Diversified Portfolios - Intelligent Investor Equity Income - 31 August 2016

COMMENTARY

PORTFOLIO COMMENTARY

A pleasing reporting season saw the Intelligent Investor Equity Income Portfolio return 2.9% in August compared to a loss of 1.3% for the All Ordinaries Index. The portfolio has now returned 20.0% since it started accepting money for investment in July last year, compared to 5.9% for the All Ords, and 13.7% a year since it began as a model portfolio in 2001, compared with 7.6% for the All Ords.

Leading the way was Ansell, which returned 18% in the month. Although the company reported a 14% fall in earnings per share, that was at the top end of the downgraded guidance issued in February. Management expects a return to growth this year and is considering selling off the company’s condoms business, to focus on the gloves and other protective equipment it sells to companies rather than consumers. That makes good sense and with an improving outlook we’re comfortable holders despite the 49% increase in the share price since we bought following February’s downgrade.

Computershare was another company that beat some downbeat expectations, returning 13% in the month despite an 8% fall in earnings per share. Management was talking up the prospects of its mortgage servicing businesses and talking down the threats from Blockchain and Brexit and the market evidently took some comfort. We take more comfort from the undemanding valuation – a price-earnings ratio of about 14 – and would consider increasing our holding if the price returned to below $9.

Virtus Health and Monash IVF, our two holdings in assisted reproduction services, also did well, gaining 9% and 5% respectively as their results showcased their growing cash flows – a hot commodity in the current low growth environment.

Trade Me, our biggest holding, produced a result that suggested it too will soon be returning to growth after a few years of heavy investment. After nudging up 3% in 2016, we expect earnings to rise by 10% or more in 2017 – so apparently does the market, which pushed the stock up 9% over the month.

Interestingly enough – when set against the likes of Ansell and Computershare, which beat low expectations – the portfolio’s worst performer in August was Sydney Airport, which fell 6% despite flagging an expected 22% increase in this year’s distributions. The fall, though, says more about how far the stock price has already flown (it is up 64% over the past two years), rather than any problems with its results, which continue to be excellent. There’s no doubt that any rise in interest rate expectations will hit Sydney Airport hard in the short term, but we continue to believe that its combination of income and reliable growth will serve it well over the long term.

Other notable fallers were GBST Holdings, which lost another 4% after missing its guidance, and Seek, which fell 4% as the market took a gloomy view of its early stage ventures.

There were no transactions in the month, but the day after it ended we took advantage of the weakness in banks to take our holding in Commonwealth Bank from 2.2% to 5.2% and our holding in Westpac from 2.3% to 3.8%. To make way for these purchases, we reduced our holdings in Trade Me (from 8.6% to 6.6%), ASX (from 7.3%to 6.3%) and Virtus Health (from 5.3% to 4.3%).

GROWTH OF $10,000

Income Reinvested

PEFORMANCE SUMMARY TO 31 AUGUST 2016

Source: Praemium, RBA. Returns are before expenses and fees. Returns are shown as annualised if the period is over 1 year. * Since Inception (SI) date is 1 July 2015.

Important Information

While every care has been taken in preparation of this document, InvestSMART Financial Services Limited (ABN 70 089 038 531, AFSL 226435) (“InvestSMART”) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and see professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. This document has been prepared for InvestSMART by InvestSense Pty Ltd ABN 31 601 876 528, Authorised Representative of Sentry Asset Management Pty Ltd AFSL 408 800. Financial commentary contained within this report is provided by InvestSense Pty Ltd. The information contained in this document is not intended to be a definitive statement on the subject matter nor an endorsement that this model portfolio is appropriate for you and should not be relied upon in making a decision to invest in this product. The information in this report is general information only and does not take into account your individual objectives, financial situation, needs or circumstances. No representations or warranties express or implied, are made as to the accuracy or completeness of the information, opinions and conclusions contained in this report. In preparing this report, InvestSMART and InvestSense Pty Ltd has relied upon and assumed, without independent verification, the accuracy and completeness of all information available to us. To the maximum extent permitted by law, neither InvestSMART, InvestSense Pty Ltd or their directors, employees or agents accept any liability for any loss arising in relation to this report. The suitability of the investment product to your needs depends on your individual circumstances and objectives and should be discussed with your Adviser. Potential investors must read the PDS, Approved Product List and FSG along with any accompanying materials. Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income, but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Past performance of financial products is not a reliable indicator of future performance. InvestSense Pty Ltd does not assure nor guarantee the performance of any financial products offered. Information, opinions, historical performance, calculations or assessments of performance of financial products or markets rely on assumptions about tax, reinvestment, market performance, liquidity and other factors that will be important and may fluctuate over time. InvestSense Pty Ltd, InvestSMART Financial Services Limited, its associates and their respective directors and other staff each declare that they may, from time to time, hold interests in Securities that are contained in this investment product.