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.
The ASX200 Accumulation index rose by 0.4% in May, and is 8.88% higher year-to-date. The month was a tale of two halves, with the market falling 3.5% initially before recovering to post a modest gain.
Australian bond and currency markets followed a similar theme, with 10-year yields spiking from 2.65% to over 3% before closing near flat. The Australian dollar similarly spiked over 81c before finishing the month back at 76.50c.
The main catalyst for the initial weakness in bond and equity markets this month, was the RBA rate-cut announcement. Despite cutting interest rates to generational lows of 2%, the RBA seemed to signal a hiatus in the easing cycle by removing its ‘bias to ease’ from the statement accompanying the rate cut. The RBA has played a stop-start game with interest rates in 2015, and so it was perhaps no surprise that this indifference impacted asset markets once confirmed.
The RBA spent much of the remainder of May endeavouring to put ‘the cat bag in the bag’ by remarking that rates could well continue lower, but after what was a reasonably expansionary 2016 Budget pronouncement it seems we should feel quite confident that interest rates are now on hold for the better part of 2015.
The Budget itself was a relatively positive affair, and was taken encouragingly by investment markets. The big news was the decision to allow small and medium sized firms the ability to immediately write off up to $20,000 in business spending. This news saw the market rebound well, with consumer discretionary equities performing well on the announcement.
The best performing sectors of the share-market were Healthcare (+2.4%) and Miners (+2%), whilst Banks continued to ease and Consumer Staples also underperformed.
Portfolio Commentary & Positioning
The PRIME Australian Equities Growth portfolio rose 1.06% in May, and outperformed its ASX200 Accumulation benchmark by 0.66%.
Year to date the portfolio is up 12.2%, well AHEAD of the benchmark rise of 8.9%.
This is a small and encouraging step forward, after last months portfolio fall and underperformance against the benchmark. In fact it proved to be one of the more satisfying months of performance given the initial losses felt by one of the portfolio’s core holdings, RESMED (RMD), which fell 18% in a single day early in May following disappointing trial results. The satisfaction comes from seeing a solid portfolio foundation do what it is built to do, which is to ameliorate the losses of any one single portfolio holding. Although RMD finished the month down only 5%, the position did weigh on performance. Encouragingly however, the likes of AGL Energy (AGL), Carsales.com (CAR), Computershare (CPU) and IOOF (IFL) did compensate for the RMD loss and allowed the portfolio to rise not only in absolute, but relative to its benchmark as well.
There was a lot of news pertaining to individual portfolio holdings this month. In turn we had:
a) RESMED (RMD) – fell 5% on the month after Phase-III trial results for use of the companys Adapative Servo-Ventilation (ASV) therapy on patients with both central sleep apnoea and chronic heart failure not only failed to demonstrate efficacy, but in fact seemed to show greater morbidity in patients relative to placebo. These sorts of trial results clearly are not the ones you want to get, however the ASV business for RMD represents only 2-5% of total group sales. The debate that ius unresolved is as to whether these trial results will have any negative impact on sales of the companys core CPAP and APAP devices and masks. For now we remain committed to the position, but maintain a close eye on the shares given the uncertainty created.
b) AGL Energy (AGL) – conversely was an excellent performer risng 7% in May after an excellent strategy presentation from the new CEO which entailed plans for future asset sales, cost-containment and capital intensity reductions. AGL has been a surprisingly good performer for the portfolio, rising over 20% since we added the position in September 2014. The stock is slowing moving towards a fairer value, and again we remain minded by the idea of watching for the appropriate level to exit.
c) BHP (BHP) – spun out the non-core South-32 (S32) operations this month. We have chosen to HOLD onto S32 despite the positions insignificance to the wider portfolio, simply since we think a fairer value for the assets rests somewhat higher than currently.
d) National Australia Bank (NAB) – announced the dramatic, but well received decision to raise $5.5bn by way of rights issue alongside confirmation of an intended spin-off of its UK banking assets by year end 2015. The move by the new CEO to get on the front foot in terms of divesting both non-core assets and raising group equity capital to well above its peers was deemed a smart decision by the market and ourselves. We chose to subscribe to the raising at $28.50 and remain committed to NAB as our core banking sector portfolio holding.
e) IOOF (IFL) – was an excellent performer rising 4% in May, assisted by news reports the group was in the throes of selling part of its asset management business to Henderson Group. IFL has been a terrific holding for the last year, and remains so.
f) Carsales.com (CAR) – was the pick of our positions in May rising 10% with help from the Federal Government 2016 Budget (accelerated depreciation allowances useful for auto sales) and with more reports demonstrating the local automotive portal continues to take more and more share from the supposedly revamped Carsguide portal relaunched by Newscorp.
Both Crown Resorts (CWN) and Computershare (CPU) excelled in the month rising 6% and 4% respectively, however there was no material news to report on these names.
The only change effected to the portfolio in May was the decision to sell our holding in Flight Centre (FLT) after what was a pretty spectacular 30% gain in the shares since the addition of the holding in late January 2015. We used the funds in part to add to positions in CAR and CPU and to raise our cash weightings too. We still feel FLT is an excellent potential investment, but felt the gains made were perhaps too fast and too soon in light of our outlook for a still subdued consumer sector in 2015.
The portfolio currently sits with near maximum cash weightings and we believe opportunity will arise to deploy this cash appropriately through the Winter months.
Transactions for the month
SELL FLIGHT CENTRE (FLT)
ADD CARSALES.COM (CAR)
ADD COMPUTERSHARE (CPU)
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