Sep 8, 2015 | Portfolio updates

Prime Australian Equities Income Portfolio – August 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

August saw the Australian share-market have its worst month since the GFC, with the ASX200 Accumulation index falling 7.79%.

Undeniably the selling across global share-markets emanated from a surprise decision by the Peoples Bank of China (PBOC) to allow its currency to float at a wider rate than previously, effectively offering up tacit approval for its currency to ease further. Most western stock-markets fell 6-10%, whilst Chinese shares themselves fell 11% (but a more pronounced 27% from their highs mid-month).

The idea that China could ‘export deflation’ seemed to be the trigger for market fears, whereas in my opinion the broader & arguably less concerning reason for the sell off is the western world acknowledgement that super-normal profit margins seen in recent years were in fact under threat by the Chinese slow-down.

In response to the slowing economic data and falling stock-market, the PBOC endeavoured to offer up increasing stimulus through a reduction in interest rates and bank reserve requirements.

In the local market, utilities were the standout performer falling less than 1% – AGL Energy (AGL) remains very much the market darling at present and closed 1% higher for the month after in-line profit results.

Elsewhere it was red-tape across the board, aided and abetted by a very average profit reporting season. Information technology shares like Computershare (CPU) and (CAR) were down 20% and 10% respectively, bank shares were down over 10% after the announcement of capital raising at ANZ and Commonwealth Bank (CBA), and energy stocks continued to plummet, falling 15% in the month.

Results season locally brought home to roost the lukewarm domestic economy and this ultimately tore down several highly-rated shares, and even a few lowly-rated ones to boot.

Portfolio Commentary & Positioning

The PRIME Australian Equity Income portfolio fell 7.27%, outperforming the 7.79% loss incurred by the ASX200 Accumulation benchmark.

Year-to-date the portfolio is up 1.00%, ahead of the -0.75% loss on the ASX200 Accumulation index.

On the whole we were encouraged the portfolio was able to best the ASX200 benchmark during the month, albeit we are undeniably disappointed that the portfolio and markets took the hit they did.

The large cash weighting in the portfolio helped soften the blow, as did large holdings in each of IOOF (IFL), Adelaide Brighton Cement (ABC) and Wesfarmers (WES). All of these positions outperformed the large index fall, as did the remaining holding in AGL Energy (AGL) that was sold during August.

IFL had been heavily sold in recent months on concerns relating to the impact on their advice business from reports of deficient compliance conduct, but managed to beat market expectations with its full year profit release. ABC also delivered an excellent profit figure, and the added bonus of special dividend. WES results were fine and continue to point to a strong pattern of outperformance against their close rival, Woolworths (WOW).

However elsewhere it was less sanguine.

The bank sector fell over 10%, Telstra (TLS) similarly. Banks fell as the market was forced to digest the significant equity raisings offered by both ANZ and Commonwealth Bank (CBA) in the month.

Our recent purchase of Insurance Australia Group (IAG) was also brought to ground with a thud after the release of average profit figures. All this said, we feel the stock looks excellent value here on 12x and with a 6%+ dividend yield. We certainly weren’t looking for strong results and feel much of what was delivered reflects a view from the rearview mirror.

We chose to add to the position in IAG during the month, whilst still retaining excellent flexibility to broaden the portfolio out if additional opportunities emerge as we expect.

Transactions for the month

Trade             Stock
REDUCE         AGL Energy (AGL)
ADD                 Insurance Australia Group (IAG)

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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