September, 2023
The Fund returned -2.1% for the month of Sept, outperformed its benchmark. The Sept Quarter return was 1.7%, ahead of its benchmark. Cash of 1.9 cents per unit plus franking was distributed for the Quarter, yielding 1.4% including franking. Main contributors for the month of were Seven group (SVW +11.4%), Santos (STO +6.3%) and ANZ (+1.3%). Detractors were Macquarie group (MQG -5.5%), Goodman group (GMG -8.2%) and Waypoint REIT (-10.0%). It was a month where equity market rose and ebbed as it reacted to movement in bond yield. REITs were among the worst performers as “higher for longer” sentiment gained momentum.
Seven Group has largely remained under the radar, partly due to the relatively low liquidity of the stock. It’s the quirk of indices that companies such as Seven are deemed as a small cap company mainly because of its low free float despite its large market capitalisation. For us, being benchmark agnostic, it meant an opportunity to invest in an undervalued company that has been significantly re-rated up since our initial investment. Seven consists of Caterpillar supplier WesTrac and equipment hire business Coates. Recent results point to both business doing well – margins are improving which indicates a strong ability to price well into markets where demand is high. The conglomerate also owns stakes in listed companies Boral (70%), Beach Energy (30%) and Seven West Media (40%), as well as unlisted energy, media and property holdings. Of these investments, it is the recently acquired 70% stake in Boral the most material in terms of value creation for Seven. We estimate Seven is trading on a PE multiple of 13.5x FY24 earnings, which is at a substantial discount to the ASX300 Index. The Fund has a small holding in this name as part of the portfolio aiming for mediumterm growth.
Dividend boom in the past few years is fading partly due to higher capex requirements and general more subdued commodity prices. Recent government legislation discussion also deterred companies undertaking corporate actions. This Fund continues to seek out companies paying sustainable dividends and offering medium term growth prospects.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Equity-Income-Fund-September-2023.pdfAugust, 2023
The August result season is over and most fundies are still catching up on the deluge of information. Market reactions for the results had been particularly strong (good or bad) even for the big companies.
Woolworths and Coles were up 3% and down 7% respectively on the day of the result. Consumer facing companies seemed continue to deliver but forward-looking guidance was scarce. Some of the key thematics from the result season included impact of rising interest rates on borrowing cost, labour shortage still a key challenge, consumers rather resilient (low unemployment), travel companies continue to benefit from sector tailwinds. Consensus earnings estimates for FY24 were revised down, now some -6% (resources the main culprit).
The Fund returned 0.4% for the month of August, outperformed its benchmark (-0.7%). Key contributors were Wesfarmers (WES +8.5%), Goodman Group (GMG +13.7%) and Harvey Norman (HVN +6.9%).
Detractors were BHP -2.5%, Insignia (IFL -12.7%) and Telstra (TLS - 5.8%). A key feature of the reporting season is the outperformance of the Discretionary sector (retail, travel, discretionary spend etc). The low expectations going into reporting meant much of the bad news had been factored in – hence the outperformance when actuals were not as bad or had been anticipated. Conversely, Defensive sector underperformed. GMG is particularly interesting as it continued to evolve over the last 25 years from having a few sheds to integrated warehousing to data centres. It is responding to the significant data centre opportunity with secured and potential power allocation of >3GW. They now represent 30% of WIP – a sizeable data centre business inside GMG, something worthwhile keeping an eye on. This earnings season was slightly disappointing from a dividend perspective. Dividend boom (thanks to the strong commodity prices) in the past few years is fading (rising capex requirements and general uncertainties). Fewer companies than usual lifted their dividend. This Fund continues to seek out companies paying sustainable dividends and offering medium term growth prospects.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Equity-Income-Fund-August-2023.pdfJuly, 2023
The Fund returned 3.4% in the first month of the new financial year. The market was buoyant, partly driven by the improving inflation data and the likelihood of seeing the end of interest rate rise. Energy names performed well on the back of rally in energy prices (trading on tighter market fundamentals and improved US macroeconomic data). Contributors were Woodside (+10.3%), NAB (+7.7%) and CBA (+5.4%). Detractors were Macquarie Group (MQG -1.5%), Woolworths (WOW - 2.8%) and Telstra (TLS -0.9%). MQG held their AGM during the month and provided a soft June Quarter update. Both commodities income (lower volatility) and investment-related income (poor environment for deal flow) were guided lower. These will be the areas to watch for MQG to meet their FY24 forecast. August is when many companies reporting their half-yearly results.
From the overall market perspective, the big miners are expected to have lower earnings due to softer commodity prices (ie lower dividends). CBA is the only Big-4 bank reporting whereas others will provide trade updates. The pressure on net interest margin and the lack of credit growth had been weighing on the sector. We also need to monitor any deterioration in the bad debt cycle.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Equity-Income-Fund-July-2023.pdfJune, 2023
The Fund returned 15.4% for FY2023, outperformed its benchmark. Total return including franking was 17.7% for our investors. Cash distribution was 9.99 cents per unit plus franking credits, hence an income yield of 4.5% or approximately 6.8% including franking. The year could be broadly divided into 2 halves in term of returns – first 6 months dominated by Resources & Financial sectors whereas Information Technology sector surged in the second half. Mid-caps did particularly well, assisted partly by a raft of M&A activities.
Key absolute return contributors for the year were Oz Minerals (OZL +58.7%), BHP (+9.1%) and Macquarie Group (MQG +7.9%). Detractors were Amcor (AMC -17.6%), Ampol (ALD -12.5%) and S32 (-4.5%). Interest rate rise, inflation, economic growth (possible recession) were some of the main concerns for FY23. Company results reported thus far seemed to indicate consumer resilience, however many retailers started to witness the apprehension of consumers as they face cost of living increases, higher mortgage repayments etc. Market earnings estimates continued to be revised downwards. Whilst we might potentially move towards the tail end of the interest rate tightening cycle, the outlook still remains uncertain. This coupled with questions over China growth stimulus (read commodity price impacts) lead us to remain cautious but constructive in equity market outlook. We will remain selective. We expect the ordinary dividends to be rather stable in the near term. The big dividend payers (big miners for example) in the last few reporting rounds are unlikely to repeat the big payouts due to lower commodity prices (lower earnings) and also to preserve the corporate balance sheet for future growth projects. We continue to hold a balanced portfolio, seeking sustainable dividends plus medium-term growth opportunities.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Equity-Income-Fund-June-2023.pdfMay, 2023
The Fund returned -3.4% compared with benchmark of -2.5% in May. Macro volatility / commentary continued to be the significant driver of market return. Materials and Financial sectors retracted whilst the IT / growth names outperformed. Main detractors were BHP (-5.4%), Wesfarmers (WES -8.3%) and National Australia Bank (NAB -9.9%). Contributors were Suncorp (SUN +6.6%), Ampol (ALD +4.9%) and Woodside (WDS +1.8%). During the month NCM received a revised non-binding indicative proposal from Newmont.
This new indicative proposal is the second attempt from Newmont at about 16% higher than one proposed in February. It also permits NCM to pay a franked special dividend of up to US$1.10 per share should they proceed. Newcrest has agreed to grant Newmont the opportunity to conduct confirmatory due diligence. NCM is rich in assets and long dated growth options. This is particularly attractive to foreign big gold operators with a long term approach to investment. It could be our second holding in the M&A space this year as Oz Minerals (OZL) bid sayonara to ASX in April. Assuming the bid for NCM is successful, the dividend distribution will most likely occur in FY24. Ampol continues to be a high yielding stock, with significant amount of franking credits available to the directors to consider capital management options. The market remains volatile as it tries to position for Central Banks’ move. We continue to hold a balanced portfolio aiming for good income plus growth overtime.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Equity-Income-Fund-May-2023.pdfApril, 2023
The Fund returned 1.5% compared with benchmark of 1.8%. Resource names reversed their previous gains (soft iron ore price) and were the main detractors – BHP (-5.9%), Mineral Resources (MIN -8.5%, disappointing production numbers plus weak lithium price) and RIO (-6.5%). Contributors were Macquarie group (MQG +3.9%), Newcrest (NCM +7.7%) and CSR (+10.5%). During the month NCM received a revised non-binding indicative proposal from Newmont. This new indicative proposal is the second attempt from Newmont at about 16% higher than one proposed in February. It also permits NCM to pay a franked special dividend of up to US$1.10 per share should they proceed. Newcrest has agreed to grant Newmont the opportunity to conduct confirmatory due diligence. NCM is rich in assets and long dated growth options. This is particularly attractive to foreign big gold operators with a long term approach to investment. It could be our second holding in the M&A space this year as Oz Minerals (OZL) bid sayonara to ASX in April. Assuming the bid for NCM is successful, the dividend distribution will most likely occur in FY24.
As we write this report, the major banks are reporting their half-yearly results (or trade update). Whilst the half yearly results appeared reasonable, all eyes are on the current state of the play. Net interest margin (NIM) are under pressure (even lower than some bearish expectation) as banks face heightened competition in the mortgage space and have to pay higher interest rates for deposits. It would seem the peak NIM has passed and the outlook for the sector would be tougher going forward. Asset quality doesn’t seem to be too much of a concern at the moment. Banks are cum-div, most yielding in excess of 3% for the Half. We will hold them for now to capture the dividends.
The market remains volatile as it tries to position for Central Banks’ move. We continue to hold a balanced portfolio aiming for good income plus growth overtime.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/200053635.pdfFebruary, 2023
The Fund returned -2.6%, in line with its benchmark. Mining stocks declined 7.5%, the main contributors for the negative return as the Fed articulated a more hawkish stand and investors rotated away from resources after concerns over falling spot prices. The Central banks’ stand impacted overall asset valuation. Main contributors to performance were Ampol (ALD +8.1%, declared special dividend), Telstra (TLS +1.9%) and Seven (SVW +7.9%). Detractors were BHP (-8.5%), CBA (-8.5%) and Harvey Norman (HVN -13.8%, slower trading data in January).
The overall reported half-yearly results were marred by higher-thanaverage number of profit misses and FY consensus estimate downgrades after companies flagged a more challenging second Half. On balance, whilst companies can maintain revenues, the challenge is margin as they navigate through rising cost, inflationary pressures (which is quite a new phenomenon to many companies which are so used to a low inflationary environment in past decade). Jan-Feb trading updates highlighted some change in spending patterns away from big-ticket items and more towards necessities. We might continue to see the change in consumer behaviour as many face higher mortgage repayments and higher cost of living for the first time.
In terms of direction of dividends, we note both BHP and RIO have flagged their intention to invest in “growth”. BHP continues to move to “futurefacing” commodities, investing through technology. This plus pending acquisition of Oz Minerals (OZL) means they are likely to be more conservative in their short-term dividend payout. RIO similarly did not declare any “special” dividend as they position themselves for growth (including potential M&A), hence we expect cash return to be more modest going forward from the big miners. Corporate action re “off-market” buybacks etc with big distribution of dividends had been lean as companies await outcome of government policy proposal on buyback/equity issue currently being debated.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/198441015.pdfJanuary, 2023
The Fund returned 6.3% in line with the strong January market performance. Most holdings had a positive return month. Key contributors were Macquarie Group (MQG +12.2%), BHP (+8.2%) and CBA (+7.3%). Only two holdings had negative return: Amcor (AMC - 5.1%) and Santos (STO -0.4%). Companies that are seen as more defensive with stable earnings were the main detractors. The lower than expected US inflation data raised hope of an easing of the aggressive rate hikes, hence driving equity markets higher. Market especially interested in the previous “sold off” names as they can potentially provide the big share price upside.
February reporting season is upon us again. As part of continuous reporting practice, many companies provide trading updates to keep market informed and to manage market expectations. We hope this reporting of the last half year result would not have too much negative “surprises” but market daily price reaction can be volatile. Market would be more interested in any comments regarding the current trading conditions especially any discernible behavior change as consumers (mortgage payers) start to factor in higher loan repayment. This might be quite a new thinking for some new home owners who had enjoyed a very low interest rate and low unemployment environment for an extended period.
The rapid change of Covid policy and opening of China are expected provide a positive impetus to global growth. There is a massive potential demand for travel and retail when Chinese residents start moving again. Movements so far seemed to be within the country - presumably similar to Australia when people started to drive / domestic flights; then international flights. Barriers to travel are gradually coming down when countries remove the “extra” Covid tests requirements for travelers from China.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/197034138.pdfDecember, 2022
The Fund returned -2.9% for the month of December or 11.5% for the first 6 months of FY23. This compared favorably with its benchmark. When including franking, the 6-monthly return was 12.8%. The Fund also distributed 2 cents per unit in the September and December quarters.
During the 6 months, Fund benefited from our resources holdings in Oz Minerals (OZL) and Mineral Resources (MIN). Our investment in OZL dated back to 2019 with the entry price of under $10. We were attracted to its producing assets, solid management team plus a strong pipeline of growth projects. This was not a short term “hot stock”, consistent with our investment philosophy. OZL signed the Scheme of Implementation Deed with BHP just before Christmas with the “final” takeover cash price of $28.25. The company aims to distribute some franked dividend as part of this consideration. We will need to hold this name till final settlement in order to capture the benefit of the franked dividend for this Fund. Our latest investment in MIN dated back to 2021 as we recognized the potential upside from its lithium assets (Electric Vehicle / battery thematic) plus its solid iron ore production and the mining services business. We continue to assess our holding as the company evolves.
Australia market is trading at PE of 14.5X, in-line with long-term average, not overly expensive – of course it depends on the “E”.
Central Bankers continue to balance growth and inflation in their deliberation. We also cannot discount the usual geopolitical wildcards. Despite the share market volatility over the recent years, dividend income has been relatively stable. We remain cautious and continue to hold a balanced portfolio aiming for good income plus growth over time.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/196062701.pdfNovember, 2022
The Fund returned a strong 5.9% for the month, just under its benchmark. Key contributors were BHP (+21.8%), Oz Minerals (OZL +13.5%) and Mineral Resources (MIN +19.5% riding on strong lithium prices). Finance sector gave up some of its past gains as the major banks went ex-div. Detractors were NAB (-2.7%), ANZ (-3.2%) and Santos (STO -3.9%).
The Fund’s resources holdings were strong contributors to performance in November. BHP, and other iron ore exposed miners, appreciated substantially over the month due to developments in China. The Chinese government has announced further incremental stimulus measures to support the property market which coincided with indications that Chinese COVID lockdown measures may begin to be eased earlier than expected. Copper miner, Oz Minerals was up 13.5% following a revised takeover offer (and most likely final offer) from BHP. We believe Oz Minerals assets will be a positive addition to BHP as it’s best placed to extract efficiencies from a combined operation, whilst in the longer term, the demand for copper should increase as electrification increases.
As we approach the end of CY22, much of the asset price adjustment from the rapid interest rate rise has arguably been priced in. Some earning downgrades have occurred (via trading updates and AGM commentaries) but we expect more to come in the half-yearly reporting time. Management outlook and commentary will be keenly watched again. Australia market is trading at PE of 14.5X, in-line with long-term average, not overly expensive – of course it depends on the “E”. Central Bankers continue to balance growth and inflation in their deliberation. We also cannot discount the usual geopolitical wildcards. We remain cautious and continue to hold a balanced portfolio aiming for good total return.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/193783870.pdfOctober, 2022
The fund returned 6.5% for the month of October, outperformed its benchmark. Economically, the focus continued to be on inflation, central banks hawkish stand. Politically China’s 20th CCP congress took centrestage. Market was looking for indication of stimulus or economic growth drivers which seemed lacking at the first glance. Hong Kong and Shanghai market were both adversely affected as foreign investors exited mainland China stocks. Banks performed strongly for the month and were the main contributors to performance: CBA +15.4%, NAB +12.5% and Macquarie Group (MQG +10.9%). Detractors were primarily the resources names: BHP -3.0%, Oz Minerals (OZL -6.2%) and Ampol (ALD -5.3%).
One of the Budget initiatives announced during the month was the cracking down of companies using off-market buybacks to reduce tax payment. This change, which took effect from Budget night will discourage ASX-listed companies from paying shareholders a lower price for off market buybacks than the on-market price using franking credits to equalise the value. Major listed companies such as BHP, RIO and the banks have in the past undertaken such activity which had been an effective tool to distribute their excess franking to their shareholders. It formed part of their general capital management strategy. The Fund has participated in various “off-market” company buybacks from time to time.
It has contributed to the higher income and higher imputation credits distributed to our investors. We have always considered them as “corporate” events and not part of the normal sustainable dividends. As a result of this change, companies with excess franking balance might opt for “special dividends” as part of their capital management strategy. We will watch this space.
As we head towards the all-important festive gifting season, the outlook for financial markets remains uncertain – policy makers have a challenging balance act. We remain cautious and continue to hold a balanced portfolio with emphasis on sustainable dividend.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/192651854.pdfSeptember, 2022
The Fund returned ‐6.3% for the month of September, broadly in‐line with the market. A rise in real yields was the key driver of the equity sell‐off. For the Quarter, Fund returned 2.0%, outperformed its benchmark of 0.5% return. Quarterly distribution of 2 cents per unit was declared and paid in early October. Contributors for the month were Mineral Resources (MIN +2.8%), Data3 (DTL +1.8%) and Oz Minerals (OZL +0.2%). Detractors were the high beta, long duration names such Macquarie Group (MQG ‐13.8%) and Goodman Group (GMG ‐19.8%).
Mineral Resources (MIN) has demonstrated a long track record of building shareholder value and continues to own undervalued assets within its portfolio. For context, Mineral Resources owns 40% of the Wodgina Mine, 50% of the Mt Marion Mine and 40% of the Kemerton lithium hydroxide converter in WA. The Australian Financial Review carried an article suggesting that MIN was considering a spin‐off of its lithium assets. The significance of a lithium assets spin‐off is two‐fold: First, should a spin‐off lead to a listing in the US stock market, MIN should benefit from a better look through valuation of its assets. We observe that valuation multiples of US listed lithium companies such as Ablemarle are more than double MIN’s current multiple. Second, cash raised from a sale of assets is likely to be directed towards other opportunities including the expansion of planned iron ore mines.
We note the current Treasury’s draft legislation on Franked Distribution and Capital Raising (different from the 2018 proposal) is being consulted and discussed. If implemented, it might impact “capital management” activities undertaken by companies. We continue to monitor the discussion and manage the portfolio with both dividend and medium‐term capital growth in mind.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/191370430.pdfAugust, 2022
August has been an eventful month with companies reporting their FY22 results and the central banks hawkish messaging. The reporting of past results was largely as per expectation. The big positive reaction to technology names were mainly due to low expectation going into the results plus the prior sell-off. The future-looking market was more interested in any forward-looking statements which proved to be a touch disappointing, though understandable. Cost pressure (labor, input cost) continues to be the culprit for earning downgrades. Consumer demand (holding up for now) remains unclear as rapid interest rate rises, living costs increases and house prices can dampen consumer confidence. On the positive side, employment data remains strong which is positive especially for the upcoming important gifting festive season.
The Fund returned 2.0% for the month of August, outperformed its benchmark. Key Contributors were Oz Minerals (OZL +36.2% indicative proposal received from BHP and rejected by the Board. We believe OZL offers BHP several strategic options including sizable exposure to copper and nickel, both critical for batteries needed for electric vehicles, and opportunities to create significant efficiencies in its Australian copper resources base.), BHP (+4.9%) and Woodside (+7.1%). Detractors were Navigator (NGI -15.6% dividend policy changed), CBA (-3.2%) and Newcrest (NCM -8.1%). We paid particular attention to any change of dividend policy or outlook. Major resource companies such as BHP and Woodside have rewarded their shareholders with high dividends reflecting high commodity prices and supernormal profits. However, we note the increase growth capex requirements, M&A activities plus the uncertainty in global outlook has led to some fall in the payout ratio.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/190983743.pdfJuly, 2022
Headlines such as inflation, interest rate hikes, falling house prices dominated news reports in the month of July. The Fund returned 6.7%, outperformed its benchmark. Holdingsin the Resource sector were the main detractors. Prices of BHP (‐6.2%) and RIO (‐4.7%) went backwards driven by a decline in commodity prices as investors responded to data signalling an increasing risk of a US recession. Sentiment towards China property market was equally negative. RIO reported close to month end, delivering a lower than expected dividend. They cited “The economic outlook is weakening due to the Russia‐Ukraine war, tighter monetary policy to curb rising inflation, and targeted COVID‐19 restrictions in China”.
Whilst we understand this more conservative approach, it is nevertheless disappointing in view of their strong balance sheet and cashflow. We take comfort in their comment that “The intention is that the balance between the interim and final dividend be weighted to the final dividend”. We would monitor how these big miners (including BHP) work out their capital allocation strategy in this less certain environment. Contributors for the month were Macquarie group (MQG +10.1%), CBA (+11.5%) and Data3 (DTL +33.2% rebound from low in June sell‐off
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/189748023.pdfMay, 2022
The fund returned -4.5% for the month of May where Australia market underperformed its global peers. Inflation fear, interest rate hikes, slower global growth continued to occupy investors’ mind. Australia election result was not a major surprise to the market but we do expect some post-election “budget repair” rhetoric from the new government. The Fund went backwards for the month. Return was positively assisted by holdings in the Material Sector: BHP (+ 4.4%), Amcor (AMC +8.5%) and Mineral Resources (MIN +9.1%). Interest rate hikes have negatively impacted a number of the higher growth names such as Macquarie Group (MQG -10.1%) and Goodman Group (GMG - 14.3%). CSR (-23.9%) also suffered as market grappled with the housing and construction outlook in the midst of interest rate rise.
Few major banks reported in May and performed relatively well. In a rising rate environment, many believe banks will be able to price up the loans hence better profitability. The banks seemed relaxed about their credit quality – however we need to remember this is a highly leverage business. Labour shortage, cost escalation and competition will impact profitability. RBA’s message remained hawkish, we are yet to witness any material change in consumer behaviour as disposable income is reduced (after higher mortgage repayment, higher food/utility cost etc) and potential loan default
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/187928248.pdfApril, 2022
The prospect of higher interest rates leading to slower growth weighed on equity markets.
The Australian share market fell 0.8% but continues to outperform its global peers, as defensive Australian companies in the Healthcare and Utilities sectors carried market performance. Fund returned -0.4% for the month of April, outperformed its benchmark
The Fund returned -0.4% for the month of April, outperformed its benchmark. Contributors were Amcor (AMC +10.4%), Pendal (+14.2% indicative takeover offer received from Perpetual but rejected by PDL Board as “significantly undervalued the company”) and Goodman Group (GMG +4.7%). Detractors were mainly in the Resources area - BHP (-7.2%), Nine Entertainment (NEC -9.4%) and Oz Minerals (OZL - 6.3%).
One of our new holdings we commented on last month was Homeco Daily Needs (HDN), which came through a merger with our holding in Adventus (AVN). The highly regarded CEO of AVN was appointed the CEO of the merged group (trading as HDN) which we looked upon favorably. However, to our surprise, the CEO retired soon after the merger in early May. The usual official line of “spending time with family” has left many ex-AVN shareholders bewildered and disappointed. We just wonder about the “culture fit” when two organizations come together despite what the spreadsheet might tell us. Another one to watch would be Pendal & Perpetual if the two decide to further explore the takeover offer. We are reminded once again not to underrate the “soft element” of any business.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/187437113.pdfMarch, 2022
The Fund returned 6.1% for the month of March or 2.7% for the March Quarter (gains made in March), outperformed its benchmark. The return is 4.0% for the Quarter when franking is added. 6 cents/unit was distributed and paid in early April. This again is a higher distribution mainly due to the Fund’s participation in tax-effective Westpac buybacks. Contributors for the month were Macquarie Group (MQG +12.4%), BHP (+10.9%) and CBA (12.7%). Detractors were HomeCo Daily Needs (HDN -6.8%), Amcor (AMC -3.5%) and Waypoint (WPR - 2.2%). REITs sector underperformed in general given the rising yield curve. Our holding in HDN resulted from the merger between Aventus (AVN – our holding) and HDN. They both operate in the large format retail space with a broader mandate including healthcare, neighbourhood from HDN.
The highly regarded CEO of AVN had been appointed to run the combined group. This is our only Retail REIT holding at the moment – partly due to its steady cashflow, solid asset backing and opportunity to grow through strong development pipeline. We will continue to assess the performance of the combined group.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/186224713.pdfJanuary, 2022
The Fund returned -4.6% for the first month of calendar 2022. It has been a volatile month, driven in part by inflation fears (hence rate concerns, hence valuation adjustments). In relative terms, Fund outperformed the broader market. Key contributors were from the resources sector as energy prices rebounded – Woodside (WPL +14.3%), Santos (STO +13.1%). BHP (+11.7%) gained on stronger iron ore prices and short term index buying resulted from stock unification. As a veteran analyst commented “It has been 20 years since BHP Ltd formed the DLC with Billiton to create BHP Billiton. At that time, the company said the new structure created a formidable enterprise of global scale and diversity, with the capacity and flexibility to pursue international growth opportunities, and with outstanding access to major capital markets. Today the message is unification will result in a corporate structure that’s simpler and more efficient, with improved flexibility to shape the portfolio”. Yes, time has changed - I would like to invest in consultants’ business! Detractors were Macquarie group (MQG -10.6% profit taking after strong performance in 1H), Wesfarmers (WES -11.1%) and Goodman group (GMG -12.5%). Our investors would note a much larger Dec 21 quarterly distribution that was paid in early January. This was due to the Fund’s participation in taxeffective company off-market buybacks of Commonwealth Bank and Woolworths. Our portfolio management clearly demonstrated our consideration for after tax return to our investors.
February is a busy time of companies reporting their December half yearly results. This year with the combination of a late cycle and hawkish central banks, will make the market even more volatile - companies reporting negative surprises might suffer “sell first, ask questions later” mentality. We will continue to monitor and adjust our portfolio as opportunities arise.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/184287868.pdfDecember, 2021
The Fund returned 4.3% for the month of December or 4.6% for the first 6 months of FY2022 or 19.4% for CY2021; outperformed its benchmark. When including franking, the numbers are 5.5% / 6.2% / 22.0% respectively. We consider franking (imputation credits) a tangible benefit to our investors. The investment strategy targets fully franked distribution which also has influenced our decision to participate in tax effective company buybacks. Absolute contributors for the month were CBA (+8.4%), BHP (+5.4%) and Macquarie Group (MQG +4.4%). MQG, one of our top-5 holdings, is also the largest contributor for the first Half of FY22 returning 31.3%. Detractors for the month were Pendal (PDL -9.7% affected by the general negative sentiment towards fund managers suffering some outflows), Woolworths (WOW -6.9% trading update highlighted covid cost impact to the bottom line) and Harvey Norman (HVN -2.6%).
Few things stood out in 2021, Covid aside. There was a higher awareness of ESG thematic - climate, carbon, energy transition, governance etc. Miners made decisions on longer term ESG palatable commodities, COP26 reinforced the climate and decarbonisation agenda. Of late, we saw a number of management governance issues playing out such as James Hardie, Bapcor, Cleanaway etc. These are strong performing companies and led by well-regarded CEOs from investors’ eyes. Stakeholders’ expectations of CEOs change overtime and we wonder if this partly contributed to the relatively shorter tenure of many CEOs. It adds another dimension to our assessment of succession risk.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/182658276.pdfNovember, 2021
If you don’t already know the Greek alphabets, you might know a few more by now! Volatility has picked up during the month as markets grapple with the newfound risks related to the Omicron variant as well as speculation around a potential hawkish stand from the Federal Reserve. Fund returned –0.8% for the month of November, a touch below its benchmark. Detractors were the banks after they went exdiv. The Banking sector returned -6.9%, the worst performing of all ASX sectors, followed by Energy. The competitive landscape of the banking sector remained intense. Earnings pressure were confirmed by the bank reporting round as policy support is removed and macroprudential policies are being reintroduced to curb excesses in housing market but the much anticipated APRA’s final capital reforms are broadly consistent with market expectation with implementation date 1 January 2023. Contributors for the month were Goodman group (GMG +12.7% continued to be leader in driving and meeting client new logistic requirement), Fortescue (FMG +22.1% recovery of iron ore prices) and BHP (+7.6%).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/181785348.pdfSeptember, 2021
The fund returned -1.6% for the month of September, slightly ahead of its benchmark. For the Quarter, it was a touch behind relatively as the Materials sector (particularly iron ore producers) took the blunt of fall of iron ore price. Oil prices had a roller coaster ride, it came back from its low as inventories were drawn down and mobility statistics (read economic data) showed improvement. Energy sector (fossil fuels) will be an interesting sector to watch as ESG considerations driving limited new investments but the demand will take time to change over (look at the current power shortages). Distribution for the Quarter was 2.0 cents per unit plus franking. Contributors for the month were Macquarie Group (MQG +9.1%), Woodside (WPL +22.5%) and Santos (+18.5%). Detractors were BHP (-17.5%), Fortescue (FMG - 28.7%) and Wesfarmers (WES -7.0%).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/179868716.pdfJuly, 2021
The Fund returned 2.1% for the month of July, outperformed its benchmark. Key contributors were BHP (+10.1%), Sydney Airport (+34.9% takeover bid received from a consortium of infrastructure funds but rejected by the Board) and Goodman Group (GMG +6.9%). Detractors were Westpac (WBC -5.0%), Santos (STO -9.0% oil price weakness and merger discussion with Oil Search) and Nine Entertainment (NEC -5.1%). Once again, we see the disparity between the listed market and unlisted market.
The unlisted players such as super funds, infrastructure funds, property funds are well cash-up and have a longer time frame looking at any investment. They are able to look past the short-term hiatus and look for longer term value. In the case of Sydney Airport - land development potential, balance sheet engineering and when using a lower risk-free rate, it makes valuation look compelling. There were plenty of M&A activities in the listed market too as acquirers with their higher-valued script making script bid for competitors.
The upcoming August result reporting time might be challenging for management to provide outlook and guidance. The optimistic view of economic recovery is somewhat moderated due to uncertainty created by current/future lockdowns plus less government supports. In addition, there are supply chain challenges caused by lockdowns in sourcing countries and rising global shipping costs. We will monitor and make adjustment as necessary
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/176305758.pdfJune, 2021
Global share markets were broadly higher in June, with the ASX300 Accumulation Index gaining 2.3%. - The Australian share market posted its strongest financial year return since FY07, assisted by both monetary and fiscal stimulus. - Fund returned a strong 34.7% for FY21 or 36.7% including franking
The Fund returned 1.4% for the month of June, underperformed its benchmark. Contributors were Wesfarmers (WES +6.7%), Goodman Group (GMG +8.9%) and Navigator Global (NGI +12.6%). Detractors were Oz Minerals (OZL -11.1% China tried to reign in surging commodity price), Newcrest (NCM -10.7% gold price declined 7% as stronger USD dampened investor demand for gold) and NAB (-2.7%). In the last quarter of FY21, the Fund lagged the general market as “growth“ names outperformed when bond yield improved.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/174813411.pdfMay, 2021
Fund returned 2.1% for the month of May, broadly in-line with its benchmark. It was a month dominated by bank reporting. Three major banks plus Macquarie Group reported relatively strong result; characterised by strong capital positions, improving funding trends and healthy provisioning levels. Importantly dividends had been restored albeit not at FY2019 level. We note banks could be in a position for capital management if this trend continues. Absolute contributors were CBA (+12%), Westpac (WBC +5.7%) and Newcrest (NCM +6.8% as market started to think about inflation risk). Detractors were Macquarie Group (MQG -5.3%), Woodside (WPL -4.6%) and Sydney Airport (SYD -5.2%, delayed international travel).
As we approach financial year end, stock market indices are at record levels globally. Interest rates are at all time low. Housing market is buoyant and M&A activities rampant. Thanks to the strong iron ore prices, Australia trade balance is in a very good position. Government Budget remains constructive and RBA is not anticipating rate hike in the short term. The current Victoria situation reminds us once again Covid risk is not over and we also witnessed breakouts in some of the previous Covid success countries such as Taiwan, Vietnam. A clear blockage to full economic recovery remains border and mobility restrictions. As labor shortages and skill gaps emerge, this will impact recovery and add to cost.
The market appeared to look past Covid as vaccinations are being rolled out. In the current “goldilocks environment”- low interest rate, low inflation, plenty of liquidity – equity is priced to near perfection. Regardless of the volatility in share price, we are confident of good dividend payout near term as robust forecasts for the big miners and banks are particularly positive for dividends.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/173427883.pdfNovember, 2020
The good news on vaccines and the low low interest rates propelled the indices upwards during the month despite the US election theatrics and the deterioration of Australia/ China relationships. The market had some rotation from paying up for the “growth story” to looking for bargains in the unloved “value” basket. The Fund returned a strong 11% for the month. Key contributors were BHP (+12.7%) and the banks (NAB +23.1%, ANZ +20.3%). Detractors were Newcrest (NCM -7.9%, gold price decline) and Woolworths (WOW, -3.1%).
Three major banks and Macquarie Group reported their half yearly results and went ex-dividend. Whilst the structural issues facing the banks were largely expected, the market were focusing on cyclical recovery in credit, plus other updates on cost out, efficiency drive etc. Since the outbreak of Covid in March, the banks have built provisions buffer consistent with a moderate downturn. However, with substantial policy support directly targeting both the housing market and SME employment, and now with positive news regarding vaccines, it appears credit charges could fall.
If the economic recovery continues, the banks may be in a position of excess capital, underpinning dividends and capital returns. This partly explained the sharp rebound in bank names during the month. In a recent industry conference, the chairman of UBS Group (former president of Germany’s central bank), warned markets need to prepare for several difficult years of pandemic recovery, with economic uncertainty to be compounded with even greater political polarisation and more surprises likely in the coming months and years.
Whilst we have enjoyed the strong Australia Equity return FYTD (Fund returned 15.1%), we do know markets do not move in straight lines – zig/zag is common. However, Equity as an asset class remains attractive when compared to alternatives. This Fund will continue to seek sustainable income, franking (added approx. 200 basis points per annum historically) and capital growth over the medium term for our investors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/162702426.pdfticker: PVA0022AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://primevalue.com.au/resources/product-information/imputation-fund/
Fund Updates
asset_class: Domestic Equity
asset_category: Australia Large Value
peer_benchmark: Domestic Equity - Large Value Index
broad_market_index: ASX Index 200 Index
structure: Managed Fund
manager_contact_details: Array
fund_features:
Prime Value Imputation B aims to provide a regular tax-effective income, combined with competitive capital growth over the medium to long-term, by managing a portfolio of assets comprised mainly of Australian equities listed on any recognised Australian stock exchange. The fund invests in Australian equities and will normally have short term cash investments for liquidity management purposes and may have limited investment in fixed interest securities.