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.
Portfolio Commentary & Positioning
An unexpected breakdown in US/China trade talks saw global equity markets suffer their worst month this calendar year. Investors dumped equities in favour of safe haven assets such as government bonds and raised cash. The MSCI World Index fell -4.27% in AUD.
Global bonds rallied with US 10-year Treasury yielding 2.13% whilst Australian 10-year government bonds tightened 33bps yielding an all-time low of 1.45%.
US (-6.5%) and Chinese (-5.8%) equity markets drove global share markets lower. China’s reported backpedalling on trade terms was met with the Trump Administration’s decision to increase tariffs on US$200b of Chinese imports from 10% to 25%. An Executive Order restricting US companies from transacting with Chinese telco Hauwei further escalated tensions.
The Australian equity market outperformed with the ASX200 Accumulation Index adding 1.71% in May.
A Federal Election result that few saw coming boosted returns locally. Having raised cash prior to the Election we are now more optimistic on the strength of the local economy for next year. We are revisiting our longer-term thesis here and considering greater exposure to domestic Australian cyclical businesses that we think will benefit from a local recovery. BLD is a recent recommendation we like even more now.
Large caps performed strongly with the banks rallying heavily following Labor’s proposed abolition of the Liberal Government’s negative gearing and franking credit policies.
Elsewhere, insurers Medibank (MPL) and NIB (NHF) bounced 15-20% as a future cap on premium increases under a Labor Government was avoided.
Oil prices fell sharply with escalations in the trade war and smaller than expected declines in US crude inventories leading to an oversupply. Brent and WTI fell 15% to $61 and $53/barrel respectively.
Iron ore rallied 10%. China’s iron ore imports continue to climb with steel output rising to record levels. Supply side issues in Brazil and Australia also contributed to iron ore trading $105/tonne.
Contributors to performance in May were Boral (BLD) +12% and Telstra (TLS) +8%. BLD rode the tailwind of a Coalition victory with sentiment on the construction sector improving. TLS benefitted strongly from the news that the TPG and Vodafone merger had been blocked by the ACCC.
Detractors were BWX (BWX) -23% and Pendal (PDL) -20%. BWX announced a further earnings downgrade and a new incoming CEO. We are hopeful the restructure and rebasing of earnings expectations can finally translate into improved performance. PDLs 1H results were weak with cash earnings and performance fees falling significantly. PDL pays a 7% dividend and trades at a significant discount to its peers and we believe performance will turn around.
We were active across the SMAs in May. The Growth SMA reduced its position size in APT and exited SEK. We also purchased VAS following the results of the Federal Election. The Diversified Income SMA added BLD to the portfolio and the Defensive SMA reduced some of its MXT exposure to take advantage of the discount on offer in the rights issue. The international SMA went unchanged. On a risk profile performance basis our 5-year numbers continue to perform well against their respective benchmarks.
RISK PROFILE PERFORMANCE FIGURES
As at 31 May 2019
SMA—MODEL PORTFOLIO PERFORMANCE FIGURES
As at 31 May 2019
What is a Separately Managed Account (SMA)?
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