Prime Australian Equities Income SMA – September 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, September 2016


Market Summary

September was a volatile month. The ASX200 index fell over 5% initially before recovering to close the period marginally higher.

Much of the initial weakness was driven by the spike higher in global bond yields, with Australian equity markets underperforming due to their heavy yield focus. Australian 10-year government bond yields moved from 1.8% to as high 2.15% and this had a significant initial impact on interest-rate sensitive sectors such as property and infrastructure. However the spike higher proved temporary, particularly after the US Federal Reserve offered a suitably dovish outlook for US interest rate rises, and Australian bond yields ended the month little changed.

Property stocks actually closed the month up +2.8%.

Another major macro factor during the quarter proved to be OPEC’s surprise decision to announce a production cap amongst its member countries. Though compliance to past caps has been middling at best, the market took heart from the renewed commitment to oil price stability from the Saudi’s and oil prices closed the month over 12% higher.

Interestingly, and rather frustratingly, the spike to 3-month highs in oil failed to translate in outperformance from much of the Australian energy sector. The sector itself closed flat on the month, with Woodside Petroleum (WPL) similarly unchanged, albeit following strong gains in August. Fortunately for us, Oil Search (OSH) rose 6% in the month, and rewarded our decision to add to positions in the GROWTH portfolio at $6.60.

Miners continued their outperformance rising almost 5% and taking their year-to-date market outperformance to +23%. There seemed little fresh reason to provoke the continued buying of miners, particularly since Chinese steel prices continued to decline and closed September over 10% from their peak. We feel it is only a matter of time before the significant underweight both portfolios hold in mining begins to pay off.

We remain cautiously disposed to Australian share-markets, in large part due to the combination of full valuations (15 year high on market P/E valuations) and an increasingly clouded forward economic outlook. As a result, both portfolios retain significant CASH holdings as they have done for several months now.  On a positive note, recent market moves have opened up an increasing number of opportunities for us to adjust the portfolio in the coming months we think.

Portfolio Commentary & Positioning

The PRIME Australian Equity Income portfolio again outperformed its benchmark, rising +0.53% against the +0.48% gain of the ASX200 Accumulation index.

Where earlier in the year the portfolio’s modest overweight in Australian banks had proven a cause for consternation, this month it again proved a helpful to outperformance.

ANZ Bank (ANZ) continued its strong performance and rose +3% , whilst National Australia Bank (NAB) too outperformed and rose +2%. ANZ has now outperformed both Commonwealth Bank (CBA) and Westpac (WBC) by over 20% in the past 6-9 months respectively and is beginning to look quite full relative to the market and its peer group, so we are contemplating our positions here.

The portfolio also benefited from the decision to ADD AGL Energy (AGL) as a position, substituting it for the sale of the remaining stake in Flight Centre (FLT). The switch proved a well-timed one with FLT sold north of $37 and AGL acquired in the mid-$16 range. AGL closed the month +3% but +14% higher on our entry level.

Wesfarmers (WES) proved a strong performer during September, rising 4% and benefiting from the continued improvement in underlying coal prices. The bounce is a fortuitous one and might well prove the opportunity to take profits in a name we have felt has begun to look quite expensive in recent times.

On the negative side of the ledger, our holdings in mid-cap names such as Blackmores (BKL) and Regis Healthcare (REG) and QUBE Holdings (QUB) both struggled during the month.

BKL fell 6% as sellers continued to exit the stock after the previous months disappointing September quarter profit guidance. Our position here is a modest one and we feel we have plenty of firepower to add to it should the stock continue lower.

REG was perhaps the biggest disappointment however, as it fell over -20% intra-month before recovering to close down -5%. REG was hit hard after the government’s surprise decision to remove the aged-care industries ability to recoup costs born on capital works undertaken on retirement properties. Much of the industry, including REG, had banked on using these charges to offset lost income elsewhere so this was a genuine knock to ours and the markets expectations. All that being said, we still feel confident in REG’s ability to offset increased government regulation and feel comfortable with our current holding.

Transactions for the month

Trade               Stock

SELL                Flight Centre (FLT)

BUY                  AGL Energy (AGL)

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


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