Prime SMA Performance Summary – August 2017

Portfolio Objective

To achieve capital growth with moderate tax-effective income via franked dividends through investment in listed Australian securities.

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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Portfolio Commentary & Positioning

Equity markets were largely flat in the month both here and abroad.

Reporting season dominated activity in local equity markets, and for the most part was modestly disappointing in quantum.

Disappointments across portfolio’s in August were Healthscope (HSO) who warned of flat operating profits in 2018, leading to -8-9% type downgrades, and TLS was also a disappointment with the dividend being cut significantly beyond even our initial assessment, from 30c to 22c a share. This saw a mass exodus of retail investors from the stock, and led to  a -11% fall in the shares despite the fact that operationally TLS is actually managing to hold its own on mobile sector profitability.

CBA was a major disappointment for the market, and fell -10% after front page press articles reported on an AUSTRAC money laundering investigation citing some 50,000+ potentially citable cases against the bank. CBA has now lost all of its previous premium valuation relative to the peer group, and this now makes CBA look less expensive in a relative sense, but still far from cheap in light of the peaking housing market.

On the positive front, Blakcmores (BKL) rose +30% in the month, buoyed by confirmation that its cashflows had materially recovered from last year’s inventory writedown’s. We feel vindicated in our conviction in the stock, and though it has run hard of late, we expect further gains in the coming 12mths driven by growth into China.

Mantra (MTR) was also a positive surprise announcing sound profit figures and the acquisition of boutique hotel brand Art Series for $52m.

Woolworths (WOW) had a sound  profit figure and excellent cash-flow, but saw profit taking on its figures whilst SEEK (SEK) too had excellent revenue growth, but was sold down by investors due to the groups announcement it planned on significant cost investment during 2018 which will forestall earnings growth to latter years. We continue to like both stocks and expect them to rebound sooner than later.

Whilst our Australian equity performance lagged the market in August, our International equity managed funds outperformed their benchmark and the Australian share market.

The AUD continued its rise, buoyed by increasing domestic economic optimism. Australian 10-year bond yields were significantly weaker than their global peers in August reflecting this. Aussie government 10yr yields were flat at 2.70% as against US yields that rallied from 2.30% to 2.10% in large part due to geopolitical issues relating to North Korea, which saw safe-haven buying of US treasuries.

In commodity markets, Chinese steel production reached a fresh record rising +9% annually, buoyed by lean finished inventory and continued strong domestic economic activity. This dragged iron ore +6-7% higher.

Oil was weaker falling from $50 to $47 in 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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