Prime Australian Equities Income Portfolio – November 2014

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 Commentary

The ASX200 Accumulation Index FELL 3.26% in November.

In keeping with recent volatility, the Australian equity market retraced much of the gains made in October. Commodity weakness was a standout theme in November. Iron ore prices lost a further 10% to be at $70-71/t, and oil prices collapsed almost 20% too. The Australian dollar fell to 85c & government bond yields fell accordingly.

Understandably, the Energy & Mining sectors exposed to commodity weakness saw major falls. On the month the Energy sector fell a whopping 13% and materials fell a further 5.6%. Defensive sectors like Healthcare and Telecoms both outperformed rising a shade over 1% for the period.

The month was notable for the successful launch of Medibank (MPL). At PRIME we had major reservations over the IPO process and the valuation of the deal, however the stock did manage to hold its $2.15 institutional price, meaning that retail investors saw sound initial gains on their $2.00 investment.

The banks continued their third quarter round-ups, and once again, we largely in line with analyst expectations and assisted by benign credit conditions (bad debts remain very low).

Woolworths (WOW) was a feature in the market, but for the wrong reasons. Its core food & liquor sales for the third quarter were reported, and disappointed analyst expectations. Sales rose a shade over 2% annually, which was well down on their competitors Coles who are running at north of 4%. The stock took a hit and lost 13% in the month.

Portfolio Commentary & Positioning

The PRIME Australian Equity Income model portfolio performed in line with the benchmark ASX200 Accumulation Index in November, returning a loss of -3.19% (ASX200 Accumulation was -3.26%).

Rolling 12 month performance to the end of November sees the INCOME portfolio OUTPERFORMING the benchmark significantly. The portfolio is up 8.74% against a 4.26% benchmark return.

Frankly there were two major holes in the portfolio this month – Woolworths (WOW) & Woodside (WPL). As described in the market commentary, WOW posted disappointing sales growth in its core food & liquor division, and this caused a reasonably significant sell off in a supposedly defensive name. Fortunately, the position in WOW is not major and the stock is approaching some degree of support. It is certainly a name where in light of the fall, we need to decide the appropriateness of our position, and whether to buy this weakness or in fact to sell and move on.

In the case of WPL, the oil price collapse is entirely responsible. Our position here has been a large one due to the companies near-term dividend policy. In light of the earnings downgrades, WPL is now no longer a 6%+ dividend yielding name, and more like a 4%+ yield. In light of this fact, it remains our number one priority to determine the extent of our weighting in this stock and its appropriateness in this portfolio which is focussed explicitly on yield.

On the positive front, IOOF (IFL) performed very well, alongside Telstra (TLS) and Adelaide Brighton (ABC). We hold significant weightings in each of these three names, and it was in large part due to their strength that the portfolio was able to perform in line with benchmark this month.

Transactions for  the month:

 AddAGL Energy (AGL)

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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