Prime Australian Equities Income SMA – May 2016

Prime Australian Equities Income SMA – May 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.

DOWNLOAD the Prime Separately Managed Account (SMA) Report, May 2016


Market Summary

May was a notably busy month. On the macroeconomic front we had the release of wage and inflation data for the first quarter of 2016 that showed both measures to be at near 20-year lows. These figures, alongside the rebounding Australian Dollar in 2016 proved to validate the RBA’s decision to lower interest rates to a record low of 1.75% early in the month.

We had confirmation of an election, and also the release of significant policy change to retirement rules at the 2017 Federal Budget.

The best performing sector by a street was Healthcare, which rose over 9%, aided and abetted by the 5c fall in the local currency during May. Our key portfolio bet, Sonic Healthcare (SHL) rose strongly after the government confirmed it would delay the cut to bulk billing incentives on pathology services.

Miners were the worst, falling 3% as Chinese iron ore prices fell 20% during the month. Surprisingly though, in spite of the significant Australian Dollar fall, and a 15% rise in oil prices, Australian energy stocks were the second worst sector, falling 2% in May.

Three of the four major Australian banks reported first half profit figures, and though none were particularly pretty, the expectation for moderately worsening credit quality, net interest margin and fee pressure, were no worse than analyst forecasts. ANZ did choose to cut its dividend payment to 80c (with the promise of at least another 80c in the second half), which was a disappointment to some, but seemingly inevitable given rising capital needs and the run-down of profitable assets in its Asian operations.

Notably as a firm, PRIME shifted its stance on global equity assets to a CAUTIOUS one. Australian shares are now trading at over 16x forward earnings, which is a 15-year high. We feel the reward offered for equity investors at these levels on the ASX200 particularly is diminished, and with our concerns around both Chinese economic conditions and domestic Australian corporate earnings momentum, we have chosen to advocate for raised cash levels.

Portfolio Commentary & Positioning

The PRIME Australian Equities Income portfolio again struggled to match the index in May. The portfolio rose +0.31%, underperforming the ASX200 benchmark rise of +3.09%.

Like April, performance for the month was below the index. Once again, the heavy reliance on Australian top-20 stocks proved to be a drag, with the ASX Top 20 rising only +1.6% in the month, well below the +5.6% gain made by the ASX Mid Cap 50.

Being heavily yield focussed, we have noted that this strategy would struggle to perform in times where yield was less a priority for investors, or in fact when small & mid-cap shares do well. We have had that occur in recent months undoubtedly.

However this is not the sole reason for the underperformance, since the portfolio also suffered the ignominy of holding both Flight Centre (FLT) and IOOF (IFL), both of which lowered analyst profit expectations during the month.

Flight Centre (FLT) guided 2016 profit to be some 8-10% below analyst forecasts. Concerns on the stock had been evident since April when QANTAS warned of a softening level of consumer activity and significant domestic airfare price deflation. In that time the stock has fallen a substantial 30%.

We are annoyed that FLT itself only narrowly missed our target price to take profit, but now that it has fallen so far, we now believe the share to look extremely cheap and worth holding onto.

IOOF (IFL) was another frustration during the month, with the company admitting that with lower investment market levels, fee income generated would be lower than anticipated. The downgrade was a modest 3-4%, but the share price fell 8% in the month, and again, we feel offers excellent value for the income-focussed investor.

On top of these warnings, Wesfarmers (WES) also announced plans to write off over $2bn in the carrying value of its Australian coal assets and Target discount retail chain. The write-downs are non-cash, but still caused the market to be disappointed, and WES ultimately fell over 5% in the month.

In accordance with PRIME’s increased caution towards equity markets, the portfolio notably raised cash weights to near maximum levels.

Transactions for the month

Trade Stock
ADD Regis Healthcare (REG)
REDUCE Insurance Australia Group (IAG)
REDUCE National Australia Bank (NAB)
REDUCE Sonic Healthcare (SHL)
REDUCE Flight Centre (FLT)

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