Prime Australian Equities Income SMA – November 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, November 2016


Market Summary

November was always likely to be a volatile month. With the US Presidential election occurring in the second week of the month, investors were cautious of a Donald Trump win and the impact this would have on global markets. Surprisingly, the market fear associated with a Trump victory proved to be underserved with global markets rallying significantly in the wake of Trump’s win.

Equity markets were boosted by Trump’s pledge to reinvigorate America through increased infrastructure spending, tighter immigration laws and the reassessment of America’s Free Trade Agreements.

U.S banks rallied hard on the prospect for steeper yield curves and lighter regulation. Australian banks followed suit and rose over +4% on the month.

Energy stocks were the second best performing sector (+3.67%.) Much of this performance came late in the month when OPEC surprised investors by agreeing to a 1.2mbpd production cut aimed at curbing record levels of inventory. Oil rallied 15% intra-month, but was largely unchanged over the period.

Safe-haven sectors such as healthcare and telecommunications were the worst performers. Healthcare was the worst performing sector in November (-1.47%) whilst telecommunications gave up -0.32%.

Bond markets saw significant selling. Australian 10 year bond yields rose from 2.35% to 2.70% on the month.

The US dollar also strengthened as the Protectionist policies of Trump received support from investors. The Australian Dollar fell from 76c to under 75c at month end.

Portfolio Commentary & Positioning

The PRIME Australian Equity Income portfolio again outperformed its benchmark, rising 3.30% against the 2.99% gain of the ASX200 Accumulation index.

AGL Energy (AGL) was the portfolio’s best performer in November adding 9.38%. Continued strength in domestic electricity prices has worked in AGL’s favour. Having risen 20% since the portfolio added AGL in September, we took the opportunity to take some profits in the stock at $20 whilst still retaining the bulk of our position.

Fund manager IOOF (IFL) was a strong contributor to the portfolio’s performance during November gaining 6.71%. Speculation that domestic funds group Perpetual might seek to merge with IFL helped its share price, and whilst a long-shot, we do feel IFL is cheap and well positioned to benefit from likely consolidation in domestic wealth management.

Sonic Healthcare (SHL) added 6.39% and benefited from earnings accretion associated with two small pathology acquisitions in Germany. SHL is a favourite of ours and we expect further upside in 2017.

Blackmores (BKL) rose 5.95% recouping losses seen in the previous month. Strong sales from China’s Singles Day retail phenomenon encouraged investors, and we feel strongly that BKL is turning the corner operationally.

On the negative front, Woolworths (WOW) was the sole position to fall during November losing -3.21%. Recent Q1 figures demonstrate the WOW transformation is well underway, and we remain confident of improved share price performance as momentum in the groups core food sales increases.

Finally, we decided to trim our portfolio exposure to domestic banks and establish a new holding in Macquarie Bank (MQG). Domestic mortgage banks are faced with rising funding costs and a peaking housing market, where MQG should be a major beneficiary of Trump policies supportive of both infrastructure and banking sectors. We believe MQG will outperform local mortgage banks by 20% in the coming 1-2 years.

Transactions for the month

Trade               Stock

REDUCE        Westpac Banking Corporation (WBC)

REDUCE         National Australia Bank Limited (NAB)

REDUCE         Australia and New Zealand Banking Group (ANZ)

REDUCE         AGL Energy Limited (AGL)

BUY                  Macquarie Group Limited (MQG)

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