Prime Australian Equities Growth Portfolio – October 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

Australian equity markets rebounded after two months of heavy losses. Early in the period miners demonstrated a certain strength, before fading. However it was the oil sector that truly snapped back after a long period of heavy losses, assisted by heightened corporate interest in the sector – notably the $6.88 indicative cash bid for SANTOS (STO) from a group of Asian high net worth individuals and groups.

Alongside the oil sector bounce, healthcare and consumer discretionary stocks all outperformed the market – Gerry Harvey of Harvey Norman (HVN) was notable in his remarks that spoke of a strong consumer, reminding the market that consumer confidence was indeed a multi-year highs.

The significant underperformer in the month was the telecom sector, led by Telstra (TLS) which fell 4% against the market gain. The group hosted an investor day very late in the month, but much of the underperformance came well ahead of that, as local institutions sold TLS to fund the substantial bank capital raisings. The supermarket stocks were also very poor late in the month, after Woolworths (WOW) came out with its significant profit warning, sending itself and its competitor Wesfarmers (WES) lower on concerns for an emerging price war.

Many of the concerns that weighed on global investment markets during the third quarter seemed to lift – Chinese equity markets rallied over 10% in successful anticipation of interest rate cuts (confirmed late in the month), oil prices stabilised, and fears over a renewed rollover in global economic demand seemed to diminish.

On the macro front locally, there was little real change to the status quo. Business and consumer confidence continued to improve, buoyed by the change in Prime Ministership and seemingly a fresh debate on future policy changes. Quarterly inflation fell back, which helps the potential for policy change down the track, but for now rates remain on hold.

The Australian Dollar rallied during the month to just shy of 74c, but in fact closed unchanged near 70-71c. 10-year bonds similarly were flat at 2.60%.

Portfolio Commentary & Positioning

The PRIME Australian Equities Growth portfolio recovered 4.72% in October, outperforming the ASX200 Accumulation’s 4.37% rise.

2015 calendar year-to-date the portfolio is 4.25%, and ahead of the 0.54% rise in the ASX200 Accumulation index.

Fortunately, the portfolio managed to better the index again this month, gradually repairing recent months indifferent performance.

There was only one transaction for the month, which was simply to trim the position in RESMED (RMD) which rose over 10% in October following reasonable quarterly profit figures.

Beyond the outperformance in RMD, the portfolio benefited from its holdings in each of Insurance Australia Group (IAG), Crown Resorts (CWN), Oil Search (OSH) and IOOF (IFL), all of which beat the market well.

IAG jumped 16% in October as the market was encouraged by the company’s decision to halt its expansion into mainland Chinese insurance markets. The significant capital outlay required, and the low odds of achieving critical mass had concerned the market, so the pragmatic decision taken to curb this strategic expansion was seen in most quarters as a sound one. It also frees up the group to pay back excess capital to shareholders in the form of special dividends in the coming few years.

CWN also rallied 16% as sentiment towards the Macau gaming sector continued to improve. The launch of its new Macau casino property, Studio City, late in the month was also deemed a success, particularly since the Macanese authorities chose to allocate a more generous gaming table allocation to the casino than was feared.

OSH bounced 10% alongside strength in the sector, and IFL’s 9% rise was largely down to a rebounding market and the market seemingly (and deservedly) losing its worries over the corporate governance issues that had beset them earlier in the year.

The biggest laggard was the large position held in TLS that I addressed in the market comments earlier. Now that the stock has pulled back under $5.50, and with bond markets still very well behaved, we actually think TLS now stands a chance for reasonable outperformance. (CAR), Computershare (CPU) and BHP (BHP) and Woodside (WPL) were all a shade weaker than the market, but flat or up on the month.

The portfolio now retains a near maximum cash position in anticipation of fresh opportunity and having seen the market rebound well in October.

Transactions for the month

Trade             Stock

Separately Managed Account (SMA): What is it? from Prime Financial Group on Vimeo.


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