Prime Australian Equities Income Portfolio – October 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

Australian equity markets rebounded after two months of heavy losses. Early in the period miners demonstrated a certain strength, before fading. However it was the oil sector that truly snapped back after a long period of heavy losses, assisted by heightened corporate interest in the sector – notably the $6.88 indicative cash bid for SANTOS (STO) from a group of Asian high net worth individuals and groups.

Alongside the oil sector bounce, healthcare and consumer discretionary stocks all outperformed the market – Gerry Harvey of Harvey Norman (HVN) was notable in his remarks that spoke of a strong consumer, reminding the market that consumer confidence was indeed a multi-year highs.

The significant underperformer in the month was the telecom sector, led by Telstra (TLS) which fell 4% against the market gain. The group hosted an investor day very late in the month, but much of the underperformance came well ahead of that, as local institutions sold TLS to fund the substantial bank capital raisings. The supermarket stocks were also very poor late in the month, after Woolworths (WOW) came out with its significant profit warning, sending itself and its competitor Wesfarmers (WES) lower on concerns for an emerging price war.

Many of the concerns that weighed on global investment markets during the third quarter seemed to lift – Chinese equity markets rallied over 10% in successful anticipation of interest rate cuts (confirmed late in the month), oil prices stabilised, and fears over a renewed rollover in global economic demand seemed to diminish.

On the macro front locally, there was little real change to the status quo. Business and consumer confidence continued to improve, buoyed by the change in Prime Ministership and seemingly a fresh debate on future policy changes. Quarterly inflation fell back, which helps the potential for policy change down the track, but for now rates remain on hold.

The Australian Dollar rallied during the month to just shy of 74c, but in fact closed unchanged near 70-71c. 10-year bonds similarly were flat at 2.60%.

Portfolio Commentary & Positioning

The PRIME Australian Equities Income portfolio rose 2.45% in October, underperforming the ASX200 Accumulation’s 4.37% rise.

It was a disappointing month despite the gains.

2015 calendar year-to-date the portfolio is 0.81 %, marginally ahead of the 0.54% rise in the ASX200 Accumulation index.

At some point we knew the significant weighting to TLS would bite us in the bum, and after several months of strong portfolio performance, October saw a reasonably significant lag.

TLS was the sole contributor to the near 2% underperformance in October, and largely stems from the heavy bank capital raisings seen in recent months and the need for local funds to make room in their portfolios to accommodate the new equity – TLS was an obvious stock to sell, being a similarly high-yielding blue chip.

We agree that competition in both mobile and fixed telecoms is picking up, but we feel that the share now offers up very good value again under $5.50, so we are very hopeful that we can get some of the months underperformance back in short shrift.

Adelaide Brighton (ABC) also fell during the quarter, dropping 4%. ABC has been a total winner for the portfolio in 2015, but as concerns continue to mount on the housing front, it seems no surprise that the share has seen profit taking. We feel very comfortable that the stock will see a terrific infrastructure tailwind in the coming 18 months, and hence any recent selling makes for a buying opportunity.

On the positive front, IOOF (IFL) rose 9% and Insurance Australia Group (IAG) jumped an even greater 16%. The market was encouraged by the IAG’s decision to halt its expansion into mainland Chinese insurance markets. The significant capital outlay required, and the low odds of achieving critical mass had concerned the market, so the pragmatic decision taken to curb this strategic expansion was seen in most quarters as a sound one. It also frees up the group to pay back excess capital to shareholders in the form of special dividends in the coming few years.

Transactions for the month

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Download the Prime MPS Performance Report, October 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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