Prime Australian Equities Income SMA – December 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

A frustrating year came to a close with a suitably frustrating month. The optimism surrounding global ‘risk’ assets such as equities continued to fuel gains in the domestic share-market, in spite of a slew of evidence pointing towards a softening outlook in 2017.

Australian 3rd Quarter GDP came in with its lowest growth in 7 years, at +1.8%, but perhaps more interestingly economic data was released pointing to a significant slowdown ahead in new construction.

October Building Approval figures fell -25% year-on-year, and the weakness was felt across both apartment and new private home construction. Given the supportive role construction has played for our economy in recent years, the threat of lower activity should give cause for concern given its likely impact on employment.

In spite of it all, Australia’s share-market outperformed the US gains. Best performing sectors were the utilities and oil sectors, with an indicative bid for Duet Group (DUE) from Hong Kong’s Cheung Kong Infrastructure surprising many and reversing much of the recent underperformance by the interest-rate sensitive utility sector. Oils were up +6% and helped by the 8% rise in underlying oil prices.

Lagging the market again were telecoms and healthcare stocks, who both barely gained ground in December in spite of the broader market rise.

Both portfolio’s suffered for similar reasons during December, with the large cash weightings detracting from performance as the market rose strongly. Secondly, the overweight positions in each of Telstra (TLS) and Sonic Healthcare (SHL) also dragged on the portfolio performance. Lastly, the positions built in Blackmores (BKL) have also been detrimental to performance with that stock falling a further -10% in the month ain spite of no fresh news.

Though we feel we have been a little early in BKL, we do feel very strongly that the stock is seeing an operational turnaround and we are encouraged by the stocks good bounce in January year-to-date.

Portfolio Commentary & Positioning

The PRIME Australian Equity Income portfolio lagged the ASX200 Accumulation’s gain of +4.38%, rising +2.93% in December.

As above, the portfolio’s large cash position proved a hinderance to performance during December, and the decision to continue trimming Australia’s mortgage banks into their recent rise also proved to be premature in hindsight.

The portfolio is now moderately underweight the big-4 banks, which is significant for a portfolio aimed at generating ‘above-market’ income. We have chosen to take a larger bet in Macquarie Group (MQG) as per the previous months initiation, simply because we feel the potential for earnings upgrades there are more significant. MQG has the exposure to improving global economic activity and the potential for additional earnings under several of Trump’s foreshadowed policy changes. On the big-4 banks we feel the 20%+ rally from their lows is now making them a fuller and fairer value, and we hold a cautious tone toward Australian housing as we get further into 2017.

Inclusive of MQG, the portfolio is approximately 5% underweight banks in total.

We were pleased to see Regis Healthcare (REG) rebound +15% in the month, helped by the Federal Governments decision to water-down several of the policies it had suggested as a means to reducing aged-care costs.

As per the comments above, BKL was the significant detractor from portfolio performance, falling -10% in the month.

Though 2016 was a disappointing year for the performance of this portfolio, we can assure you we are doubling down on our efforts to recoup performance in 2017. We have belief in our process and views, and feel very strongly that 2017 and beyond can be better years and consistent with the outperformance we were able to generate in both 2014 and 2015.

Transactions for the month

Trade               Stock

SELL                Insurance Australia Group (IAG)

BUY                 Mantra Group (MTR)

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