Prime Australian Equities Growth SMA – October 2016
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.
DOWNLOAD the Prime Separately Managed Account (SMA) Report, October 2016
October was a frustrating month. The ASX200 index continued its recent run of volatility and was ultimately impacted by the looming US Presidential election and the selloff in the bond market. As was the case in the previous month, global bond yields continued to bounce higher with 10 year government bond yields moving from 1.90% at the end of the previous month to 2.34% at the end of October.
Given the ever increasing focus on “income” in the Australian equity market, the selloff in bonds naturally impacted sectors that trade primarily on account of interest rate movements. Property and Infrastructure both underperformed the market, with property stocks closing the month down -7.80%.
The worst performing sector in October was healthcare which came under pressure for the third straight month and fell -8.26%. The government’s increased focus on affordability continues to plague the sector, with proposed cuts to certain “unnecessary” medical procedures likely to reduce the amounts to which health insurers can claim.
With oil having well and truly traded through the $50 barrier midway through October before eventually retreating, energy stocks were given an initial boost. However, the frustrating month that it was saw the oil price retreat in the second half of October to round out the month at $46 per barrel, which was a 2.70% decline. This impacted our portfolios ability to generate some outperformance in the energy space. With Oil Search (OSH) having traded above $7.70 at one point, the second half of the month saw it come under renewed selling pressure and it ultimately fell 6%. Whilst we still feel exceptionally comfortable with our OSH position we now wait for the next OPEC meeting at the end of November with keen interest to see whether a plan to cap production is accepted by all parties.
Miners were once again strong gaining 1.27% for the month, outperforming the broader market by 3.42%. The iron ore price continued its resurgence adding more than 14% in October and finishing the month at its highest level in six months. Whilst holdings in our portfolios are no longer disposed to the iron ore price the way they once were, we remain sceptical on Chinese demand for steel going forward. So despite missing out on its short term outperformance, we are content to be on the sidelines for the time being.
We have been advocating a “cautious” tone to investments in recent months, as evidenced by the more than 10% cash weights we have held in both portfolios. We have for some time held the view that market valuations were exceedingly becoming full
er. The derating of several of these mid cap or ‘market darling’ stocks vindicated this view. Whilst we continue to remain cautious going forward, we are beginning to see opportunities emerge that we think will enable us to make positive changes to the portfolios.
Portfolio Commentary & Positioning
The PRIME Australian Equity GROWTH portfolio lagged the index during October, falling -2.82% compared to the ASX200 Accumulation Index which fell 2.15%.
The biggest drag on portfolio performance for the month was our position in Crown Resorts Limited (CWN.) The detainment of 18 Crown employees in China who are still waiting to be formally charged led to a significant decline in the CWN share price. The arrests of CWNs China staff, who source high net worth VIPs and encourage them to visit Australia created a market fear that caused CWNs share price to tumble 16% in October. Concerns over CWNs ability to generate revenues from VIP activities in China going forward were raised on top of the uncertainty of how CWNs employees are going to be treated. Whilst this is a disappointing result for shareholders we continue to hold CWN noting its increasing momentum prior to this bad news and Packer’s intention to demerge the international assets from CWNs domestic assets next year to extract greater value for shareholders.
Aged care operator Regis Healthcare (REG) was the other disappointing performer. Cuts to government spending in the long-term continues to impact REGs share price performance as investors look to exit the healthcare sector while the dust settles from the proposed government changes. Reductions to amounts that healthcare operators are going to be allowed to claim back going forward will continue to hurt revenues in the medium term. We view REGs 9% decline as another disappointing result but continue to hold REG for the time being.
We also chose to reduce our position in OSH at around $7.40 and feel vindicated with this decision given the stock is now approximately 12% lower. We are still very comfortable with OSH going forward.
On the positive side the banks outperformed the index and helped ensure the damage caused by a down market was limited in our portfolio. Westpac Banking Corporation (WBC) was the best performer in our portfolio rising more than 3% during October. Our other bank holdings ANZ Bank (ANZ) and National Australia Bank (NAB) were also up 0.80% and 0.5% respectively. We took the opportunity to reduce a portion of our ANZ weighting at around $28 recognising it was trading at 12 months highs.
Resorts and hotel operator Mantra (MTR) was able to build on its recent momentum posting a 2.50% gain for the month. As one of those “mid cap market darling” stocks MTR seems to get picked on when the market is in a punishing mood and rewarded when the market is feeling friendly, so it was particularly nice for us to see such outperformance from MTR. Once again, there was no pertinent information to explain MTRs outperformance, rather a rebound from some previously harsh overselling.
One of our highest conviction positions in the portfolio is Woolworths Limited (WOW) which outperformed the market and added 1.63%. WOWs release of its Q1 sales figures in the backend of October saw the stock shoot up through $25 as WOW continued to win back market share from Coles. Sales were up 1% and the number of customer transactions increased 0.7%. Despite a quick selloff in WOW shares during the last 2 days limiting the extent of its outperformance, we could not be more confident in the WOW turnaround story.
Transactions for the month
REDUCE Oil Search (OSH)
SELL Insurance Australia Group (IAG)
REDUCE ANZ Bank (ANZ)
BUY Transurban Group (TCL)
ADD Blackmores Limited (BKL)
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DOWNLOAD the Prime Separately Managed Account (SMA) Report, October 2016
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