Prime Australian Equities Income Porftolio – May 2015

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 rose by 0.4% in May, and is 8.88% higher year-to-date. The month was a tale of two halves, with the market falling 3.5% initially before recovering to post a modest gain.

Australian bond and currency markets followed a similar theme, with 10-year yields spiking from 2.65% to over 3% before closing near flat. The Australian dollar similarly spiked over 81c before finishing the month back at 76.50c.

The main catalyst for the initial weakness in bond and equity markets this month, was the RBA rate-cut announcement. Despite cutting interest rates to generational lows of 2%, the RBA seemed to signal a hiatus in the easing cycle by removing its ‘bias to ease’ from the statement accompanying the rate cut. The RBA has played a stop-start game with interest rates in 2015, and so it was perhaps no surprise that this indifference impacted asset markets once confirmed.

The RBA spent much of the remainder of May endeavouring to put ‘the cat bag in the bag’ by remarking that rates could well continue lower, but after what was a reasonably expansionary 2016 Budget pronouncement it seems we should feel quite confident that interest rates are now on hold for the better part of 2015.

The Budget itself was a relatively positive affair, and was taken encouragingly by investment markets. The big news was the decision to allow small and medium sized firms the ability to immediately write off up to $20,000 in business spending. This news saw the market rebound well, with consumer discretionary equities performing well on the announcement.

The best performing sectors of the share-market were Healthcare (+2.4%) and Miners (+2%), whilst Banks continued to ease and Consumer Staples also underperformed.

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.

Portfolio Commentary & Positioning

The PRIME Australian Equities Growth portfolio rose 1.06% in May, and outperformed its ASX200 Accumulation benchmark by 0.66%.

Year-to-date the portfolio is up by 9.7% and AHEAD of the benchmark’s 8.9% rise.

We were very encouraged by the portfolio’s gains this month for several reasons.

1. First and most obvious, the portfolio is explicitly an income focussed portfolio so when benchmarked against a wider index such as the ASX200 Accumulation we feel we are constantly faced with a difficult benchmark.

2. Secondly, with the National Australia Bank (NAB) rights issue announced we found one of our largest portfolio holdings in the midst of a material, and unexpected capital raise. The market, like ourselves, fortunately took the decision by new NAB management to get ahead of the curve on equity capital meaning the position in NAB actually managed to hold its own during the month.

Fortunately during the month significant positions in AGL Energy (AGL) and IOOF (IFL) managed to contribute favourably to portfolio performance, rising 7% and 4% respectively. AGL spiked after a very encouraging strategy presentation from its new CEO Andrew Vesey promised up to $1bn in asset sales by 2017, a re-commitment to ‘new energy’, and several substantive promises to reduce cost and capital intensity.

IFL on the other hand continued to forge ahead with little fresh news other than press reports of a likely sale in part of its Perennial investment management operations to Henderson Group (HGG).

The small positions this portfolio retains in both Wesfarmers (WES) and Woolworths (WOW) dragged again in the month, with WOW reporting poor March quarter sales growth of only 0.2% after adjusting for Easter timing. Coles grew at 3.4% in the same period, and the performance indicates the significant foot-fall loss being incurred by WOW within their core supermarket franchise. We have retained both WES and WOW in the portfolio in very modest size since inception in large part due to their defensiveness, and though neither appeal to us significantly, we remain comfortable with the core businesses and broadly speaking the relative valuation. WOW is more likely to be a position added to in time, but as yet is still not cheap enough to allow us to make a more definitive portfolio bet against the backdrop of its underperforming core business.

The portfolio retains a significant cash position and will continue to do so until such time as genuine value in defensive, income generative equities arises. We feel certain segments of the market are looking better value than they have before, but for now we feel it appropriate to wait out for better levels.

Transactions for the month
Trade               Stock
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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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