Prime Australian Equities Income SMA – February 2016

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.

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Market Summary

Frankly, February was a nightmare month for fund managers and a continuation of the volatile and softer tone seen in January.

Though the ASX200 Accumulation index fell a modest 1.76% in February (-7.14% YTD), the index was down as much as 6% at one point. Furthermore, performance within the broader market diverged materially from previous trends meaning we saw a dramatic bounce in unloved mining and resource-related shares, and a material sell-off in banks, Telstra and the supermarkets.

Concerns insofar as global growth remained at the fore of investors minds this month, with data across each of the US, China and Europe all pointing to a moderation or, in the case of Chinese and US industrial activity, outright weakness. Bond markets the world over rallied strongly, and in Australia 10-year government bond yields fell to 2.32% (barely off their record low of 2.25% set in early last year).

In the local Australia market there were several drivers of performance – December interim corporate profit reporting, media fear-mongering of a housing collapse which impacted the banking sector, and lastly short-covering in mining shares.

Bank shares fell over 6% during February due to the confluence of global financial fears and the more local concerns relating to dividend sustainability and the potential for a collapse in house prices. Telstra (TLS) and the supermarket retail companies were also hard hit, meaning retail investor portfolio’s faced significant underperformance in the month.

Compounding difficulties for investors in February was the short-covering rise in many of the serial underperformers, with shares across the mining and engineering sectors rising strongly against the falling index.

Whilst it was a very difficult month for equity investors, on a positive note, corporate earnings in Australia seem to be holding in reasonably well and the early 2016 indicators of economic activity seem to point to a continuation of the moderate uptick in domestic service growth witnessed during 2016.

Portfolio Commentary & Positioning

The PRIME Australian Equities Income portfolio disappointed with a fall of -3.04% in February, lagging the ASX200 Accumulation’s -1.76% decline.

Like the Growth portfolio, the Income portfolio saw losses inflicted both due to its heavy overweight in Telstra (TLS) and its significant underweight in resources names. Furthermore, as a portfolio biased towards income generation, it tends to be even more skewed to large-cap Australian shares making it more vulnerable to performance disappointment when large-caps are sold – small and mid-cap shares outperformed the top-50 shares by 4-5% in February.

The decision to go modestly overweight banks in September 2015 proved to hurt as the banks fell 6% in the month, on housing fears outlined above.

The large holdings in each of Flight Centre (FLT), IOOF (IFL) & Insurance Australia Group (IAG) all held in well and provided excellent outperformance, with IFL notable for an excellent set of profits.

The portfolio did make several changes in February, selling the last of our successful holding in Adelaide Brighton (ABC) having seen it reach our target level, and also sadly selling the small position taken in BHP (BHP) for a loss after it proved that the dividend cut was more substantial than our expectations.

The portfolio now sits with a large overweight in cash which we remain hopeful of deploying in the months ahead.

Transactions for the month

Trade Stock
ADD SONIC HEALTHCARE (SHL)
ADD IOOF (IFL)
SELL CYBG (CYB)
SELL ADELAIDE BRIGHTON (ABC)
SELL BHP (BHP)

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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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