Prime Australian Equities Income SMA – July 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

July seemed to continue from where June left off, with investors scrambling to gain exposure to the market in the after-market of the post-BREXIT pessimism. The ASX200 is up 10% from its BREXIT lows.

A near hung parliament did little to temper the enthusiasm for shares, nor did the continued rise in Australia’s currency. Much of the optimism locally was born out of strong international share-markets, and a renewed confidence in both the US economic improvement and in ongoing central bank support.

Consumer stocks were the standout performers in July, driven by a strong jump in media and discretionary retail names and a +12% rise in Woolworths (WOW) after it gave 2016 profit guidance and plans for a rationalisation of underperforming stores.

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 Equities Income portfolio bounced back well in July, matching the ASX200 Accumulation index gain of +6.28%.

Much like the GROWTH portfolio, we were impressed with the performance of the INCOME portfolio in spite of its significantly overweight cash position. In a market of strong gains, its near maximum cash weight certainly held back the potential for even greater gains.

The performance marks a welcome improvement after an indifferent period year-to-date, and we are hopeful that in a fully-valued market, our conservatism and value bias will prove fruitful to relative performance in the months ahead.

In such a strong month of returns, it is unsurprising that the portfolio had many strong contributors. IOOF (IFL) and Woolworths (WOW) led the gainers for us, rising 15% and 12% respectively. IFL published sound fund figures to the end of June, which helped, however the strength in IFL is as much down to its leverage to a rising share-market as anything else.

As we noted above, Woolworths (WOW) finally started to show some life. The company posted a market update in which it confirmed 2016 profit guidance, whilst also announcing significant plans for asset rationalisation and a slowing in the previously aggressive supermarket roll out plans. We have high hopes for continued strength in the coming months as the group look likely to unveil additional asset sales (liquor and service stations) and ought provide further evidence of improving momentum within the core food business.

Insurance Australia Group (IAG) and Regis Healthcare (REG) were also standout performers during July. IAG in particular we see as being increasingly fully valued at $6.00, so we have begun reducing exposures ahead of full year profit results.

Banks were marginally behind the index during July, and Telstra (TLS) too lagged the index gain. The small position in Flight Centre (FLT) continued to lag the market, however as we remarked last month, we feel pretty confident in the underlying value of the stock and so are holding on for better levels to exit.

Oil stocks were again laggards, and the Woodside (WPL) position was the only share to fall in absolute value during July. All the same, we again fell confident in a recovering oil price and in the delivery of better levels at which to sell this position.

Like the GROWTH portfolio, the INCOME portfolio retains a high cash holding given concerns we feel towards the risk/return outlook for both local and global shares.

Transactions for the month

Trade Stock

REDUCE                Woolworths (WOW)

REDUCE                IOOF (IFL)

REDUCE                Insurance Australia Group (IAG)

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DOWNLOAD the Prime Separately Managed Account (SMA) Report, July 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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