Adapting to the new

The nature of future changes resulting from recent political upheavals are beginning to become clearer. The first is that interest rates, after years on the slide, are beginning to rise and are expected to rise further. We have reviewed the risks this poses for our investments and are heartened that only a small number of changes need to be made.

In particular, we have looked for equities with high PE, high borrowing levels and high payout rations. Such equities would be prone for to selling pressure as interest rates rise. We have ruled out for now a number of investments under review, but have downgraded just one existing investment: Vocus Communications (ASX: VOC). Our holding in Vocus has been reduced by about 40%. We have also reluctantly slightly reduced our holding in Infigen Energy (ASX: IFN) – a great company, but still burdened with high borrowings. Although Infigen is able to reduce this level debt with its significant cashflow, its ability to fund future growth may be curtailed.  We are taking a cautious approach.

For a different reason we have also reduced our holding in Australian Ethical Investment (ASX: AEF). Management has announced the need to significantly refund fees received in past years, due to overcharging of superannuation investors. This, combined with $900,000 costs associated with investigating the errors, will reduced the company profit for the current half year by 60% on top of previous such provisions. Given our role in setting up that company, it is extremely disappointing that this could occur, but all we can do is watch from a distance.

Speculative investment Mobile Embrace (ASX: MBE) has been disposed of in full after unexpected falls in revenue were reported, It was not just the fall in revenue, but the seemingly long delay in reporting the fall in revenue to the market. We are out.