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Interview with the Jaguar Australian Leaders Long Short Fund Limited
Eurekahedge

October 2004

The Jaguar Australian Leaders Long Short Fund Limited was established in 2003 by Glenn Rosewall and Robert Hunter. Jaguar Australian Leaders Long Short Fund Limited is its flagship fund. The fund is a long/short equity fund investing exclusively in Australia. It was launched in March 2003 and was +17.3% in 2003 and is +3.7% in 2004.

Glenn Rosewall is the managing director and chief investment officer. Prior to Jaguar he was head of equities at Ord Minnett Securities Limited and a trustee of the company's pension fund.

  1. Could you explain your investment selection process, specifically the MVR™ screening process? How quantitative driven is it?

    The Jaguar Australian Leaders Long Short Fund employs a long/short equity strategy using its MVR™ investment process to exploit pricing inefficiencies between related securities. MVR™, which stands for Momentum, Value and Return, screens and ranks companies in the S&P/ASX100 based on these key quantitative factors.

    This screening process is sequentially based, ranking stocks first on Earnings & Price Momentum (M), followed by Value (V) and then by Return (R).

    MVR™ screens:

    • Momentum, by analysing consensus earnings revisions and share price changes over multiple timeframes;

    • Value by analysing price earnings ratios (absolute, relative to history, and relative to the company's Global Industry Classification);

    • Return by screening return on equity (ROE) and ROE growth.

    An optimiser is then used to screen for industry (GIC) exposure before selecting the portfolio. Adjustments may be made to the weightings applied to growth and value factors depending upon the market cycle at that time.

    Our process is therefore quite heavily quantitative-driven, but a key point of differentiation of our process is the qualitative overlay we apply to the stock rankings in the portfolio construction stage.

  2. In which sectors are your screening process and management visits showing the most earnings momentum? Do you think these are the same sectors that will be the earnings leaders for the 1H of 2005?

    Sectors that the Jaguar Funds MVR™ process is currently identifying as having the strongest earnings momentum in the Australian market are Materials, Resources and Industrials. This has been driven largely by continued strong demand for commodities from developing economies, especially China, and the robust domestic economy.

    We expect the earnings momentum in these sectors to be maintained for the remainder of 2004 and into early 2005. As we move further into 2005, we expect global growth and Chinese demand to moderate, and for these factors to translate into consensus earnings downgrades, however we see no immediate risks to earnings momentum.

  3. What is the short availability for Australia? Specifically, how many names can you short borrow, what is the general price and how great is the recall risk?

    The stock borrowing market for shares within the S&P/ASX300 is extremely liquid. Given the breadth and depth of this market, we do not experience any difficulties in shorting stocks within the S&P/ASX100, and our recall risk is extremely low.

  4. The New Zealand market is at its 2004 year-to-date high and the Australian market is just off its all-time high. Will there be a correction shortly?

    The Australian equity market, in contrast to most global markets, has been very strong over the past six months, recently hitting a new all-time high. We have seen solid profit growth amongst a range of blue chip stocks that has offset a long list of worries ranging from terrorist threats, high oil prices and a slower global economic growth. Despite this outperformance, we believe Australian equities are still reasonably priced.

    We expect the Australian market to continue to be well supported by reinvestment of record dividend payouts and continued strong inflows of superannuation money. A cooling of interest rate expectations, as reflected by the flat yield curve with Australian 10-year bonds at 6-month lows, is also providing support. The continued strength in the resources sector should also continue to underpin the Australian market.

    Given the above factors, we do not expect a significant correction in the Australian market in the near future. In fact, we expect the market to push forward to new highs over the next six months.

  5. What is your view on the October 9th election in Australia and how would the potential outcome affect the markets?

    The fundamentally bullish factors at play in Australia will be unchanged, regardless of who wins our election on 9 October. Given a remarkably large surplus, the main risk will be whether we see a return to profligate spending that has been promised by both sides in the election campaigning. The re-election of the government seems unlikely to herald any particular change in spending patterns or directions. Under Labor, there would be greater spending in health, education and welfare, though not a large proportion of these economic sectors are listed on the Australian share market.

  6. It appears that commodity demand (specifically nickel and steel) from China has picked up again; have you seen an increase in the sales outlook for Australian mining and steel production companies?

    The Australian share market could be described as being at the middle stage of a classic sectoral boom, such as the previous resources boom of the 70s and early 80s. Prices are at or close to all-time highs in many commodities, with the next round of iron ore sales tipped to be stronger again. We are continuing to see upgrades to commodity price forecast, which is feeding through to higher earnings expectations.

  7. What are your views on the direction the RBA will take on interest rates for the next six months, and how much would this affect equity prices in Australia?

    We expect a further moderate increase in Australian interest rates over the next six months. We do not expect higher interest rates to affect equity prices significantly. In our opinion, the bank sector valuations are relatively attractive and we expect the materials sector to continue to perform strongly.

  8. What is the likelihood of a sharp housing correction in Australia, which could lead to a severe dampening in consumer demand or a possible banking crisis?

    We do not believe monetary policy settings implemented by the RBA will cause a sharp housing correction. Although we believe the residential property market is overvalued relative to other asset classes, we expect moderate underperformance of the sector to correct the yield imbalance rather than a sharp correction.

    The possibility of a banking crisis is, in our view, extremely low. Banks began the process of tightening lending criteria some time ago, particularly restricting lending to over-supplied markets, such as inner-city residential units.

  9. How detrimental would a weakening Australian dollar be to your offshore hedge fund?

    We employ an active currency hedging programme that aims to limit exposure to a weakening Australian dollar. Typically, the exposure is hedged when the Australian dollar is trading above purchasing power parity (PPP). To date, this programme has been effective in capturing upside in the AUD whilst limiting the downside risk.

  10. How much interest is there for single manager hedge funds from Australia-based investors?

    Our flagship fund has been established for over 18 months, during which time we have generated strong returns and built confidence in our investment process. As our track record builds, we are beginning to see a significant increase in interest in our fund. We believe that this reflects the increasing sophistication of Australian investors and a general increase in demand for boutique managers and alternative investment strategies.

    We believe that strategies such as ours that aim to deliver superior risk-adjusted return in all market conditions will continue to attract significant inflows.

  11.  

Contact Details
Jaguar Advisory Services Pty Limited
+61 2 9251 0840
+61 2 9251 0802
jaguar@jaguarfunds.com
www.jaguarfunds.com


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