Prime Australian Equities Income SMA – March 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

The market rebounded strongly in March, recovering Februarys losses and some of January’s too. However it was very much a tale of two halves, with the early strength subsiding in the final fortnight.

Equity markets had strong reassurance from all corners of the world this month with evidence emerging the US Federal Reserve will prove to be decidedly less aggressive in their rate hiking plans, the European Central Bank unveiling a further reduction in official interest rates and an expansive financing package for the banking system, and lastly in China there seems more confidence that the expedition of infrastructure projects is having a positive impact on the economy.

The main impact outlet for this improved global outlook was seen in the Australian Dollar, which leaped nearly 5c to 76c. The rise in the Australian Dollar shouldn’t necessarily have been a surprise in light of the Fed’s dovish interest-rate outlook and the improving levels of Chinese industrial activity, but the move certainly opens up the renewed prospect of the RBA moving to cut domestic interest rates in order to weaken the currency.

Amongst stocks and sectors, the biggest risers came amongst the banks (+5.6%), miners (+5.5%) and oil (+5.3%) groups. Healthcare (-0.5%) and telecoms (+1.9%) were the laggards. The rising AUD had a large impact on the performance of the major sectors, with healthcare notably weak given the substantial offshore earnings composition of groups such as CSL (CSL), Sonic Healthcare (SHL) and Ramsay Healthcare (RHC).

Notably the bank sector bounce came in spite of the negative announcement from ANZ Bank (ANZ) that its first half credit expense would be $100m or more higher than the initial estimate it gave as recently as a month earlier in its February trading statement. ANZ still managed to close the month 5% higher in spite of the heavy selling post this news.

Amongst the miners, there was a substantial spike in iron ore prices early in March which helped boost the likes of BHP, Rio Tinto (RIO) and Fortescue (FMG) – iron ore initially jumped 25% in the early part of the month, before subsiding to be up 10% for the month, and significantly 20% for the year-to-date.

Portfolio Commentary & Positioning

The PRIME Australian Equities Income portfolio performed admirably in March rising in line with the ASX200 Accumulation index benchmark, in spite of its significant cash weighting. The portfolio rose +4.76% against the index rise of +4.73%.

We were impressed with the gains made in March since the portfolio retains a near maximum cash weighting at present, and also retains a substantial ownership of Telstra (TLS) and Woolworths (WOW), both of which underperformed the market during the month.

The rise in the bank sector helped the portfolio’s modest overweight position, however it was the substantial positions held in both Insurance Australia Group (IAG) and IOOF (IFL) that helped underpin the monthly performance.

Currently the portfolio is as narrow and concentrated as we have seen it, and we are looking to redress this in the weeks and months ahead. The difficulty this portfolio faces as an ‘income’ focussed portfolio is that the subset from which it draws its investment ideas is inherently concentrated in the large-cap, blue-chip Australian shares, many of which are already over-owned by the market and indeed the portfolio.

For now the portfolio remains nearly maximum weight in cash.

Transactions for the month

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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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