Jul 30, 2015 | Portfolio updates

Prime Australian Equities Income Portfolio – June 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 fell by a significant 5.3% in June, leaving it up by 3.12% year-to-date. .

Much of the month’s fall was experience in the first week of trade, after the RBA decision to leave interest rates unchanged also saw the perceived removal of the banks ‘bias toward further easing’. That the RBA had become arguably more equivocal on the need for further interest rate reductions took some by surprise, and 10-year Australian government bonds were heavily sold falling from yields of 2.7% to over 3% by the month end.

Also helping to contribute to both local equity and bond weakness was the dramatic sell off in global bond markets, with German 10-year bond yields notably spiking from almost zero to 0.80% in a short space of time.

On the economic front too, data was actually pretty good for May and releases for each of employment and business confidence were both well ahead of recent months and expectations.

In terms of individual sector and stock performance, telecoms and bank shares actually beat the market in spite of bond market weakness. Miners and energy were the worst.

Flight Centre (FLT) proved to be a notable faller in June after it further downgraded current year earnings expectations. Weak consumer confidence and a loss of market share to online competitors were to blame, and the shares fell 27%. Fortunately, in PRIME’s Australian Equity Growth portfolio we had sold our position during May for precisely these reasons of concern.

IOOF (IFL) and Insurance Australia Group (IAG) were the other major stand-outs for the ASX in June, one on the negative and the other on the positive, but both discussed in greater detail in the portfolio reports below.

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

Year-to-date the portfolio is up 3.83%, ahead of the 3.12% gain in the ASX200 Accumulation index.

The portfolio fell over 5% in June, mirroring the index fall and marking June as the second worst absolute monthly performance since inception 3 years ago.

Like the PRIME Australian Equity Growth portfolio, a significant weakening in the share price of IOOF (IFL) contributed to losses sustained in June. IFL fell 17% after press revelations relating to inadequate compliance procedures within the firm’s research department. Whilst not wanting to make light of what surely were deficient practises, the likely actual impact on the broader IFL business seems slight and we feel confident in maintaining our position in the share.

Wesfarmers (WES) was also a major drag on portfolio performance, falling 11% in June. Frankly there were no major reasons to justify the WES fall in June other than to say that after Woolworths (WOW) significant weakness during May, perhaps some fund managers felt the need to re-balance away from WES and into the lower-priced WOW shares. WES is and remains a modest weighting in the portfolio, offering quality and dividend support, but frankly not much outright value.

On the positive front, the performance of the banks, Telstra (TLS) and AGL Energy (AGL) all helped add value in June.

The portfolio made one change during June, adding Insurance Australia Group (IAG) as a new position. This is the first new change to the portfolio since January and reflects belief in the underlying value of IAG. Fortunately within 10 days of our position change, our optimism was vindicated with IAG announcing that fabled investor Warren Buffett’s group, Berkshire Hathaway, had taken a $500m stake in the company and agreed a major 10-year ‘quota-share’ with IAG to underwrite 20% of IAG’s existing Australian general insurance book. The deal is a great one for IAG in that it frees up capital to continue its South East Asian expansion, and it brings on board a well-regarded and financially flush partner to support them in their continued growth drive.

Transactions for the month
Trade               Stock
BUY                    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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