Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
DNR adds SkyCity and Scentre
Australian equities fund manager, DNR Capital, which is managed and led by chief investment officer Jamie Nicol and Portfolio Manager Scott Kelly, says the local market “continues to enjoy a strong run despite lockdowns in Melbourne, uncertainty regarding the outcome of the US elections and ongoing trade disputes with China,” which are just some of the issues moving markets today. All may change, however, with President Trump’s COVID-19 diagnosis, which throws a real spanner in the upcoming US Presidential election and adds an extra element of concern at a time when volatility was subsiding from COVID-19. The news was the last thing that investors wanted to hear.
So why has DNR Capital added shopping centre operator Scentre Group (SCG) and gaming venue operator SkyCity Entertainment (ASX:SKC)?
Australian shopping centre operators were hit hard by the initial lockdown caused by COVID-19, which forced retailers to close their doors and negotiate rent reductions. Shopping centre operator Scentre Group wasn’t immune, and suffered revenue losses due to lower foot-traffic numbers. But according to analysts, shopping centre operators may have reached a turning point. As lockdown laws ease and people return to normality, so too will the state of once-bustling shopping centres as they start to see a revival. When lockdown laws end and shoppers are ready to spend again, activity will return to shopping malls; but digital will take a much larger slice than ever before. As a result, SCG won’t be hit anywhere as hard as some of the other mall operators. “SCG owns the best assets in the best locations, in an environment where new shopping centres are not being built and lower-quality centres are struggling. Physical retail will shrink, with the premium assets remaining as the primary physical connection between brand and consumer,” says DGR.
DNR has taken up a position in SCG saying the company “has underperformed the market and listed REIT peers since the market downturn,” especially as the stock meets DNR’s five-point quality check, which includes important investment criteria such as: ensuring the company has a market-leading position in its industry; stable earnings strength; unalarming gearing levels and healthy state of its balance sheet; solid management; and that the company practises good ESG qualities. Using these principles, SCG scores well according to DNR. The company remains the premier shopping centre operator in Australia (market-leading position); it has a stable earnings outlook until 2023; its balance sheet is a tiny bit on the highly-geared side, but well within debt covenants; and it has a skilled management team that operates in a low-ESG-risk environment.
The second portfolio change was the addition of SkyCity Entertainment (SKC), which owns and operate tourism, leisure and entertainment facilities with a focus on casino gambling. SKC operates casinos in Auckland, Queenstown and Hamilton. Its Australian casino, in Adelaide, is undergoing a $330 million expansion. As with shopping malls, hotels, entertainment and casino venues all suffered a similar demise during lockdown, but a turning point is near.
DNR Capital sees SKC “as a high-quality asset that has been impacted by COVID-19 shutdowns, but is well-positioned to benefit from a gradual re-opening. The business is entering a phase in which capital expenditure is likely to be lower, given recent projects are completing, and this should drive very strong, free cash flow.” And with the newly renovated Adelaide casino set to reopen, risk is now to the upside.
