Prime Australian Equities Growth SMA – February 2016

Portfolio Objective

To generate a grossed-up dividend yield at least equal to the one-year bank deposit rate and capital value targeted to grow at least in line with CPI.

The Model Portfolio is managed by selecting primarily those securities with moderate growth potential but robust cash-generating capacity. These securities are expected to deliver an above-market average income yield, together with a relatively moderate level of capital growth. The portfolio benchmark is the S&P/ASX200 Accumulation Index.

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Market Summary

Frankly, February was a nightmare month for fund managers and a continuation of the volatile and softer tone seen in January.

Though the ASX200 Accumulation index fell a modest 1.76% in February (-7.14% YTD), the index was down as much as 6% at one point. Furthermore, performance within the broader market diverged materially from previous trends meaning we saw a dramatic bounce in unloved mining and resource-related shares, and a material sell-off in banks, Telstra and the supermarkets.

Concerns insofar as global growth remained at the fore of investors minds this month, with data across each of the US, China and Europe all pointing to a moderation or, in the case of Chinese and US industrial activity, outright weakness. Bond markets the world over rallied strongly, and in Australia 10-year government bond yields fell to 2.32% (barely off their record low of 2.25% set in early last year).

In the local Australia market there were several drivers of performance – December interim corporate profit reporting, media fear-mongering of a housing collapse which impacted the banking sector, and lastly short-covering in mining shares.

Bank shares fell over 6% during February due to the confluence of global financial fears and the more local concerns relating to dividend sustainability and the potential for a collapse in house prices. Telstra (TLS) and the supermarket retail companies were also hard hit, meaning retail investor portfolio’s faced significant underperformance in the month.

Compounding difficulties for investors in February was the short-covering rise in many of the serial underperformers, with shares across the mining and engineering sectors rising strongly against the falling index.

Whilst it was a very difficult month for equity investors, on a positive note, corporate earnings in Australia seem to be holding in reasonably well and the early 2016 indicators of economic activity seem to point to a continuation of the moderate uptick in domestic service growth witnessed during 2016.

Portfolio Commentary & Positioning

It was an extremely trying month for the PRIME Australian Equities Growth portfolio which had its worst month of relative performance since mid-2012.

The portfolio fell -3.73% against the ASX200 Accumulation benchmarks decline of -1.76%. The index is now down over 7%, and the Growth portfolio moderately worse than that.

The massive divergence in sector and stock performance during February was certainly not to the portfolio’s benefit. The Australian materials sector rose 8% in February, and was heavily driven by the smaller-sized miners and builders, and our market weight position in BHP (BHP) failed to contribute after a late month disappointment to investors with the decision to cut its dividend by over two-thirds.

The large overweight in Telstra (TLS) also hampered performance, this in spite of reasonable profit figures from TLS and the added benefit of a rallying bond market.

Although the portfolio is only market-weight banks, the sheer size of the losses in the sector hurt absolute returns.

Computershare (CPU) perhaps stood out as the most disappointing share for the fund, with a rather disappointing outlook conveyed for 2016 profits and investors continuing to question business strategy insofar as its move into US mortgage servicing. That said, positions in Crown Resorts (CWN) and Woolworths (WOW) also dragged.

On the positive side of the ledger Flight Centre (FLT) & IOOF (IFL) continued to impress after sound profit figures, and Oil Search (OSH) was also well ahead of the index and its major-cap peer Woodside (WPL), demonstrating investor confidence in its low-cost, high-return asset base. Sonic Healthcare (SHL) and Insurance Australia Group (IAG) also held their own after sound figures, and the special dividend from IAG was a welcome surprise.

Despite the poor months performance, we actually feel decidedly happier with the portfolio shape looking forward, and hope to see outperformance resumed soon.

Transactions for the month

Trade Stock
SELL CYBG (CYB)
ADD SONIC HEALTHCARE (SHL)

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DOWNLOAD the Prime Separately Managed Account (SMA) Report, February 2016

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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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