Prime Australian Equities Income SMA – August 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.

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


Market Summary

Where June and July were dominated by macro events such as the surprise BREXIT vote, August activity tended to be closer to home as companies released full-year 2016 profit results.

Amongst the dozens of reports, the majority of portfolio names managed to deliver results that at least matched market expectations. Sonic Healthcare (SHL) and Woolworths (WOW) were arguably the best figures amongst our list of names, however this didn’t necessarily translate into sustained outperformance over the month as both share prices initially popped strongly before easing back as the month dragged on.

On the negative front, Insurance Australia Group (IAG) was perhaps the most disappointing even in spite of its announced off-market buyback. Fortunately we had anticipated this and sold IAG out of the GROWTH portfolio and we had reduced it significantly in the INCOME portfolio. Amongst the banks, Westpac (WBC) was also disappointing.

The portfolios both either exited completely (GROWTH) or substantially reduced (INCOME) their holdings in Flight Centre (FLT) after the stock squeezed 15% higher through ‘in-line’ results. We concede FLT hasn’t worked out as we had planned initially, so we chose to take advantage of the price spike to exit much of the positions this month for no loss.

Both portfolio’s added ADD Blackmores (BKL) as a core holding after the company disappointed the market with guidance for a weaker September quarter. We think the revenue softness will prove transitory and hence have begun to build positions on the confidence we have in the longer-term Chinese growth story.

In May 2016, PRIME shifted its stance on risk-assets to a CAUTIOUS ONE, and chose to reflect this view by raising cash weightings in each of its Separately Managed Accounts (SMA). We maintain this view and continue to retain substantial cash holdings in both the GROWTH and INCOME portfolios.

Portfolio Commentary & Positioning

The PRIME Australian Equity Income portfolio again outperformed its benchmark, falling only -0.50% against the benchmark -1.55% decline of the ASX200 Accumulation index.

Much like the GROWTH portfolio, Woodside (WPL) was the standout position in August, rising 8% after delivering a confident production outlook and a higher proportion of contracted future gas production.

Similarly the overweight positions in both ANZ (ANZ) and National Australia Bank (NAB) helped performance as both banks outperformed not only the market, but their peers Commonwealth Bank (CBA) and Westpac (WBC).

Woolworths (WOW) were a positive surprise, declaring that supermarket sales in the first 8 weeks of the new financial year were higher – the first time we have seen positive like-for-like sales in over a year. In addition to the constructive figures coming from supermarkets, WOW also confirmed a closure of the troublesome Masters DIY chain and the sale of its smaller Home Timber business for a sum above market expectations.

Insurance Australia Group (IAG) fell 8% after a disappointing set of figures. We had anticipated this, so had sold 75% or more of our position at $6.00 ahead of the figures. Telstra (TLS) was also a laggard, falling 9% after the group declared a re-commitment to network quality and announced a further $3bn in planned cap-ex over the coming 3 years. We remain entirely committed to our TLS position and see the stock as a bond at these levels, and offering investors a 6%+ dividend yield with near certainty for at least the next 3 or 4 years.

The only changes to the portfolio over August were the decision to SELL the majority of our Flight Centre (FLT) position, and to replace this with a new holding in Blackmores (BKL).

FLT had been a disappointing holding for several months, and we fully admit the deterioration in global travel conditions had not been part of our investment thesis. Fortunately we bought the position ‘cheaply’ so we were able to exit the holding without loss.

In adding BKL, we felt the disappointment surrounding its guidance for a weaker September quarter would likely prove short-lived and that the significantly reduced share price would offer us up the opportunity for significant gains as the market looked through what we feel is simply a short-term inventory de-stock associated with the changes to Chinese import regulations earlier in the year.

Transactions for the month

Trade Stock

REDUCE Flight Centre (FLT)

BUY Blackmores (BKL)

WATCH VIDEO: What is a Separately Managed Account (SMA)?

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

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


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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