Prime Australian Equities Income SMA – April 2017

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.

DOWNLOAD the Prime Separately Managed Account (SMA) Report, April 2017


Market Summary

Banks once again underpinned our market. (+1.89%.) The Big 4, which account for more than 26% of the index, continue to provide a backbone for the wider market. Our underweight position in banks contributed to our underperformance, however we maintain that the sector looks increasingly full at these levels and look towards earnings season next month which we hope will vindicate this underweight position.

Telecommunications (-10%) were the biggest drag on portfolios in April. TPG Telecoms decision to enter the mobile market through its $1.2b purchase of mobile spectrum caused a wider sell-off in the telecoms space with pundits unsure what to make of the high price it paid and the increased competition this will bring to the mobile market.

Bonds rallied on account of sustained weakness in Australian domestic economic data. Australian 10 year bond yields fell from 2.69% to 2.57% as April consumer confidence numbers fell to 18 month lows.

Iron ore continued its losing streak with large stockpiles contributing to a 16% fall in April. Having lost 12% the month prior and having provided a significant boost to the domestic economy in 2016, iron ore continues to undermine it in 2017.

The AUD/USD fell 1.86% in April to 74.9c as consumer confidence numbers in the U.S climbed to 15 year highs. Combined with robust employment data and the potential for two further rate hikes this year, the US economy continues to go from strength to strength.

Portfolio Commentary & Positioning

The PRIME Australian Equity INCOME portfolio fell -0.17% in March relative to the ASX200 Accumulation Index gain of +1.03%

Transurban (TCL) added 4.54% in April and we decided to sell our remaining 2.5% holding in the stock. TCL is a fantastic business but with the stock rallying 13% since we purchased it, coupled with the 25c distribution which was worth another 2.5% we decided to book some profits with a view to buying it back at more attractive levels.

IOOF Holdings (IFL) bounced 3.4% on account of its Q3 fund flows, which showed significant growth across its advice, platforms and management divisions. IFL trades on an FY18 P/E of 16x and has a fully-franked forecast dividend of 5.7%. IFL has and continues to remain a core holding of our portfolio given its good management and the strength of its balance sheet.

Telstra (TLS) was the biggest detractor to portfolios falling -9.44% after news TPG Telecom would become the 4th mobile network in Australia. TLS trades on a fully-franked dividend yield of 7% and has a very manageable $14bn of debt on its balance sheet. With a possible capital return to shareholders as part of the NBN securitization we continue to hold TLS and added 2% to our existing position following the selloff at very attractive levels ($4.02)

Blackmores (BKL) fell -5.27% as the release of its Q3 sales showed only minor improvement on Q2. Whilst we had hoped for a little more progress on this front we note that much of last year’s excess inventory continues to be reduced at some margin expense. Positively China announced 7 new free trade zones ensuring less regulation which will provide greater opportunity for BKL. We remain comfortable for now and hope to see less margin compression as the destocking continues to unwind.

Transactions for the month

Trade               Stock

ADD                 Blackmores Limited (BKL)

ADD                  Telstra Corporation (TLS)

REDUCE            Transurban Group (TCL)

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DOWNLOAD the Prime Separately Managed Account (SMA) Report, April 2017


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