After the market’s January wobbles, things settled down in February and March and our Equity Income Portfolio recovered to end the quarter with a 0.5%. Hardly ideal, but a little better than the All Ordinaries’ loss for the period of 2.4%.
Since 1 July 2015, when we opened it up for direct investment, the portfolio has returned 8.6%, which is 10.5% ahead of the All Ords’ 1.9% loss. Since inception in 2001, the portfolio has returned 13.3% a year compared to 7.5% a year for the All Ords.
As has been the case for most of the past year, we were helped by our limited exposure to the banking sector, with the big four banks each losing around 10% (and ANZ dropping 16%) in the quarter. Between them, the big four account for around a quarter of the All Ords, while our Equity Income Portfolio’s exposure is limited to 1.6%in each of Commonwealth Bank and Westpac. At current prices, however, these two banks are beginning to look attractive and, since the end of the quarter, we have increased our weightings in each by about 1 percentage point to 2.6%.
We also invested 3% of the portfolio into Macquarie Group in February, at $60.28, after it had fallen 27% since the start of the year. The negativity surrounding global markets had pushed the stock down to just ten times forecast earnings per share for the year to March, which we feel undervalues the company given its shift towards more stable streams of earnings.
Also in February we invested about 3% in Ansell at $15.05, after its share price tumbled as much as 20% after management warned that earnings per share would fall by around 17% in 2016, in US dollar terms, compared to previous guidance of a 9% fall.
Our final purchase for the quarter was to increase our weighting in Woolworths from 3.3% to 5.3%. The company’s problems have been well documented, but it remains a high-quality business with the best supermarket locations and most efficient supply chain.
Making way for these purchases were the redoubtable Washington H Soul Pattinson and Servcorp. We’re great fans of both these companies and would gladly have continued to hold them, but neither is particularly cheap after returning 24% and 20%respectively this financial year.
So far, Macquarie and Ansell have rewarded us with returns of 10% and 13%(Woolworths was only bought on 30 March). The standout performer of the quarter, though, was South32, which leapt 38% from what we considered to be very oversold levels, as commodity prices recovered.
At the other end of the scale, OzForex lost 39% after it announced a profit warning alongside news that Western Union had failed to come up with an offer for the company following its due diligence. The company said the lower expected profits were due to a reduction in marketing expenditure while the group switches over to its new global logo: OFX. At current prices the stock looks cheap, but we’re reluctant to add our 3% holding due to the increased risks.
Computershare was the other notable faller, losing 16% after a disappointing interim result compounded concerns over potential disruption to its business from distributed ledger (aka ‘block chain’) technology. One way or another, it’s becoming clear that Computershare isn’t as good a business as we once thought, but that is already more than reflected in its share price, which represents a multiple of just over 13 times this year’s expected earnings per share.
The investment objective is to achieve an income return of 5% from a portfolio of high yielding shares selected from the All Ordinaries Index per annum.
GROWTH OF $10,000
PEFORMANCE SUMMARY TO 31 MARCH 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.
|PERFORMANCE TO 31 MARCH 2016||1 MONTH||3 MONTH||6 MONTH||SI* (P.A.)|
|Intelligent Investor Equity Income Portfolio||4.73%||-0.55%||7.50%||8.63%|
|ASX All Ordinaries Accumulation Index||4.74%||-2.35%||4.11%||-1.92%|
|Excess to Benchmark||-0.01%||1.81%||3.38%||10.55%|
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