Prime Australian Equities Income Portfolio – September 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

September continued a trend for weaker markets, with the ASX200 Accumulation index falling a further -2.96% and taking its quarterly loss to -6.58% and its 6-monthly loss to a more significant -12.69%.

This month the market continued its recent malaise with very little fresh impetus nor catalyst for the performance. Concerns surrounding a pronounced Chinese FX devaluation seemed to fade into the background when the Yuan failed to deteriorate more meaningfully, but on the whole, it seemed that in spite of no fresh negatives, few were willing to do anything more than reduce risk.

In Australia, the AUD eased back 1c and bond yields also fell a shade, but were hardly drivers of performance.

Again, commodity sectors were the hardest hit with Australian oil shares down 12.5% for the month, and miners down another 6.6% – miners are now back at levels post the GFC, and in the case of oils, they are in fact now back at 10-year lows as a sector. Commodity prices remain soft, but perhaps the most significant concern pertaining to the oil sector is the prospect of excess balance sheet leverage causing cash-flow issues at the likes of Origin Energy (ORG) and SANTOS (STO) – the former announcing a significant $2.5bn capital raising in the last couple of days.

Banks and telecoms were indifferent, and down in line with the market.

Encouragingly, small-cap stocks were not nearly as bad as their larger peers. This gives us heart that there is genuine buying around for small-caps on weakness, which ordinarily is a good sign that investors are not overly concerned by broader economic prospects.

Portfolio Commentary & Positioning

The PRIME Australian Equities Income portfolio fell -2.47% in September, outperforming the ASX200 Accumulation’s 2.96% fall.

2015 calendar year-to-date the portfolio is -1.60%, and ahead of the -3.67% fall in the ASX200 Accumulation index.

The portfolio continued its consistent run of late, again beating the market by around 0.50% for the month in spite of its large-cap, dividend bias.

Best performer for the month was Ausnet Services (AST) which rose just under 5%, and benefited from the bond market improvement.

Elsewhere much of the portfolio was in-line with the broader market, with few easy-to-identify problem stocks during the period. Banks and Telstra (TLS) were largely in line with the market, as was Wesfarmers (WES) and Adelaide Brighton Cement (ABC).

Woodside (WPL) was the major disappointment falling 10%+ in the month after disclosing an indicative bid for Oil Search (OSH) on terms of 1 WPL share per 4 OSH shares. In truth, I can see merit in the bid and in the manner that WPL has chosen to bid, however it seems investors were disappointed that WPL were perhaps over-paying for the potentially risky exposure to PNG held by OSH – we feel this concern is grossly overplayed for now, and that in time, with or without OSH, WPL shares will reassert themselves as the quality Australian oil play it is.

Elsewhere there is little else to add on the portfolio.


Transactions for the month

Trade             Stock
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