Prime Australian Equities Income Portfolio – November 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 was down very modestly in November, giving up the small gains from October. On the whole however, Australian equities are showing little ability to rebound from what has been a significantly weaker 3-4 months of performance since mid-year.

BHP was the standout Australian share during November, falling a whopping 21% in the month after news of the SAMARCO dam collapse in Brazil emerged. Concerns relating to compensation and reparation costs cast a pall over the stock, but perhaps even more significantly there was significant conjecture surrounding BHP’s ‘progressive’ dividend policy and the boardroom commitment (or lack thereof) to it.

The reality seems pretty clear to me – the dividend will be cut. The earnings don’t back it up, and anyone who can’t see that needs glasses. However, we think much of this pessimism is now priced into the share.

SANTOS (STO) announced a major capital raising, wrong-footing investors with a request for $2.5bn of fresh funds only weeks after its out-of-hand rejection of a $6.88 cash bid. This was a major volte-face and undeniably a costly decision for STO shareholders.

Within the broader market, small and mid-cap stocks continued their strong performance. Investors seem entirely full of the large-cap Australian stocks, and far more willing to diversify into shares outside the top-10 and to international managed funds.

The RBA again held fire on interest rates, though did concede that the inflation situation was such that it wouldn’t prohibit the RBA from further easing rates should the situation require it. That being said, the RBA Governor Glenn Stevens did remark late in the month that he felt inclined to leave rates as they were, preferring to see how retail sales locally over Christmas perform and how markets take the likely interest rate rise from the US Federal Reserve in mid-December.

In local economic news, October employment figures were particularly strong. The Australian dollar floated higher during the month to 72c+ and Australian 10-year government bond yields also pushed higher on the stronger economic data, closing up 0.20% at 2.85%.

Internationally, the horror of the Paris terror attacks did little to affect markets in truth. That said, weakness in the Euro was a feature of global currency markets. The Chinese Yuan was also notably softer, raising again concerns insofar as the export of deflation from China to western economies.

Portfolio Commentary & Positioning

The PRIME Australian Equities Income portfolio rose +0.55% in November, beating the ASX200 Accumulation’s -0.68% fall.

2015 calendar year-to-date the portfolio is +1.37%, marginally ahead of the -0.14% fall in the ASX200 Accumulation index.

It was an improvement on the previous month.

The main changes taken in the INCOME portfolio this month, were largely similar to those undertaken in the GROWTH portfolio.

With BHP (BHP) having fallen so far, we did choose to add BHP to the INCOME portfolio on the belief that the company WOULD likely cut its dividend in 2016, but to a level in the order of $1.00 a share. At this level, we felt BHP under $20 was beginning to offer up reasonable value to the income investor (5% fully-franked yield), and hence we chose to add a ‘market-weight’ in BHP to the portfolio.

At this point, the position is under-water and looking a little early in its timing. However that said, we feel our decision has merit and we are hopeful for a quick rebound in BHP to vindicate this move.

The portfolio also saw the modest Woolworths (WOW) position increased, as WOW finally fell back to our target entry level in the $23-24 range.

To fund both the BHP and WOW purchases, we chose to reduce our positions in IOOF (IFL) and Ausnet Services (AST) – both winning positions – and Wesfarmers (WES).

The portfolio retains a significant cash weighting at months end, and stands positioned to raise its weightings as and when appropriate.

Transactions for the month
Trade               Stock
BUY                    BHP (BHP)
ADD                   WOOLWORTHS (WOW)
ADD                   ANZ BANK (ANZ)
ADD                   WESTPAC BANK (WBC)
REDUCE           IOOF (IFL)
REDUCE           CASH

Separately Managed Account (SMA): What is it? from Prime Financial Group on Vimeo.

Download the Prime MPS Performance Report, November 2015

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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