May 4, 2015 | Portfolio updates

Prime Australian Equities Growth Portfolio – April 2015

Portfolio Objective

To achieve capital growth with moderate tax-effective income via franked dividends through investment in listed Australian securities.

The Model Portfolio is managed in line with Prime’s investment principles of long-term investment in high quality securities. The bottom-up approach focuses on business fundamentals, seeking businesses with strong balance sheets, structural competitive advantages, and purchasing them with the requisite dividend yield and growth prospects. The portfolio benchmark is the S&P/ASX200 Accumulation Index.

Market Summary

The ASX200 Accumulation index fell by 1.7% in April, but is still 8.45% higher year-to-date. The pullback should be no surprise since the March quarter rise represented the best period for Australian stocks since 2009, and some profit-taking seemed inevitable.

The month was characterised by widespread reversion to the significant trends of 2015 with bond yields selling off globally and currency moves reversing. In an Australian context, the local currency jumped from 76c to 79c and the decision by the RBA ‘not’ to cut interest rates to 2% early in April saw the local interest-rate market sell-off significantly – bank bills went from expecting almost 3 0.25% rate cuts, to now expecting just over 1.

Australian banks fell by over 4%, and underperformed the mining sector by over 6% in a reversal of the longer-term trend.

Oil and iron ore prices rebounded from major lows, helping to lead the resources sector higher.

Chinese equities surged ahead in the month, rising a further 15% after a cut to bank reserve requirements, an easing in property regulation and a move to replenish capital within several of the major developmental finance apparatus of the state.

Portfolio Commentary & Positioning

The PRIME Australian Equities Growth portfolio fell 3.50% in April, and underperformed its ASX200 Accumulation benchmark by 1.80%.

This is the worst relative monthly performance for the portfolio in 2 and a half years. Fortunately, year-to-date the portfolio is up by 11% and well-ahead of the benchmark’s 8.45% rise.

There were several obvious reasons for the disappointing performance, many of which are tied to the same reversionary effects felt across global asset classes in the month of April. The portfolio’s underweight position in RESOURCES was one factor, alongside its heavy exposure to interest-rate sensitive and Australian dollar-sensitive Australian equities.

The rise in the Australian dollar from 76c to 79c was a counter-trend move that frankly we felt little need to respond to, but were forced to bear the impact on our monthly performance. Australian 10-year bond yields also rose from their cycle lows at 2.3% to nearly 2.7%, and this had a bearing on the large single-stock positions the portfolio had taken in IOOF (IFL) and Telstra (TLS) – both positions that had performed extremely well for the portfolio in the previous 12 months.

The major portfolio detractor however was the major portfolio position in RESMED (RMD), which fell 13% in the month, and nearly 20% from its highs. RMD posted quarterly profits late in April that seemed to disappoint the market expectations for gross margin and mask sales. We can understand some frustration with mask sales momentum, but on the whole see the selling as a gross over-reaction. RMD is still up 60% since we added it to the portfolio, and we still very comfortable with our position here.

The best performing stock in the month was Flight Centre (FLT) which rose 10%. FLT was assisted by the substantial short-base in the name, and the perceived exposure it has to the currency – a stronger AUD is seen as being helpful for outbound tourism.

BHP (BHP) was also good, rising 3%. We are UNDERWEIGHT BHP and it is our sole resources exposure, but the holding helped absolute performance this month.

Many of our single stock bets also struggled in the month, with Computershare (CPU) and Crown Resorts (CWN) falling 3% each, and Carsales.com (CAR) down 6% after its dividend was included. We are entirely comfortable and optimistic on all these positions going forward.

The portfolio suffered due to short-term contrarian factors, but we remain entirely comfortable with the fund positioning. Hence, there were no changes to the portfolio in April.

Transactions for the month

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Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

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