Prime Australian Equities Growth Portfolio – December 2015
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 MPS Performance Report, December 2015
December market performance was very much a tale of two halves, with initial trading soft before a nearly 9% index rally in the final fortnight to close the month up 2.7%.
The month was dominated by news of foreign macro events, notably the decision by the US Federal Reserve to raise interest rates for the first time in 9 years. In addition to this, markets paid significant attention to the ongoing weakening in China’s currency – the Renminbi fell 3% in December and is now at its weakest level to the US dollar in 5 years. The concern with China’s currency weakness is the fear that China becomes more competitive in global export terms, and effectively crowds out volume and pricing power in economies and markets in which it competes. This is where the concept of China ‘exporting deflation’ comes from.
In local economic news, the mood was reasonably upbeat. Consumer and business confidence remained fine, quarterly GDP for September came in a shade above expectations at 2.5%, and most notably the November employment report delivered a whopping 71,400 new jobs – the highest monthly growth in over 5 years. The improving economic tone here locally saw the RBA remark that it could see the prospect of firming conditions ahead.
In stock news, the biggest December headline came with the decision by Woodside (WPL) to withdraw its interest in acquiring Oil Search (OSH). The move saw the OSH share price lose 20% in 2-days, and caused a significant dent in the performance of PRIME’s Australian Equity Growth portfolio.
Crown Resorts (CWN) saw a reasonable bounce as press reports emerged to suggest its major shareholder, Consolidated Press, were looking to take the casino business private. Fuelling this rumour was confirmation during the month that James Packer would step down from the CWN board, and flies hot on the heels of his decision to acquire a further 3% of CWN a month prior (taking his holding to 53%).
Retail shares performed solidly as reports of Christmas consumer spending came through with a positive tone – Consumer Staples (namely Wesfarmers) and Consumer Discretionary were the two best performing sectors in December.
Portfolio Commentary & Positioning
The PRIME Australian Equities Growth portfolio underperformed the benchmark to rise +0.83% in December, lagging the ASX200 Accumulation’s 2.73% jump. It was a disappointing end to a solid year, and brought about almost entirely by Woodside’s (WPL) decision to withdraw its proposed bid for Oil Search (OSH).
For the second year running the portfolio significantly bettered its benchmark. The portfolio rose 6.89% in 2015, well ahead of the 2.56% rise in the ASX200 Accumulation index.
The GROWTH portfolio gave back all of its excellent November outperformance in large part due to the news of Woodside’s (WPL) withdrawn bid for Oil Search (OSH). OSH fell 18% in the month, and contributed 80% of the portfolio’s underperformance. On a mildly positive note, we were fortunate to trim a quarter of our OSH position earlier in the month to make room for our new position in Flight Centre (FLT).
We retain our positive view for OSH, and will look for opportunities in 2016 to add to this position.
The major change in the portfolio this month was the decision to take profits in Carsales.com (CAR) and to channel part of the funds here into Flight Centre (FLT). Like many of the larger Australian mid-cap names, CAR has seen excellent performance in recent months culminating in a 14% jump during December. Having outperformed the market by over 35% since we initiated the position, we felt it appropriate to book profits given the move up to a rather full 25x P/E valuation.
In the case of FLT, it is a familiar name, and one that has been successful for the portfolio already in 2015. We chose to re-build a position here on the basis that the company again looked very cheap relative to history and relative to the market. The company has an excellent balance sheet, strong management, and an offshore growth strategy that we feel will compensate for competitive pressures in its local Australian business. Fortunately, FLT had a good month and rose 8% after our position was struck.
Crown Resorts (CWN) repaid some of our faith in December, jumping over 7% on reports of an imminent bid by Consolidated Press for minorities. We feel there is strong potential this could occur, and are hopeful of a bid to privatise the company somewhere in the $14-15 region.
Banks and Telstra (TLS) were largely in-line with the index, but our defensive bets in each of Computershare (CPU), RESMED (RMD), Insurance Australia (IAG) and IOOF (IFL) all lagged the index performance.
Transactions for the month
BUY FLIGHT CENTRE (FLT)
SELL CARSALES.COM (CAR)
REDUCE OIL SEARCH (OSH)
WATCH VIDEO: What is a Separately Managed Account (SMA)?
DOWNLOAD the Prime MPS Performance Report, December 2015
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