For clients that have elected the “Income” Australian equity option we have bought Macquarie Group, a global provider of banking, financial, advisory, investment and funds management services employing over 13,900 people in 28 countries.  Post the GFC management have successfully reinvented the business as market conditions and industry dynamics changed, expanding the annuity style businesses (i.e. Funds Management, Corporate & Asset Finance and Banking& Financial Services) while maintaining the Group’s expertise in niche investment banking sectors and asset markets (i.e. Macquarie Securities, Macquarie Capital and Fixed Income, Currencies and Commodities) to ensure it enjoys an earnings boost as market conditions improve.

We have added Macquarie to Portfolios due to:

• Continued expansion of the annuity style businesses provides a sustainable, lower-risk underpin to earnings
• With around two-thirds of revenue generated offshore the Group benefits from a weaker local currency
• Conditions are improving for the market facing businesses, especially around deal flows and M&A activity
• A strong balance sheet allows the Group to weather the impact of an unexpected downturn in trading conditions while also providing flexibility to fund further growth via acquisition

The Main Risks Include:

• The Group has no competitive advantage in the highly competitive investment banking market
• The market facing businesses are cyclical and subject to ‘lumpy’ earnings
• High operating leverage within the market facing businesses amplify earnings impacts from revenue changes (this can be negative or positive)

In essence we expect Macquarie will benefit from a weaker AUD and improving capital markets while enjoying an earnings underpin from the lower-risk annuity style businesses.

To fund the purchase we have sold Suncorp.  This was driven by a desire to decrease our exposure to the general insurance industry where we think margins are near peak levels and will be under pressure going forward as premium growth slows, especially in personal lines where competitive pressure is increasing, and the yield cycle moves from a tailwind to a headwind.  Additionally we believe it prudent to reduce exposure to unexpected catastrophe events especially in storm prone Queensland as we head into summer.

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EP Financial Services Ltd

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