Apr 7, 2015 | Portfolio updates

Prime Australian Equities Income Porftolio – March2015

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.

Market Summary

The ASX200 Accumulation Index was nigh on flat in March, falling only 0.06% on the month. The index rose 10.33% in the quarter, making it one of the best periods of stock-market performance in 5 years.

The month was a largely quiet one locally, and reflected some reversion of recent performance. The standout was the retracement of miners and oil during March, with both major sectors falling 6%. Offsetting this, banks rose 1%+ and healthcare also led, assisted by ongoing Australian dollar weakness.

In a macro sense, the main standout on the month was the ongoing strength in the US dollar. European markets took great comfort from the falling Euro, the commencement of European Quantitative Easing policies, and of the seeming cooling in overt animosity between the Greek and German law-makers.

Oil continued to fall as US supplies escalated to near full capacity. Iron ore fell a staggering 20% again this month.

The Federal Reserve met and were deemed to suggest that though a rate hike was likely mid-year, it was not pre-ordained. This helped bond markets rally, and so as we end the month Australian bonds are at or near record low yield levels of 1.71% for 3-year bonds and 2.33% for 10-year bonds. This level of bond yields is hugely supportive of equity markets near term.

The RBA did not cut rates in March, preferring to hold fire, however interest-rate markets and ourselves are overwhelmingly in favour of a likely 0.25% rate cut at the next bank meeting after Easter. It is our view that this will likely be the end of Australian rate cuts for now, however the market is far more optimistic and sees one and perhaps two more rate cuts in the coming 12 months, an optimism I expect will prove undeserved.

Lastly, takeover activity was a notable feature of the ASX during March. The best performing stocks were those involved in M&A action, as TPG (TPM) & iiNet (IIN) led all-comers rising 25% and 35% respectively. PanAust (PNA) rose 31% after receiving a bid from its major-shareholder, the Chinese backed Guandong Rising Asset Management. As the Australian dollar weakness becomes more ingrained in corporate management psyche’s, the prospect of further inbound M&A for Australian assets becomes a real possibility.

Portfolio Commentary and Positioning

The PRIME Australian Equities Income portfolio rose 0.93% in the month, outperforming the broader index indifference (ASX200 Accumulation -0.06%). On the quarter, the portfolio rose 11.18%, again outperforming the benchmark rise of 10.33%.

We were encouraged by the strength shown this month, as the portfolio had idled in recent months as its lack of exposure to the broader materials sector rally had caused it to lag.

By its very nature, the Equity Income portfolio will ordinarily be of a lower beta to the market, performing well in times of weakness and lagging during market strength. Further, the portfolio is more constrained in its flexibility, operating with a more restricted universe of stocks from which to choose. Turnover for this reason has been light in the past 12 months or so, but we remain vigilant for opportunity to not only book profits, but to add new positions.

We made no changes to the portfolio in the month, but were benefited by our market-weighting in the bank sector and continued persistence with a large weighting in Telstra (TLS). With record low bond yields, it is hard for us to be anything other than optimistic for continued relative performance in both telecoms and banks, but we are surely mindful of the rising absolute valuation in all things ‘yield-sensitive’ and remain on watch for a time to switch the portfolio to either a higher cash weight or in fact to shift the portfolio towards a more pro-cyclical bent.

Adelaide Brighton Cement (ABC) continued its recent run and was the standout performer for the portfolio, rising a further 6% in March

Transactions for the month

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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.


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