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 ASX Accumulation Index rose 2.06% in December.
The evolving macroeconomic environment proved the major feature for equity markets in December, with the falling Australian Dollar still most prominent. During the month, the AUD fell further from 85c to 81c.
Much of the driver for the ongoing Australian dollar weakness is the diverging interest rate outlooks for both Australia and the United States. With multi-year highs in US economic growth, the Federal Reserve looks certain to raise interest rates before mid-year, whereas locally the continued slump in exports and consumer confidence means the RBA stand a very strong chance for cutting rates as soon as Q1 2015.
Australian bond yields fell further in the month, with 3 year bonds yielding less than cash (2.24%) and 10 year bond yields now at 2.8%.
Stocks most exposed to a falling Australian dollar dominated performance in December. With that in mind Healthcare was the standout sector rising 6%. QANTAS surged 25%+ on strong profit guidance, and the market’s encouragement at its leverage to falling jet fuel prices. Telecoms and Banks also did well as bond yields fell.
Materials and oils remained pressured and lagged the broader index performance.
Portfolio Commentary and Positioning
The PRIME Australian Equity Income managed portfolio matched the benchmark ASX200 Accumulation Index in December, returning a gain of 2.08% (ASX200 Accumulation Index +2.06%).
For the record, the portfolio has risen in calendar 2014 by 8.3%, far outperforming the index benchmark return of 5.58%.
The major change to the INCOME portfolio this month was our deployment of cash. We chose to add to our underweight banking sector position quite significantly, and to utilise our overweight cash position to do just that.
This move reflects our newfound optimism for Australian equity markets on a 12 month forward view.
Telstra (TLS) was a handy contributor to the portfolio, rising 5% on the month. TLS saw a new NBN deal rubber-stamped, and though comforting to see, this should not have been a major driver to performance. Simply put, with falling bond yields, TLS stands out as a large bond proxy. We continue to target $6+ for TLS before reviewing our weights.
Woodside (WPL) also performed handsomely. WPL announced the US$3.75bn acquisition of Apache Energy’s 13% stake in the giant Wheatstone LNG complex in WA, along with related stakes in producing fields and in a proposed Canadian LNG development. The deal isn’t cheap, but strategically is extremely sound.
We like the fact that WPL was able to rise 6% against the market in spite of the ongoing oil price slump. As we stated last month, WPL remains a core position in our portfolio in spite of likely near term softness in world oil markets.
Our banking exposures via National Australia Bank (NAB), Westpac (WBC) and ANZ Bank (ANZ) all modestly outperformed the index, and our decision (as above) to add to weightings in this sector proved well timed.
Lastly, Adelaide Brighton (ABC) proved a strong contributor to the portfolio, rising some 5%. Reports that major cement producers across the eastern seaboard were raising prices augers well for ABC, and the market fortunately thought similarly.
Though none of the portfolio fell materially on the month, the likes of IOOF (IFL), Wesfarmers (WES) and Woolworths (WOW) all treaded water, offering no relative performance.
Transactions for the month
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