Prime Australian Equities Growth Portfolio – Performance Report, November 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.
The ASX200 was down very modestly in November, giving up the small gains from October. On the whole however, Australian equities are showing little ability to rebound from what has been a significantly weaker 3-4 months of performance since mid-year.
BHP was the standout Australian share during November, falling a whopping 21% in the month after news of the SAMARCO dam collapse in Brazil emerged. Concerns relating to compensation and reparation costs cast a pall over the stock, but perhaps even more significantly there was significant conjecture surrounding BHP’s ‘progressive’ dividend policy and the boardroom commitment (or lack thereof) to it.
The reality seems pretty clear to me – the dividend will be cut. The earnings don’t back it up, and anyone who can’t see that needs glasses. However, we think much of this pessimism is now priced into the share.
SANTOS (STO) announced a major capital raising, wrong-footing investors with a request for $2.5bn of fresh funds only weeks after its out-of-hand rejection of a $6.88 cash bid. This was a major volte-face and undeniably a costly decision for STO shareholders.
Within the broader market, small and mid-cap stocks continued their strong performance. Investors seem entirely full of the large-cap Australian stocks, and far more willing to diversify into shares outside the top-10 and to international managed funds.
The RBA again held fire on interest rates, though did concede that the inflation situation was such that it wouldn’t prohibit the RBA from further easing rates should the situation require it. That being said, the RBA Governor Glenn Stevens did remark late in the month that he felt inclined to leave rates as they were, preferring to see how retail sales locally over Christmas perform and how markets take the likely interest rate rise from the US Federal Reserve in mid-December.
In local economic news, October employment figures were particularly strong. The Australian dollar floated higher during the month to 72c+ and Australian 10-year government bond yields also pushed higher on the stronger economic data, closing up 0.20% at 2.85%.
Internationally, the horror of the Paris terror attacks did little to affect markets in truth. That said, weakness in the Euro was a feature of global currency markets. The Chinese Yuan was also notably softer, raising again concerns insofar as the export of deflation from China to western economies
Portfolio Commentary & Positioning
The PRIME Australian Equities Growth portfolio recovered to rise +1.21% in November, outperforming the ASX200 Accumulation’s fall of -0.68%.
2015 calendar year-to-date the portfolio is +5.51%, and well ahead of the modest -0.14% fall in the ASX200 Accumulation index.
The GROWTH portfolio performed well in November, with many names contributing.
BHP (BHP) was absolutely the one black mark for the portfolio, falling over 20% after news of the SAMARCO tailings dam disaster hit the market. The BHP dividend was also significantly in focus over the company’s AGM and as a topic, occupied a lot of column inches for financial journalists.
On the positive front, we have been heavily underweight resources for the last 3 years, with a modest underweight in BHP our only position. However, we did choose to raise the weighting modestly as BHP traded under $20, on the belief much of the pessimism stemming from the issues raised above, had been priced in. At this early stage we look wrong, as the stock has fallen a further 10%. However we stand by our view, and are keen to point out that the position taken is only very moderately above its market weight – a hardly aggressive move.
More structurally, we chose to add Woolworths (WOW) to the portfolio after many months of underperformance. Following the significant price and service investment announced a month or two ago, the market estimates for future earnings have become far more realistic, and we think the potential is there for WOW to restore itself in the eyes of investors.
We added to our bank holdings during the month too, and are now broadly at a market-weight for the sector – the first time in many years on my recollection. The simple move here was in relation to the broad-based value that had begun to emanate from the sector following recent selling.
We funded the purchases above by way of running cash down, and by also taking some modest profits in core holdings such as RESMED (RMD) and IOOF (IFL) after their excellent performance.
The core portfolio performance in November was driven by outperformance from our holdings in Computershare (CPU), Carsales.com (CAR), Oil Search (OSH) and RESMED (RMD).
Transactions for the month
BUY WOOLWORTHS (WOW)
ADD BHP (BHP)
ADD ANZ BANK (ANZ)
ADD NATIONAL AUSTRALIA BANK (NAB)
ADD WESTPAC BANK (WBC)
REDUCE IOOF (IFL)
REDUCE RESMED (RMD)
Download the Prime MPS Performance Report, November 2015
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