Sep 8, 2015 | Portfolio updates

Prime Australian Equities Growth Portfolio – August 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

August saw the Australian share-market have its worst month since the GFC, with the ASX200 Accumulation Index falling 7.79%.

Undeniably the selling across global share-markets emanated from a surprise decision by the Peoples Bank of China (PBOC) to allow its currency to float at a wider rate than previously, effectively offering up tacit approval for its currency to ease further. Most western stock-markets fell 6-10%, whilst Chinese shares themselves fell 11% (but a more pronounced 27% from their highs mid-month).

The idea that China could ‘export deflation’ seemed to be the trigger for market fears, whereas in my opinion the broader & arguably less concerning reason for the sell off is the western world acknowledgement that super-normal profit margins seen in recent years were in fact under threat by the Chinese slow-down.

In response to the slowing economic data and falling stock-market, the PBOC endeavoured to offer up increasing stimulus through a reduction in interest rates and bank reserve requirements.

In the local market, utilities were the standout performer falling less than 1% – AGL Energy (AGL) remains very much the market darling at present and closed 1% higher for the month after in-line profit results.

Elsewhere it was red-tape across the board, aided and abetted by a very average profit reporting season. Information technology shares like Computershare (CPU) and (CAR) were down 20% and 10% respectively, bank shares were down over 10% after the announcement of capital raising at ANZ and Commonwealth Bank (CBA), and energy stocks continued to plummet, falling 15% in the month.

Results season locally brought home to roost the lukewarm domestic economy and this ultimately tore down several highly-rated shares, and even a few lowly-rated ones to boot.

Portfolio Commentary & Positioning

The PRIME Australian Equities Growth portfolio fell 9.00%, underperforming the ASX200 Accumulation’s 7.79% decline.

Year-to-date the portfolio is up 2.01%, and ahead of the -0.75% loss of the ASX200 Accumulation index.

We were very disappointed with the result delivered this month, both from a relative and absolute stand-point. Whilst we can rarely overcome substantial market moves like the one seen this month, we do feel that historically our bias has been to outperform in months of heavy selling. The managed portfolio was set up to be maximum cash for the downdraft, but even that wasn’t enough to overcome what proved to be disappointing share price performance from several of our favoured names through their profit results.

Computershare (CPU) was a notable laggard, falling 20% after it cut its USD guidance to reflect the lack of leverage the group had seen to improving corporate M&A. This was undoubtedly a disappointment to us, but we feel reflects events of the past. Moreover, the weak Australian should act as something of a cushion for local investors particularly given its historically low valuation multiple. The decision by CPU late in the month to announced an $140m was a clever one, and well-received by the market.

Crown Resorts (CWN) and Carsales (CAR) both fell 16% and 10% respectively after reporting profit figures that quite genuinely we felt were sound. This hurt.

With the banks all falling en-masse by 10% or more, and Telstra (TLS) also falling 11% it was hard to find a place to hide.

When large market moves hit, it becomes very ‘index’ focussed and as a result the large-cap names end up underperforming, evidenced by the 0.65% underperformance of the ASX50 index relative to the broader ASX200.

Only IOOF (IFL) and the underweight holding in BHP (BHP) managed to demonstrate any meaningful outperformance amongst the managed account holdings. IFL we were impressed with the profit figures and encouraged that the auditors report into their internal compliance procedures seemed to find few genuinely troublesome shortcomings above and beyond what is known.

I would say that on the positive tack, we feel very strongly that with the portfolio we have, the potential for us to again recoup this drag is high. The portfolio added to its initial position in Oil Search (OSH) during the month, and at attractive levels, as it did in CAR. The remainder of the portfolio holding in AGL was jettisoned to reflect our recent view that the stock was increasingly fairly valued.

The only new holding initiated in the depth of the sell-off was the decision to add Insurance Australia Group (IAG) to the portfolio, given its significant retracement and sound underlying business model and balance sheet.

Transactions for the month
Trade              Stock
REDUCE          AGL Energy (AGL)
ADD                  Oil Search (OSH)
ADD         (CAR)
BUY                  Insurance Australia Group (IAG)

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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