Prime Australian Equities Growth SMA – September 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

September was a volatile month. The ASX200 index fell over 5% initially before recovering to close the period marginally higher.

Much of the initial weakness was driven by the spike higher in global bond yields, with Australian equity markets underperforming due to their heavy yield focus. Australian 10-year government bond yields moved from 1.8% to as high 2.15% and this had a significant initial impact on interest-rate sensitive sectors such as property and infrastructure. However the spike higher proved temporary, particularly after the US Federal Reserve offered a suitably dovish outlook for US interest rate rises, and Australian bond yields ended the month little changed.

Property stocks actually closed the month up +2.8%.

Another major macro factor during the quarter proved to be OPEC’s surprise decision to announce a production cap amongst its member countries. Though compliance to past caps has been middling at best, the market took heart from the renewed commitment to oil price stability from the Saudi’s and oil prices clo
sed the month over 12% higher.

Interestingly, and rather frustratingly, the spike to 3-month highs in oil failed to translate in outperformance from much of the Australian energy sector. The sector itself closed flat on the month, with Woodside Petroleum (WPL) similarly unchanged, albeit following strong gains in August. Fortunately for us, Oil Search (OSH) rose 6% in the month, and rewarded our decision to add to positions in the GROWTH portfolio at $6.60.

Miners continued their outperformance rising almost 5% and taking their year-to-date market outperformance to +23%. There seemed little fresh reason to provoke the continued buying of miners, particularly since Chinese steel prices continued to decline and closed September over 10% from their peak. We feel it is only a matter of time before the significant underweight both portfolios hold in mining begins to pay off.

We remain cautiously disposed to Australian share-markets, in large part due to the combination of full valuations (15 year high on market P/E valuations) and an increasingly clouded forward economic outlook. As a result, both portfolios retain significant CASH holdings as they have done for several months now.  On a positive note, recent market moves have opened up an increasing number of opportunities for us to adjust the portfolio in the coming months we think.

Portfolio Commentary & Positioning

The PRIME Australian Equity GROWTH portfolio mirrored the index during September, rising +0.39% as against the +0.48% ASX200 Accumulation.

The best performer during the month was the recently added position in Australian hotel & resort operator Mantra Group (MTR), which rose +7%. There was little to explain the strong outperformance other than to reference what we thought was an overly harsh underperformance of the stock post its full-year results in August.

Oil Search (OSH) was another strong performer rising +6% and aided by the +12% jump in crude oil prices. We chose to add to our positions in OSH in the mid-$6.00 range, and thus far feel vindicated with this decision given the stock is approximately 10% higher.

Beyond OSH and MTR the mainstay of the portfolio’s performance this month were the holdings in banks. ANZ Bank (ANZ) continued its strong performance and rose +3% , whilst National Australia Bank (NAB) too outperformed and rose +2%. ANZ has now outperformed both Commonwealth Bank (CBA) and Westpac (WBC) by over 20% in the past 6-9 months respectively and is beginning to look quite full relative to the market and its peer group, so we are contemplating our positions here.

On the negative side of the ledger, our holdings in mid-cap names such as Blackmores (BKL), Regis Healthcare (REG) and QUBE Holdings (QUB) all struggled during the month. QUB had been an excellent performer in recent months and we had used this strength to sell some of our holdings. Conversely this month’s 8% fall proved an opportunity for us to again add to positions under $2.30 in anticipation of some positive news on the groups Moorebank development.

BKL fell 6% as sellers continued to exit the stock after the previous months disappointing September quarter profit guidance. Our position here is a modest one and we feel we have plenty of firepower to add to it should the stock continue lower.

REG was perhaps the biggest disappointment however, as it fell over -20% intra-month before recovering to close down -5%. REG was hit hard after the government’s surprise decision to remove the aged-care industries ability to recoup costs born on capital works undertaken on retirement properties. Much of the industry, including REG, had banked on using these charges to offset lost income elsewhere so this was a genuine knock to ours and the markets expectations. All that being said, we still feel confident in REG’s ability to offset increased government regulation and feel comfortable with our current holding.

Transactions for the month

Trade               Stock

ADD                 Oil Search (OSH)

ADD                 QUBE Holdings (QUB)

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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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