Prime Australian Equities Growth SMA – August 2016

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 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

Where June and July were dominated by macro events such as the surprise BREXIT vote, August activity tended to be closer to home as companies released full-year 2016 profit results.

Amongst the dozens of reports, the majority of portfolio names managed to deliver results that at least matched market expectations. Sonic Healthcare (SHL) and Woolworths (WOW) were arguably the best figures amongst our list of names, however this didn’t necessarily translate into sustained outperformance over the month as both share prices initially popped strongly before easing back as the month dragged on.

On the negative front, Insurance Australia Group (IAG) was perhaps the most disappointing even in spite of its announced off-market buyback. Fortunately we had anticipated this and sold IAG out of the GROWTH portfolio and we had reduced it significantly in the INCOME portfolio. Amongst the banks, Westpac (WBC) was also disappointing.

The portfolios both either exited completely (GROWTH) or substantially reduced (INCOME) their holdings in Flight Centre (FLT) after the stock squeezed 15% higher through ‘in-line’ results. We concede FLT hasn’t worked out as we had planned initially, so we chose to take advantage of the price spike to exit much of the positions this month for no loss.
Both portfolio’s added ADD Blackmores (BKL) as a core holding after the company disappointed the market with guidance for a weaker September quarter. We think the revenue softness will prove transitory and hence have begun to build positions on the confidence we have in the longer-term Chinese growth story.

In May 2016, PRIME shifted its stance on risk-assets to a CAUTIOUS ONE, and chose to reflect this view by raising cash weightings in each of its Separately Managed Accounts (SMA). We maintain this view and continue to retain substantial cash holdings in both the GROWTH and INCOME portfolios.

Portfolio Commentary & Positioning

The portfolio had another sound performance in August, falling less than the broader market. The PRIME Australian Equity Growth portfolio fell -0.90% against the ASX 200 Accumulation index fall of -1.55%.

Corporate reporting season was the dominant driver of share market performance this month, and fortunately for the most part our positions held their own.

Woodside (WPL) was the standout position in August, rising 8% after delivering a confident production outlook and a higher proportion of contracted future gas production.

ANZ Bank (ANZ) and National Australia Bank (NAB) were also outperformers, and interestingly have been significantly better than their peer group for much of the last 2 months.

Amongst the results, Crown Resorts (CWN) confirmed their announced intention to restructure their domestic and foreign assets, and this helped the shares hold ground against the weaker market. Woolworths (WOW) too were a positive surprise, declaring that supermarket sales in the first 8 weeks of the new financial year were higher – the first time we have seen positive like-for-like sales in over a year. In addition to the constructive figures coming from supermarkets, WOW also confirmed a closure of the troublesome Masters DIY chain and the sale of its smaller Home Timber business for a sum above market expectations.

Insurance Australia Group (IAG) fell 8% after a disappointing set of figures. We had anticipated this, so had sold 75% or more of our position at $6.00 ahead of the figures. Telstra (TLS) was also a laggard, falling 9% after the group declared a re-commitment to network quality and announced a further $3bn in planned cap-ex over the coming 3 years. We remain entirely committed to our TLS position and see the stock as a bond at these levels, and offering investors a 6%+ dividend yield with near certainty for at least the next 3 or 4 years.

In portfolio changes this month there were many. We added Australian hotel operator Mantra Group (MTR) after having seen the share fall over 30% year-to-date. Whilst the market felt its results showed weakness amongst its CBD hotel portfolio, we felt confident the figures were no worse than anticipated and in fact that the Resorts division continued to demonstrate strong occupancy and revenue-per-room growth. We think MTR is an excellent medium-term play on a weaker Australian dollar and on the ongoing boom in Chinese inbound tourism.

The portfolio also added Blackmores (BKL) after having seen the stock plummet 22% in the month on a warning that September quarter sales would demonstrate negative annual growth. Again, this figure did not surprise us perhaps as much as the market and in fact we see the weak sales merely as a function of aggressive de-stocking associated with the April/May Chinese regulatory changes, and more likely than not a transitory factor.

To make way for the new positions, we sold out of our Flight Centre (FLT) position, and we reduced our recent weighting in QUBE (QUB) due to its stellar performance. FLT had been a disappointing holding for several months, and we fully admit the deterioration in global travel conditions had not been part of our investment thesis. Fortunately we bought the position ‘cheaply’ so we were able to exit the holding without loss.

Transactions for the month

Trade Stock

BUY Mantra Group (MTR)
BUY Blackmores (BKL)
ADD Woolworths (WOW)
ADD  Regis Healthcare (REG)
ADD Telstra (TLS)
SELL Flight Centre (FLT)

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


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