Prime Australian Equities Income SMA – October 2016

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Prime Australian Equities Income SMA – October 2016

Portfolio Objective

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.

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Market Summary

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 fuller. 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 Income portfolio again outperformed its benchmark, falling -1.65% against the -2.15% fall of the ASX200 Accumulation index.

Once again it was the slight overweight position in banks in the INCOME portfolio that enabled us to outperform the market for the fourth consecutive month.

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.

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.

The inclusion last month of AGL Energy (AGL) to the Income portfolio has continued to boost our performance with AGL adding 0.70% in October.

On the negative side, 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.

Wesfarmers (WES) also posted a relatively disappointing result in October, declining 7% for the month following mediocre figures from their Q1 sales update. A significant weakening in food and liquor sales coupled with easing growth rates in supermarket volumes caused investors to reduce their WES positions. We continue to hold WES for the time being but do note the shift that is taking place along with the ground being made up by its closest rival.

Transactions for the month

Trade                 Stock

REDUCE           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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Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

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By | 2017-06-16T15:16:15+11:00 November 16th, 2016|Active Management Performance|0 Comments

About the Author:

As the Chief Investment Officer (CIO) for Prime Financial Group, I work closely with the national advisory team, high net worth individuals, family groups and Prime’s broader accounting network to provide considered and pro-active investment advice.