Prime Australian Equities Income SMA – June 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

June was a volatile month with the BREXIT decision dominating. The ASX200 fell 5% in the days post the decision, but like its global peers, set about a steady and quick rebound with help from the ongoing collapse in global bond yields.

The major global theme during June must surely have been the fall in bond yields. Australian 10-year bond yields compressed from 2.3% to under 2% by months end – a new record low.

The fall in bond yields allowed Australian utilities to outperform the market, and the portfolio’s large overweight in Telstra (TLS) bore fruit. However, in spite of the over-riding fears for global economic growth that dominated bond markets, miners yet again outperformed the broader index, helped by the continued rise in Chinese steel prices.

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 again struggled during June, falling -3.16% against the ASX200 Accumulation benchmark fall of -2.45%.

As we have highlighted on several occasions, this particular portfolio’s bias towards high-quality, high-dividend paying shares sees it significantly weighted towards the ASX20 Leaders index, with substantial holdings in banks, Telstra (TLS) and the supermarket groups. Regrettably, Australian ‘blue-chips’ have been notable underperformers during 2016, and this has made it particularly difficult for the portfolio to perform in line with the wider ASX200 Accumulation benchmark.

During June, the Australian Banks underperformed the index, but so too did diversified financial groups such as IOOF Holdings (IFL) and Insurance Australia Group (IAG).

Falling interest rates are unhelpful for the Australian bank sector, and compound the pressures from increased regulation and a peaking Australian housing market. Falling interest rates also hurt insurers, and we think this is one of the reasons why IAG struggled. IAG has been a particularly strong performer for the portfolio since it was added, but we are minded to take some profits in this position given our core expectation for further cuts to domestic interest rates.

Woolworths (WOW) was also a major laggard during June, falling just under 6%. The stock remains friendless, but we think offers excellent value in an expensive market, particularly when you consider the near term potential for value accretion from asset sales and a renewed operational focus on driving customer traffic within its core supermarket franchise. We continue to stick with this bet, and feel it is on the cusp of some solid performance.

Regis Healthcare (REG) took a wobble during the month, falling almost 15% after a broker warned that new government funding initiatives would see revenue pressures crimp future earnings growth. Fortunately the selling was short-lived, and the stock closed down less than 5% on the month. We feel very strongly that REG can continue to grow earnings and its asset base in spite of the more austere Federal Government funding terms announced with the budget.

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

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