rettytough atthemomen nt,reflectedinourlocal sh haremarkets sfallof 15.2% % for ca alendar year r 2011. This would represent the se econd occasi ion that our r market has s delive ered negative e returns over r the past fou ur years and flys in the fa ace of fifty ye ears of history y that has h seen a negative n return delivered on average once every t three and a half years. In n terms s of comparis sons, the All Ordinaries O Ind dex is now tr rading back at t 2005 levels while the US S S&P500 5 indexhasittradingbackat1998lev vels. In ou ur lead article this quar rter, we exp plore how th he internatio onal energy landscape is s under rgoing its own structural changes. c The developmen nt of new poo ols of natural gas provides s the world w with what w appears to be a plen ntiful and pr rice competit tive energy source. s While e Austra alian coal sea am gas opera ators have gra abbed much of the headlines in this re egard, the US S econo omy is very well w positione ed to benefit enormously over the lon ng term from m its own coal shale gas resource e base. Impor rtantly, the news emanati ing from US is positive on a number of f fronts saswewillex xplainfurther r.
Selecto orFundsManag gementLimited ACN102756347AFSL225316 3 66HunterStr reetSydneyNSW W2000,Australi ia Level3, Teleph hone61280903610 3 Webwww w.selectorfund.co om.au
Closer to home, our o local mar rket faces its s own set of challenges. Enough has already been n writte en on our tw wo speed eco onomy, howe ever, a topic that we belie eve will garn ner increasing g intere est surrounds s Australias international reputation when w it come es to carrying out business s here.Someofthestatistics,cou urteouslyoft theWorldBan nkGroup,ma aysurpriseso omereaders. Finally y, the Fund delivered d a positive gross performance e for the qua arter of 1.18% %, a relatively y goodoutcomecon nsideringthevolatileconditionsonhan nd. Toallourinvestors swetrusttha atyoufindthereportinformative. Regar rds TonyScenna Corey yVincent
Table eofContents Page1:Lettertoin nvestors 4 Performan nceDecember rQuarter201 11 Page4: Page4: 4 Performan ncetablesince einception Page4: 4 PortfolioTop T 10 Page7:HenryHub bwhatisitand a whyitma atterstous a bullishon ntheUSeconomy Page13:Whyweare usinessreview w2012 Page16:WorldBankdoingbu Page18:Company yvisitdiaryDe ecemberQua arter2011 Page20:PortfolioStatisticsDec cemberQuart ter2011
Performancetable esinceincept tion %Re eturns 3mo onths 3yea ars Since einceptionco ompoundpa Top10December2011* Blackmores CampbellBrother rs Fligh htCentre IOOF FHoldings IRESSMarketTec chnology New wsCorporation nInc ResM MedInc SEEK K SIRTeXMedical Whit tehavenCoal Top10=65.78% *Liste edinalphabet ticalorder
Fund% Gross 1.18 9.59 5.07
AllOrds Index% 1.01 3.96 0.60
AllOr rdsAcc Ind dex% 1.86 8.49 4.88
Top10Sept tember2011* Blackmores s CampbellBrothers FlightCentr re IOOFHoldin ngs IRESSMarke etTechnology NewsCorpo orationInc ResMedInc c SEEK SIRTeXMed dical Whitehaven nCoal Top10=67 7.69%
Select torrunsahig ghconvictionindexunawarestockselec ctioninvestm mentstrategywithtypically y 1525 5 stocks chos sen for the Fund. As sh hown above, , the Funds top 10 posi itions usually y representthegrea atmajorityof f itsequityex xposure. Current and past portfolio com mposition has s histor ricallybeenveryunliketha atofyourave eragerunofthemill indexhuggerfu undmanager. Our stock s selectio on to this po oint has not included eith her retail ban nks or the la arge resource e comp panies, RIO an nd BHP. Our r goal remain ns to focus on o truly differ rentiated bro oad cap stock k select tionratherth hanthecloset tindexhuggin ngportfoliosofferedbymostlargefund dmanagers.
Performanceattributionforthequarter Top5stockcontr ributors % Top5stockdetra actors % Phar rmaxis 0.97 ResM MedInc 1.13 Coch hlear 0.87 SIRTe eX 0.80 CampbellBrother rs 0.83 CathRx 0.56 New wsCorporation nInc 0.61 FlightCentre 0.51 SEEK K 0.34 4 Black kmores 0.40 Cash is king at the e moment and nothing illu ustrates that better than Graphs 1 dep picted below. Everything has a price and on o our recko oning, while the Australian market will need to o transv verse some tougher eco onomic obsta acles over th he next year r, it remains s a standout, globally. So why are investors abandoning a t the market an nd running in nto cash. In sh hort, investor r confid dencehasbee enshot.How weverasSunSuperchiefinv vestmentoffi icerDavidHartleyrecently y obser rvedinreferencetotheflig ghttocash; If yo ou think abou ut that in ter rms of a price e to earnings s ratio, 10 ye ear governme ent bonds are e curren ntly trading on a 27 time es PER with no prospect of any incre ease in the earnings. e And d peopl learefindingitdifficulttojustifypaying g10timesPE ERforashare. Graph hs1.Howlow wcanitgo?
In a global g context t, Graph 2 hi ighlights how w our share market m perfor rmed against a number of f other markets dur ring the cours se of 2011. Th he headlines would have y you believe that t the woes s inEur ropewouldhaveextended dtotheirrespective index xes,howeverapartfromtheUSmarket t which h sat alone in n posting a 6.1% positive return, the Australian A All l Ordinaries 200 2 Index fell 14.5% %, underperfo orming the UK and Spanish markets bu ut just beatin ng the German and French h performanceofne egativereturn ns.
Graph h2:Globalmarket m perform manceLoca almarketvaluations
Source:M MerrillLynch
Source:MerrillLyn nch
Locall ly, our mark ket is now priced on price earnings ratios (PERs s) last seen in 2009 and d depen ndinghowfar rbackonego oes,periodsthatincludeth helateeightie esandearlynineties. n Ona yield basis, should d the forward d estimates of o company profits p pan ou ut, fully frank ked yields are e tipped d to hit 7.0% % while cash yields are se et to drop fu urther. This is not to sugg gest that the e marke ets are not without w risk but b to place some s perspe ective of what has been a difficult and d feardriven d environ nment. During the quarte er the Fund maintained its top ten holdings wit th the most notable and d signifi icant positive e contributio ons coming f from holdings in News Corporation C and a Campbell Brothers following g another ste ellar interim result. r Outsid de this group p, Pharmaxis and Cochlear r both regained som me lost ground. In the ca ase of Pharm maxis, the group successf fully received d Europ pean approva al for its Cyst tic Fibrosis d drug Bronchit tol during Oc ctober, with management t now pressing p forw ward with a product p launc ch to comme ence in the in nitial markets s of Germany y andth heUnitedKin ngdominthefirstquarterof2012. Cochlear also updated the market following the Septem mber 20011 recall r of its Nucleus N CI500 0 cochle ear implant. As we noted d in our last n newsletter, we w exited our r entire posit tion following g our in nitial concern ns regarding the t potential severity of the recall, bot th to the Nuc cleus product t and the company s brand repu utation. How wever, following further clarification on n the specific c issues s that led to o the volunta arily recall, we w reentere ed the stock, , made attra active by the e marke etssalvageprice p reactiontobelow$50 0pershare. Asthe epastquarte erhassoclear rlyshown,inv vestorswillre eactquicklytonews,beitgoodorbad. In som me instances these action ns are more t than justified, in other cas ses they pres sent investors s with an opportun nity to buy into a well run, first cl lass business s franchise undergoing u a tempo orarysetback k.SFM
Henry yHubwhat tisitandwhy yitmatterstous? In our r September quarterly newsletter we shone the lig ght on the retail sector an nd specifically y the in nroads that online o was ha aving on the industry. Cas st your mind back even ten t years and d online e was an interesting concept but con nsumer hesitancy particularly surroun nding security y conce erns acted mo ore as a hand dbrake on its s take up. Today, online and a its adoption is gaining g increa asingrelevanc ce. The Forrester F Consulting group p forecasts th hat the Australian online r retail market t will increase e from $24 billion in n 2009 to $38 8 billion by 2 2013, a rise of o 58%. This w would see on nline retailing g taking g a bigger slic ce of the tot tal retail spen nd from an estimated e 5% % market shar re to a figure e more like 10%. Fu urthermore, the t data sugg gests that the acceptance e within the community c is s nowmore m broadbased b withsome56perce entofAustrali iansbuyingonlinemonthly. So wh hat does onlin ne retailing have h to do wit th Henry Hub b? Well In sho ort, very little e. However in n a similar manner to t how online e has structur rally altered the t retailing landscape, l so o too may the e impor rtanceofHen nryHubaltertheglobalen nergylandscape. Henry yHub,isanat turalgaspipe elinelocatedinErath,Loui isianaasillust tratedinMap p1.Thetown n of Era ath has a population of f approximat tely 2,200, however h its n national imp portance is it t represents the pr ricing gatewa ay to natura al gas trading in the US market. Think of major r motorway intersec ctions and th he importance of Henry Hub H becomes more obviou us. In the US, natural gas is pric ced and traded at differe ent locations throughout the country. . These sites, referr red to as ma arket hubs, exist across the country and are located at the in ntersection of f major rpipelinesyst tems.Thereare a over30m majormarkethubsintheU U.S.,theprinc cipleofwhich h iskno ownasHenryHubdepicted dinMap2. Map1: 1 Location of o Erath in Louisiana L
Chevr ronTexacoth hroughitswhollyownedsubsidiarySab binePipeLine eLLCownsth heHenryHub, which h is the end point p of a pip peline that starts in Texas, runs throug gh Louisiana and connects s withthe t GulfofMexico.
Map2: 2 NaturalGa asHubs Texas sandLouisian naNaturalGasHubsinrela ationtoHenr ryHub
With its multiple pipeline connections, key y location in the Gulf Co oast supply re egion and an n average daily thro oughput of 1.8 billion cub bic feet (Bcf), equivalent to 310,000 barrels b of oil, Henry yHubisthela argestandmo ostliquidnaturalgaspri icingpointintheworld. Natur ralGasasaco ommodity Natur ral gas is sold d as a comm modity, much like pork be ellies, corn, c copper, and oil. o The basic c characteristic of a commodity is that it is e essentially the same prod duct no matte er where it is s locate ed. Natural gas, after processing, fits this t description. However r the marketing of natural gas re eally took hol ld during the early 1980s. Prior to der regulation, pr roducers coul ld only sell to o the pipeline p owne ers who in tu urn sold to local distribution compan nies. However natural gas s marke etinghassinc ceevolvedint toanintegralcomponentofthenatura algasindustry y. At the e centre stan nds Henry Hub, the largest tural gas spo ot and futures s t centralised point for nat tradin ng in the US. Here market ters look to buy b and sell natural n gas, b both in the spot market (wher re purchase takes t place fo or delivery to oday) and in the t futures market (where contracts s are en ntered for de elivery at a future day). The New York Mercantile M Ex xchange (NYM MEX) uses the e Henry y Hub as the point of deliv very for its natural gas fut tures contrac ct. The NYME EX gas futures s
contra act began tra ading on Apr ril 3, 1990 and is current tly traded 72 2 months into the future. NYME EX deliveries at the Henry y Hub are treated in the same s way as cashmarket transactions. Many y natural gas marketers als so use the He enry Hub as their t physical contract delivery point or r theirpricebenchm markforspottradesofnaturalgas. Graph h3:HenryHu ubspotpricehistory
As Gr raph 3 clearly y illustrates, the t natural g gas market is inherently vo olatile and dr riven by both h the de emand and supply econom mics that sit w within the requirement of f the US dom mestic market. While e external shocks felt in other commodities like oil o may bear some influe ence on what t marke eters are pre epared to pa ay for natura al gas, ultima ately, season nal weather conditions c or r supply ydisruptionwill w carrythegreatestweig ght. This has h certainly been the cas se up to this point, howe ever recent events sugges st the current t lownaturalgaspri icesmaybehere h tostaywith w thelikely yconsequencesfeltwellbeyondtheUS S shore eline. And her re technology y is playing a big part, with new drillin ng technique es opening up p vast energy e resources in both conventional areas includ ding oil and li iquefied natu ural gas (LNG) provin ncesaswellas a theunconv ventional,includingcoalse eamgas,alsoreferredtoas a shalegas. The sh hift in thedemand supply y equation isn now beenref flected inthe erapidly grow wing supply of f bothnaturalgas andoil.Importantly,theUS Sisnolonger rjustadomesticsupplierof o energybut t a grow wing influenc ce on interna ational marke ets. Graph 4 highlights h this growing tre end for US oil produ uction,howev verthisisalso otrueofLNG.
Graph4.USoilpr roductionpro ofile
Source:TheAustralianDe ec1,2011
Accor rding to the US U Energy Info ormation Adm ministration, the US sent a abroad 753 million m barrels s of oil related prod ducts in the nine months s of 2011, wh hile imports have totalled d 689 million n barrels. Records sh how that this s is the first time in 62 yea ars that the U US has been a net exporter r ofpet troleumproducts,atrendthatislikelytocontinuefor f theforese eeablefuture. . Industry analysts note the rev versal in fortu unes, a statu us that was o once regarded as virtually y unthin nkable. However in truth h it reflects o on one hand d, the divergi ing economie es of the US, growing slowly an nd hampered d by high leve els of unemp ployment and d on the oth her, emerging g count triesexpandin ngstronglyan ndinneedof fbasiccommo oditiessuchas a energy. In a research piece e undertaken n by JP Morg gan titled Wi ill US natural gas help sav ve the world theau uthorsexplor redthechang gingfortunethat t isthenat turalgasmarket.Theynot tethattheUS S is now w the worlds largest natural gas prod ducer, having g surpassed Russia R in 200 09, as well as s being the third lar rgest crude oil o producer. And while the t US is in surplus, s China is in deficit t despit te local natural gas produ uction growin ng at compou und annual rates r in exces ss of 10%. To o make up the short tfall and prov vide surety of f Chinas ener rgy demands, Chinese aut thorities have e invest tedheavilyin nbuildingthenecessaryna aturalgasinfr rastructureto oacceptexpo ortsupply. Sowh heredoesHenryHubfitin ntotheequat tion? While e domestically y traded gas prices are lin nked to local conditions, c in nternationally y traded LNG, as a general g rule, is i priced usin ng a formula t that links gas s prices to cru ude oil. As these contracts s arelo ongterminna ature,usually y20years,tim mingastowh henthecontr ractsarestruckcanhavea consid derable beari ing as to whe ether the dea al is favourable to either the buyer or seller. s As way y
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of ex xample, if crude oil were e trading at $75 per ba arrel, the for rmula linking g the energy y equivalentofLNGwouldpriceit i at$13permillion m cubicfeet(Mmcf). f comparison, , Henry Hub gas g in the US is currently trading t at the e In stark contrast and by way of consid derably lower level of $3.00 per Mmcf f. While Henr ry Hub prices s are of little consequence e when production of natural gas remains d domestically stranded, its s importance increases as s more supply is made available e to the export market. In the JP Mo organ research paper the e autho orsmakethefollowing f obs servations; Natu uralgas isone eof the mark ketsthat canbringthesepieces p togethe er for mutual lbenefit.Asa result t, historic events are unfol lding in natur ral gas marke ets that will li ikely alter the e composition n of glo obal GDP ove er many deca ades. The US S and Canada a the worl lds first and third largest t produ ucershavemoved m signifi icantly in 2011toward bui ildinggas exp portsupplych hainsthat wil ll delive er gas into Asia A at prices s based on N North America an gas not w world oil. Thi is is a titanic c chang ge from prior r pricing schemes and repr resents an im mportant evol lution for wo orld trade and d future e inflation ex xpectations among a consu umers, given the nearly US$100 per barrel of oi il equiva alentdifferen ntialbetween nAsianoilsan ndNorthAme ericangasbas sis. AndtheChinesear recertainlyawareofthec changingenergylandscape e,showingawillingness w to o payanoilrelatedgas g priceforaccess a toimm mediatesupp plybutastron ngincentiveto t moveaway y fromoillinkedpric cinglongerte erm,towardacheaperNorthAmerican ngasprice. USen ntersLNGexp portmarket The emergence e of f the US ente ering the inte ernational LN NG market fu undamentally y changes the e supply y dynamics. Up until this point, it was s generally ac ccepted that Australia wo ould overtake e Middl leEastheavyweightQatar rasthelarges stLNGproducerbytheendofthisdeca ade. Tradit tional LNG pr rojects, simila ar to Woodsid des North West W Shelf are e to be supple emented by a raft of o unconventional coal se eam gas projects that will see total A Australian LNG G production n capac cityliftfrom20 2 mtpacurre ently,toover70mtpaby2016 2 asshow wnonGraph5.Inall,some e $220 billion worth of constru uction dollars s is either under way or r planned, with w Australia a estimatedtohaveuptotwoth hirdsofglobal lLNGconstru uctionnowba asedhere. The environmenta e al concerns su urrounding c coal seam gas s have alread dy been raise ed locally and d abroa ad, while tigh ht labour ma arkets and co ontract time constraints highlight the e enormity of f bringi ing these pro ojects in on time t and bud dget. As JP Morgan M noted d, the natura al gas market t dynam mics are changing and th hose projects s that have not n yet execu uted on long g term supply y contra actscouldstr ruggletogene eratesufficientreturns. Credit tSuisseanaly ystSandraCo olemanrecent tlyhighlighte edthegamec changing impactexportUS S shalegascouldhav veonlocalpr roducers.She enotedthateven e atUSdo omesticgasprices p of$US7 7 a giga ajoule, which is double cur rrent domest tic prices, it would w be prof fitable to exp port to Asia at t
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curren nt spot LNG prices. At the ese levels, he er analysis concluded that unsanctioned Australian n LNGprojects p willstruggletosta ackupagainstNorthAmer ricanimports. h5.Australia anLNGprodu uctioncapacity Graph
Source:TheAustralianFin nancialReview7Dec D 2011
It is at a this junctu ure that thing gs could get very interest ting for our local industry y and energy y produ ucers includin ng Origin Ene ergy, Santos a and AGL. While the local t talk so far ha as centred on n billion ndollarprojectsandboom mtimecondit tions,theeme ergenceofth heUSasaser riousexporter r ofene ergycarrieswith w itenorm mouscapitalri iskforproduc cersandinvestorsalike. So pr rofound has been the shift to unconv ventional ene ergy, that in the US, sha ale sources is s expec cted to make e up about one third o of total US oil o and gas production p by b 2020 in n comp parison to sixt teen percent in 2009 according to Washington W ba ased consulta ancy firm PFC C Energ gy.Therushin ntoshalehasledtoasupp plyglutandle edtooneUSenergyprovider,Cheniere e Energ gy signing two o long term gas g supply de eals as it pres sses ahead w with plans to build b the first t US LN NG export te erminal in Sabine Pass, Lo ouisiana. Che eniere manag gement note ed that North h Americacouldhav veasmuchas s20millionto onnesofLNGcapacityasearly e as2018. Our own o BHP Billit ton continues to splash se erious money y as it boosts s it shale gas assets in the e US. In n our June 20 011 quarterly y newsletter a article titled Energy we wrote about t how the Big g Austra alian outlaid $5 billion buy ying The Faye etteville shale e gas acreage e from Chesapeake Energy y in Feb bruary 2011. In August, th he company followed this s up with the e $15 billion acquisition a of f Petrohawk. These acquisitions, now totalling g $20 billion in capital, will be followed d up with $60 0 billion n of additiona al developme ent expenditu ure over the next decade, , with produc ction forecast t torise efrom250,00 00barrelsperdaytomore ethan1millio onbarrelsad dayby2020. Howe everin an ominous warnin ng, BHPmana agement note edin its most t recentcomp pany filingsto o themarket, m that it tsability to br ringnaturalg gasto market tcouldbelim mitedby therecentgrowth h inpro oduction,Ifwe w are unable etoobtainad dequateamo ountsoftakea awaycapacity ytomeetour r growing productio on levels, we e may have t to delay initial production n or shut in some of our r
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wells. . With Henry y Hub natura al gas prices t trading at mu ultiyear lows s and produc ction ramping g upsig gnificantly,BH HPBillitonsshiftintoshale egasproduct tionisnotwit thoutrisk. ould not be fo orgotten, that t natural gas is still just a commodity c a and the laws of o supply and d It sho demand will preva ail. That said, the econom mic benefits of o cheaper so ources of energy may yet t provid deaboonfor rboththeUSandChinaas sJPMorgannoted n intheir rpaper. For decades d it ha as been axiom matic that the e US trade ba alance will be in deficit and d the Chinese e trade balance will be in surplus. Indeed, the e widening of trade gaps between the e two nations s c to t frictions over o currency y valuations for f nearly 2 20 years. But t this is now w has contributed chang ging. The sur rplus balance e in China and the deficit balance in t the US, may have already y reachedtheirpeak k/trough. Theri isingmiddleclass c inChinawillincreasin nglyspendits swealthongo oodsandserv vicesthatwil ll requir re primary commodities c as inputs, These T inputs could be obtained from Africa, Latin n Ameri ica, and elsew where, but th hey are in sur rprising abund dance in the United States s and Canada a cou untries charac cterised by op perational eff fficiency, relia able product s specifications s, rule of law, w, sancti ityofcontrac cts. The North N America ans are starti ing to realise e there is stro ong and susta ained busines ss to be done. From the perspe ective of th he United States, this means jobs, , potentially y millions of f manu ufacturingjob bsinparticula ar. How ironic i it would be that for r its all curren nt difficulties, , the US actua ally emerges economically y strong ger in the co oming decade e as a byproduct of its massive m energ gy resource, supplying s the e growing needs of countries inc cluding China a. Importantly the oil pric ced formula that t links gas s prices s to crude oil, may not ho old as more n natural gas su upply enters the export market m from a multit tude of suppliers including the US, sou urced from unconvention u al means, specifically coal shalegas.SFM Whywe w arebullishontheUSeconomy e Looking back it is hard to imag gine that as this new cent tury kicked in n, the US gov vernment was s actually running a budget surpl lus defined as governme ent receipts le ess governme ent expenses. In fac ct, in 2000 the US budget surplus sat at a $236 billion. In 2010, th he US budget t hit a record d deficit t of $1.3 trillion. The importance of w whether a surp plus or defici it is recorded d is not unlike e the demands d on any family budget. b Spen nd more than you have for too man ny years and d event tuallysometh hinghastogiv veexpensesneedtobereinedinandpersonalsacr rificesmade. For go overnments, the usual practice of serv vicing deficits s is to borrow w, so that the total public c debt increases or decreases as a result of f the annual deficit or su urplus recorded. It just so o happe ens that in the t US, defic cits have bec come the no orm (see Gra aph 6) and with w that the e gover rnment debt profile has mushroomed m with increase es of $1trillio on in 2008, $1.9 $ trillion in n 2009and$1.7trillionin2010.As A ofDecemb ber2011,theUSgrossdeb btstoodat$1 15.0trillion.
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In comparison, th he US annual gross dome estic product t (GDP = Con nsumption + Government t Spend ding + Investm ment + Exports less Import ts) to the end d of June 201 11 also sat at$15.0trillion, withtotal t publicdebtoutstandingsittingataratioof100 0%ofGDP.It tsthereforenot n surprising g thattheissueofde eficitsandde ebthastakencentrestage. Graph hs6.USBudg getDeficits/USDebtProf file
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c notion that the US can service their growing deb bt profile by kick starting g The conventional house ehold consum mption, given n the large jobless rate and debt overhang has been found d wanting. Rather part of the so olution may li ie with what is unfolding in the growing regions of f
Asia. As we discu ussed earlier, the US see ems to have what the As sian economies need. US S corpo nce sheets, abundance orations, bene efiting from low interest rates, streng gthened balan a of f cheap plabourandacompetitive edollarnowf findthemselv vescompeting gaggressively yforexports. . While e US househo olds may not be in a position to get the country out of its debt hole, there is s roomforoptimism mthateconom miccondition nsareontheimprove.Une employmentlevels appear r to ha ave peaked and a despite the t malaise of bad news s globally, co orporate pro ofitability and d comp pany share bu uy backs are surging, whil le cash on ba alance sheets s sit at near 30 3 year highs s (seeGraph G 7). Graph h7.Cashasapercentageoffinanciala assets(US)
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Source:QICec conomicupdate e noted, it is rather ironic that as we e entered this century, c you c could have fo oolishly made e As we thepr redictionthat twiththeUSrunningabu udgetsurplus, ,thattheout tlookfortheeconomy e and d the market m was in ndeed rosy. In I fact, nothi ing could be further from m the truth with w the Dow w JonesIndustrialAv verage(seeGraph8)havin ngshownnogrowth g since2000. Graph h8.USDowJones J Industr rialAverage2 20002011
y you could be b making a similar prediction, that with w record de eficits and de ebt levels the e Today outloo ok for both the t US econo omy and the share market t is indeed ve ery bleak. If history is any y guide,thingsarenever n asblack korwhiteasthey t wouldappear.Fromourvantagepointthereis s
a goo od chance tha at the US will emerge fro om this curre ent decade in n a stronger position than n fromwhere w itbega an.SFM World dBankdoin ngbusiness2012 2 The World W Bank Group G has jus st reported its Doing Bu usiness Projec ct findings for f 2012. The e projec ct, first publis shed in 2003, , covered 5 a areas of busin ness regulatio ons across 133 economies. Today y, the report has expande ed to incorpo orate 11 key indicator areas and 183 economies. e In n short the group lo ooks to impar rtially gather and analyse quantitative data, compa aring business s ation environ nments acros ss economies with the prime p objective of encou uraging more e regula efficie entregulation n. eport makes for some int teresting reading and the e following ta able focuses on o Australias s The re standingononeof fthebusiness sareas,specifically,theea aseofdoingbusiness. b Table e1.WorldBan nkGrouptop p20rankingsEaseofDoingBusiness Econ nomy Rank20 011 Rank2012 Singapore 1 1 Hong gKong 2 2 New wZealand 3 3 Unit tedStates 4 4 Denm mark 5 5 Norw way 7 6 Unit tedKingdom 6 7 Kore ea,Rep 15 8 Icela and 13 9 Irela and 8 10 Finla and 14 11 12 Saud diArabia 10 Cana ada 12 13 14 4 Sweden 9 Aust tralia 11 15 16 Georgia 17 Thailand 16 17 18 Mala aysia 23 Germ many 19 19 20 Japa an 20
Source:WorldBankGroupwebsite
16
AsnotedabovetheWorldBank klookstoran nkcountriescovering c 11bu usinessareas s.WhileTable e 1 focu used on just one area, th he other 10 topics t covere ed include; st tarting a busi iness, dealing g with construction permits, get tting electricity, registerin ng property, getting credit, protecting g invest tors,payingtaxes,tradingacrossborde ers,enforcing gcontractsan ndresolvingin nsolvency.
Table e2.Australiasotherperfo ormancerank kings BusinessTopics AustraliasRanking g Start tingabusines ss 2 Deal lingwithcons structionperm mits 42 Gett tingelectricity y 37 38 Registeringprope erty Gett tingcredit 8 65 Protectinginvesto ors Payingtaxes 53 30 Trad dingacrossbo orders Enfo orcingcontrac cts 17 17 Reso olvingInsolvency
Source:WorldBankGroupwebsite
A quic ck scan of Ta able 2 would no doubt lea ad to some discussion as t to the relative accuracy of f some of the ranki ings. Anyone who has ever dealt with h councils or planning aut thorities may y well agree a with the ranking when w it come es to dealing g with constr ruction perm mits, while on n gettin ngcredit,mos stbanksandlendingagent tsareprettyforthright f inp providingloans. Howe ever the one topic t which should s attract t the greatest t focus and as a conseque ence the most t conce ern, centres on o the area of f protecting investors. Aus stralias ranki ing in this department has s slippe ed from 60 to 65. And while the findings don nt specifically focus on the role of f gover rnments, it is snt surprising g that the is ssue of sover reign risk is now n more op penly spoken n about tinpublic. Gover rnments in particular need to understa and that it is investors and voters who o have capital atrisk k.Unfortunat telyawholeraft r ofnewta axes,beitthe eminingtax,the t carbonta axoreventhe e flood levy and the e adoption of f retrospectiv ve legislation does little to entice inve estors to part t with their t capital. Company boards also have to show leadership a and in this re egard cutting g performance hurd dles to reward senior exec cutives on ac chieving med diocre returns s just doesnt t washwithmostindependentobservers. Sowh horanksabov veAustraliain ntheprotect tinginvestors sstakes? Well, perhaps you u would be pleased p to he ear that our neighbour n Ne ew Zealand ranks r number r one, followed f by Singapore, Hong Kong, Malaysia, M the United State es, Ireland, Ca anada, Israel, Colom mbia and the e United King gdom, who r round out th he top ten. In contrast, Australia, A sits s alongside nations such as Para aguay, Turkey y, Finland, Nigeria N and Italy to name a few, while e Afgha anistanpicksup u therear. While e robust deba ate will undo oubtedly resu ult from international rank kings such as s this, it is far r too easy to dismis ss its conclus sions as inacc curate or bias sed. Rather t than arguing the toss, the e shiftinfocusshouldbeoncorre ectingsomeo oftheissuesraised.SFM
17
Comp panyvisitdiar ryDecember rQuarter201 11 Octob ber F FLX Flexi igroupsitevis sit P PXS Phar rmaxisQ1201 12conference ecall S SRX Sirte exmanageme entmeeting O ORL Orot tonGroupma anagementmeeting C CXD Cath hRxmanagem mentmeetingcapitalraisin ng B BOQ Bank kofQueensla andmanagem mentmeeting g C CCF Carb bonConscious smanagemen ntmeeting C COH Coch hlearannualgeneral g meet ting C CSL CSLannual a gener ralmeeting W WES Wes sfarmersQ12012 2 conferen ncecall P PXS Phar rmaxisEurope eanapprovalconferencecall c O ORG OriginEnergyann nualgeneralmeeting m R ResM RMD MedQ12012 2conferencec call W Wor WOR rleyParsonsannualgeneralmeeting D DTL Data a#3onsitemanagementm meeting S SRX Sirte exannualgen neralmeeting g W Whit WHC tehavenCoalannualgene eralmeeting P PXS Phar rmaxismanag gementmeet ting Novem mber W WOW Woo olworthsinve estorday N New NWS wsCorporationQ12012co onferencecall l E EHR EarthHeatResou urcesmanage ementmeetin ng B BKL BlackmoresUBShealthcare h co onference C CSL CSLUBShealthca areconferenc ce C COH Coch hlearUBShea althcareconfe erence M MSB Mes soblastUBShealthcarecon nference R ResM RMD MedUBShealthcareconfe erence C CXD Cath hRxannualge eneralmeetin ng P PXS Phar rmaxisannualgeneralmee eting W WOW Woo olworthsannu ualgeneralmeeting m H HVN Harv veyNormanannual a genera almeeting C CPB Cam mpbellBrothersinterimres sultspresenta ation O ORL Orot tonannualge eneralmeetin ng F FXL Flexi igroupannua algeneralmee eting Decem mber O OTH Onth hehouseman nagementme eeting F FXL Flexi igroupPayma ateacquisitio onconference ecall P PRY Prim maryHealthca areBBYhealth hcareconfere ence
05 5/10/11 13 3/10/11 13 3/10/11 14 4/10/11 14 4/10/11 17 7/10/11 17 7/10/11 18 8/10/11 19 9/10/11 20 0/10/11 24 4/10/11 24 4/10/11 25/10/11 25 5/10/11 26 6/10/11 27 7/10/11 28 8/10/11 28 8/10/11
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02/11/11 0 03 3/11/11 07 7/11/11 08 8/11/11 08 8/11/11 08 8/11/11 09 9/11/11 09 9/11/11 16 6/11/11 21 1/11/11 24 4/11/11 29 9/11/11 29 9/11/11 30 0/11/11 30 0/11/11
01 1/12/11 05 5/12/11 06 6/12/11
MSB M P PXS S SPL U UBI IPD C CSL W WHC A ACL Select torFundsMa anagementLi imitedDiscla aimer The in nformation contained in this t documen nt is general information only. This document d has s not been b prepared taking in nto account any particu ular Investor s or class of Investors invest tmentobjectives,financialsituationorneeds. TheDirectors D andourassociate estakenores sponsibilityfo orerrororom mission;howe everallcareis s takeninpreparingthisdocume ent. The Directors D and d our associa ates may hold units in th he fund and may hold investments in n individualcompaniesmentione edinthisdocu ument.SFM
Mes soblastBBYhe ealthcarecon nference Phar rmaxisBBYhe ealthcarecon nference Starp pharmaHoldingsBBYhealthcareconfe erence Univ versalBioseno orsInc.BBYhe ealthcarecon nference Impe edimedBBYhealthcare h co onference CSLR&Dinvestor rday Whit tehavenCoalmergerconf ferencecall Alchemiamanage ementconfer rencecall
06 6/12/11 06 6/12/11 06 6/12/11 06 6/12/11 06 6/12/11 08 8/12/11 12 2/12/11 15 5/12/11
19

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SelectorFundsManagement 29

SelectorFundsManagementLimited ACN102756347AFSL225316 Level3,66HunterStreet SydneyNSW2000Australia Tel61280903610 www.selectorfund.com.au

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Fund% Gross 1.18 9.59 5.07

AllOrds Index% 1.01 3.96 0.60

AllOr rdsAcc Ind dex% 1.86 8.49 4.88

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Graph h2:Globalmarket m perform manceLoca almarketvaluations

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Map2: 2 NaturalGa asHubs Texas sandLouisian naNaturalGasHubsinrela ationtoHenr ryHub

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Graph4.USoilpr roductionpro ofile

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Source:TheAustralianFin nancialReview7Dec D 2011

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

01 1/12/11 05 5/12/11 06 6/12/11

Decem mber2011Select torAustralianEq quitiesFundQua arterlyNewslette er#28

06 6/12/11 06 6/12/11 06 6/12/11 06 6/12/11 06 6/12/11 08 8/12/11 12 2/12/11 15 5/12/11

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