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 3.28% in January.
Equity markets took a while to get going this new year, falling 2% or so initially before motoring in the final weeks of the month. In much the same vein as December, Australian equities took their lead from a supportive macro-environment – the Australian dollar continued to fall (from 82c to 78c) and interest rates continued to rally (10-year government bonds fell from 2.75% to 2.47%).
The 10% fall in oil prices in the month also provided a boost to consumer finances, allowing Christmas retail sales to meet or beat initial expectations.
Employment improved in January, but consumer and business confidence remained largely flat.
The fall in the oil price has opened a real possibility for domestic interest rate cuts, and it was this feature that really drove the strong close to January in share-markets. The Bank of Canada surprised many in the market when they cut rates by 0.25% in January, and this was deemed as a harbinger for local interest rate policy by many, ourselves included.
Understandably the best performing sectors in January were interest rate sensitive – Telecoms lead the pack up 8%, Consumer Discretionary and Utility stocks also rose over 6% and Banks were up 4.5%. Energy stocks lagged, falling 6% and miners were only up 1%, however it is notable that both of these laggards were a lot worse during the month and have rallied hard in the last few weeks.
Portfolio Commentary & Positioning
The PRIME Australian Income portfolio rose 3.54% and outperformed the ASX200 Accumulation Index benchmark rise of 3.28%.
On a rolling 12 month basis to January 2015 this portfolio is up 15.68% and over 3% ahead of the ASX200 Accumulation benchmark rise of 12.45%.
The strength in local bond markets underpinned the INCOME portfolio performance this month unsurprisingly. The large position held in Telstra (TLS) was a significant tailwind, as was the market weight position in Australian banks.
Like the GROWTH portfolio, the large overweight positions in AGL Energy (AGL) and IOOF (IFL) assisted performance, with both stocks rising over 6% in the month.
The main change implemented in the portfolio in the month was to cut the position in Woodside (WPL) in half. The fall in oil prices has rendered the future dividend on WPL as being significantly lower than previous expectations, and as a result we felt the position size in WPL was inappropriately large given the portfolio’s focus on yield and steady income. We chose to reinvest these funds in raising our existing positions in each of Ausnet Services (AST), National Australia Bank (NAB), Westpac (WBC) and ANZ Bank (ANZ).
Transactions for the month
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