Prime Australian Equities Growth Portfolio – January 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.

DOWNLOAD the Prime MPS Performance Report, January 2016

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Market Summary

It wasn’t a typical January. The prevailing optimism that typically greets markets at the commencement of a new year was absent, and in fact US equity markets opened the year with the worst first 10 days of trade since 1897.

Fortunately markets recovered through the course of the month, and the ASX200 managed to close down 5.5% having been down over 10% intra-month. Much of the concern again emanated from worries the ongoing weakness in China’s economy and currency would spill over and infect the global economy. It seems there is some degree of validation to this fear.

Perhaps the other reason why the market fall felt so bad was that in the case of the ASX200, shares rallied almost 9% in the last two weeks of 2015 only to fall completely flat early in the new year. Perhaps it felt worse than it should have.

Defensive sectors such as utilities & telecoms, healthcare and groceries all outperformed in the down-draft, whilst miners led the fall (-10%) accompanied too by banks (-7.5%) and oils (-6%)

Being January there wasn’t a huge amount to discuss in terms of corporate nor economic news.

Woolworths (WOW) confirmed they would end their support of the underperforming Masters hardware experiment, and this helped their shares outperform the broader market by ~5% in January. The next test will be Christmas sales, and after that a likely announcement on a new CEO. Wesfarmers (WES) was also a sound performer, buoyed by the WOW decision and the likely positive trading impact this move will have on the Bunnings hardware business it owns.

BHP (BHP) took a major US$4.9bn write-down on its US shale oil assets during January, in response to falling oil prices. The focus in BHP continues to be its dividend policy, which will most likely see a forced halving of its previous dividend (US$1.24) when the company reports half year profits in late February.

Portfolio Commentary & Positioning

The PRIME Australian Equities Growth portfolio started the year soundly, bettering the ASX200 Accumulation benchmark by falling -4.56% against the index fall of -5.48%.

The portfolio held in well in spite of the continued overweight oil position it holds by way of Oil Search (OSH) and Woodside (WPL).

RESMED (RMD) was the standout holding during the quarter, rising 8% against the market fall after posting what were again another sound set of quarterly profits. We chose to jettison our long-standing position in RMD after the spike given our increasing belief that on 22x RMD had reached a fuller and fairer value against a falling market, and our sense that operational momentum had reached peak levels.

Sonic Healthcare (SHL) was a new addition to the portfolio, and performed very soundly after our purchase. We believe SHL has excellent medium term growth prospects both locally and abroad, and the current concerns relating to a clampdown on excess healthcare spend are simply an opportunity to buy a solid corporate story cheaply.

Telstra (TLS), Woolworths (WOW), Crown Resorts (CWN) and Flight Centre (FLT) were all outperformers in the period.

Hindering performance in January were positions in BHP (BHP, -14%), IOOF (IFL, -14%), ANZ & Westpac (ANZ & WBC, -13% & -8%). It was a rare month to see both of Australia’s two largest sectors underperform the index, being banks and resources.

The portfolio retains a near maximum cash weighting as at month end in the hope and expectation of further market volatility and the opportunity to acquire excellent solid corporate stories at undemanding multiples.

Transactions for the month

Trade Stock
BUY       SONIC HEALTHCARE (SHL)
SELL     RESMED (RMD)
ADD      INSURANCE AUSTRALIA GROUP (IAG)

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DOWNLOAD the Prime MPS Performance Report, January 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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