Prime Australian Equities Growth Portfolio – September 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

September continued a trend for weaker markets, with the ASX200 Accumulation index falling a further -2.96% and taking its quarterly loss to -6.58% and its 6-monthly loss to a more significant -12.69%.

This month the market continued its recent malaise with very little fresh impetus nor catalyst for the performance. Concerns surrounding a pronounced Chinese FX devaluation seemed to fade into the background when the Yuan failed to deteriorate more meaningfully, but on the whole, it seemed that in spite of no fresh negatives, few were willing to do anything more than reduce risk.

In Australia, the AUD eased back 1c and bond yields also fell a shade, but were hardly drivers of performance.

Again, commodity sectors were the hardest hit with Australian oil shares down 12.5% for the month, and miners down another 6.6% – miners are now back at levels post the GFC, and in the case of oils, they are in fact now back at 10-year lows as a sector. Commodity prices remain soft, but perhaps the most significant concern pertaining to the oil sector is the prospect of excess balance sheet leverage causing cash-flow issues at the likes of Origin Energy (ORG) and SANTOS (STO) – the former announcing a significant $2.5bn capital raising in the last couple of days.

Banks and telecoms were indifferent, and down in line with the market.

Encouragingly, small-cap stocks were not nearly as bad as their larger peers. This gives us heart that there is genuine buying around for small-caps on weakness, which ordinarily is a good sign that investors are not overly concerned by broader economic prospects.

Portfolio Commentary & Positioning

The PRIME Australian Equities Growth portfolio fell 2.19% in September, outperforming the ASX200 Accumulation’s 2.96% fall.

2015 calendar year-to-date the portfolio is -0.45%, and ahead of the -3.67% fall in the ASX200 Accumulation index.

We managed to recoup some performance this month, after what had been a pretty middling few months of performance in which several of our core and performing positions saw some unfortunate retracement. Key amongst these names was Computershare (CPU), which managed to rise 7% against the weaker market and regain some of the 20% fall it sustained in September following its cautious 2016 profit guidance. We were thrilled with the bounce as we do genuinely see CPU as being a very cheap name, albeit the 2016 guidance was a negative surprise to us.

We were also fortunate to see Woodside (WPL) announce an indicative 1 for 4 scrip bid for Oil Search (OSH), that allowed OSH to rise 5% against the weaker tide. The bid is still only indicative, and it is no surprise that WPL’s request for conditional access to OSH books was denied. We own both stocks and feel management at the two are both playing their hands well. As to how this situation plays out, we feel that OSH is a stock worth well north of the current bid terms and more likely than not over $8.50 in a normalised oil price environment.

Unsurprisingly, WPL underperformed after news of the bid was revealed and it ended up falling over 10% for the month.

RESMED (RMD) and (CAR) continued to perform soundly, and were flat on the month. RMD reports quarterly profit figures in mid-October that should be sound, and there was a significant broker upgrade for the stock that we hope will end up playing out in share price strength.

On the weaker end alongside WPL, Crown Resorts (CWN) continued to struggle, falling 13.5%. The stock remains pressured due to continued weakness in its Macau associate MPEL, but we are hopeful for a successful launch late October of MPEL’s new Macau casino, Studio City. Further, the core Australian franchise continues to win increased patronage from Asian high-rollers, meaning that much of the lost Macau business is being regained on the tables of Crown Melbourne. The stock looks incredibly cheap to us, and we are upbeat the rally seen in the stock in the early days of October can continue.

BHP (BHP) was also a notable laggard falling 12%, however our portfolio is underweight BHP and the mining sector, so the impact on performance here was not material.

Transactions for the month
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