Prime Australian Equities Income SMA – June 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.

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Market Summary

Healthcare was the standout performer in June (+6%) and continues to be the best performing sector in 2017 (+22%.) Investors turned to the perceived safety of healthcare stocks with trusted names Healthscope (+9%), Cochlear (+6%) and CSL (+6%) all well sought.

However, it was a different story for energy stocks which were punished (-7%) on account of continued weakness in oil prices.

For the fourth consecutive month, oil went lower (-5%.) Record US inventory and ongoing concerns over the relationship between Saudi Arabia and Qatar and the implications this may have on OPEC and its members saw oil fall to $46/barrel.

Iron ore turned around a 3 month losing streak climbing 9.5% to end the month at US$63/tonne. However, we maintain that excess supply and the increased use of cheap scrap steel in place of iron ore at Chinese steel mills will ensure further weakness is to come.

Australian Q1 GDP figures showed annual growth of only +1.7% – the lowest since mid 2009 and well below the RBAs target band of 2-3%.

Bond yields rallied significantly in June, taking into account the aforementioned weak economic data.

Meanwhile offshore, the US Federal Reserve raised interest rates as anticipated and perhaps more importantly announced its intention to unwind its quantitative easing (QE) strategy, commencing in Q4 17. We think this move is highly significant and will act as a headwind for markets into confidence numbers continued to slide.

Portfolio Commentary & Positioning

The PRIME Australian Equity INCOME portfolio lost -0.65% in June relative to the ASX200 Accumulation Index which increased by +0.17%

 IOOF Holdings (IFL) added 8% during the month, trading at a 2-year high for the stock. IFLs investor briefing focused on continual investment in organic growth, acquisitions and increases to productivity and efficiency. IFL has been a long term position in the portfolio and is an exceptionally well run company but on reaching $10 we felt it was prudent to book profits and reduce our position.

Platinum Asset Management (PTM) (+9%) was the replacement and newest addition to the portfolio. Having endured a sustained period of underperformance on account of fund outflows, we believe the timing was right to purchase the stock. Trading on a forward P/E 16.5x with a forecast yield of 6%, we believe PTM has a bright future. We purchased between 1-1.5% in both portfolios with a view to adding more lest the price pulls back.

We initiated a new 4% weight in Commonwealth Bank (CBA) and added 1% to ANZ given that the portfolio is maximum cash.

We also decided to reduce our position in Sonic Healthcare (SHL) (+4.5%) having made a return on investment in excess of 35%. SHL is also a well-run company but now trades on a 7 year valuation high.

The main detractors from the portfolio in June were Woodside Petroleum (WPL) and Oil Search (OSH), which fell 7% and 4% respectively. OPECs extension of its six-month production cuts the previous month in order to support the oil price were offset by record high crude inventory levels. Despite the ongoing weakness in the price of oil, we remain comfortable with both positions.

Blackmores (BKL) also underperformed in June (-6%) with the announcement of CEO, Christine Holgate’s, departure. Her success in leading BKLs business in recent years, most notably through her expansionary vision in China saw the stock sold off 4% when the announcement was made. Despite the leadership changes, we remain comfortable with nature of BKLs business and are reassured by its healthy balance sheet and the ongoing demand for its products.

Transactions for the month

Trade               Stock

ADD                 Westpac Banking Corporation (WBC)

ADD                 ANZ Banking Group (ANZ)

BUY                  Commonwealth Bank of Australia (CBA)

BUY                  Platinum Asset Management Limited (PTM)

REDUCE            Sonic Healthcare (SHL)

REDUCE            IOOF Holdings Limited (IFL)

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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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