Prime Australian Equities Income SMA – April 2016

Prime Australian Equities Income SMA – April 2016

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.

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Market Summary

Performance in April was dominated by the commodity sectors, particularly the iron ore names. A well-reported surge in speculative activity in Chinese commodity futures markets saw iron ore and steel prices rise a staggering 30% during the month, dragging the likes of Fortescue (FMG), BHP (BHP) & Rio Tinto (RIO) up 20-30%.

In spite of OPEC’s failure to cap oil production at their mid-April meeting, oil prices too surged in the month to rise some 20%. As a result, Australian oil shares jumped just under 8% too.

The substantial outperformance of all things commodity-related meant no other major sub-index was able to better the ASX200 performance, meaning a portfolio’s relative exposure to commodities was the predominant determinant of performance during April. It was here specifically that the INCOME portfolio lost significant relative performance against the index.

Beyond the significant jump in commodity exposures, the other major item to note during April was the collapse in Australian inflation figures with the release of March quarter annualised CPI showing a rise in prices of only 1.3% – just shy of a 17-year low. The figure triggered a rally in Australian bond yields, and the renewed expectation by many in the market that the RBA would follow a global trend by reducing domestic interest rates in early May – an outcome ultimately confirmed.

In single stock news, QANTAS (QAN) was a standout in April falling by 20% after it warned domestic demand had waned since Easter and that it was reducing capacity in response. For both portfolios, this news proved a negative as it had a knock-on effect to listed travel plays such as Flight Centre (FLT), which fell 10% in sympathy with QAN.

Portfolio Commentary & Positioning

The PRIME Australian Equities Income portfolio struggled to compete with the index this month given its significant underweight in mining and energy shares. The portfolio rose +1.37% in April, underperforming the ASX200 benchmark rise of +3.37%.

The portfolio was significantly hamstrung in its ability to perform during April given the absence of exposure to Australian mining shares, and its market-weight holding in the oil sector by way of its long-standing Woodside (WPL) position. Compounding the absence of exposure to commodities, the portfolio ‘overweight’ in large, defensive holdings such as Woolworths (WOW), Telstra (TLS) and the banking sector dragged on relative performance furthermore.

By definition this is going to happen from time to time given the large exposure the ASX200 has to commodities. In fact, given the materials sector is up 18% to the end of April against a +0.5% index rise, much of the year-to-date underperformance of the strategy can be explained by this single observation.

All this being said, we feel the mining sector performance peaked in April and we remain very confident that some of the relative underperformance year-to-date can be recaptured by existing positions in several consistent dividend payers such as TLS and WOW above, but also IOOF (IFL), Insurance Australia Group (IAG) and Sonic Healthcare (SHL).

The 17-year low in Australian recorded inflation reported last month and the resultant RBA interest rate cut in early May signal a strong likelihood for performance by Australian interest rate sensitive shares in the weeks and months to come.

The only new position taken in the month was the addition of Regis Healthcare (REG). Our confidence in the longer-term aged care industry growth rates, alongside an improved share price valuation caused us to add REG to the portfolio. The stock pays a 4%+ fully franked dividend yield, but importantly we believe this yield will grow strongly alongside group earnings in the coming 2-3 years.

The portfolio also added to its WOW position.

Transactions for the month

Trade Stock
ADD Woolworths (WOW)
BUY Regis Healthcare (REG)

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DOWNLOAD the Prime Separately Managed Account (SMA) Report, April 2016

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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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