Portfolio update for July

With all the political confusion around the world, not least in the White House, you can forgive markets for not knowing which way to turn. After the ‘Trump Bump', which saw the All Ordinaries Index jump almost 7% in the final two months of calendar 2016, the index has added just 3.1% so far in 2017, including just 0.2% in July.

Against that our portfolios have performed reasonably well, with the Growth Portfolio managing 1.4% in July and 4.5% so far in the year and the Equity Income Portfolio returning 1.6% and 6.9% respectively (all after costs).

Investors' main point of focus continues to be the future direction of interest rates, which influences the yield investors expect to get from their investments and therefore the prices they're prepared to pay.

The US Federal Reserve has now raised its target rate by half a percentage point this year, to a range of 1–1.25%, and has even set some targets for reducing its balance sheet, swollen from all the assets acquired under quantitative easing.

In Australia the cash rate has been left unchanged for a year at 1.5% and shows no great sign of moving higher, despite the RBA recently asserting that 3.5% should be considered the ‘normal' level.

Markets, though, have faced it all with a big shrug, with the US 10-year Government bond yield slipping from 2.5% to 2.3% since the beginning of the year and its Australian equivalent dropping from 2.8% to 2.6%.

Perhaps the most notable move has been from the US dollar, which has fallen about 10% so far this year against the British pound, the euro and the Australian dollar, including a 4% against the latter in July.

That has put pressure on some US dollar earning companies. Nanosonics (ASX: NAN), for example, made over 90% of its sales in North America in 2016. Alongside concerns about uncertainty over healthcare policy in the US, that was enough to knock it down by 7% in July. Ansell (ASX: ANN) is another big US dollar earner, with 43% of sales in North America in 2016, and it fell 7% in both portfolios.

The worst performer in both portfolios, though, was Perpetual (ASX: PPT), which shocked investors with a $1.0bn net fund outflow in the June quarter. The performance was particularly disappointing because flows had seemed to have stabilised. We'll be watching them closely, but Perpetual's private wealth and corporate trust businesses have been performing well and the share price is not demanding, with a price-earnings ratio of 18.

Better news came from Flight Centre (ASX: FLT), which said that airfares had stopped falling, leading to a recovery in transaction value late in the year. With the US also on track for a record profit, the overall group profit is now expected to land near the top of the lowered range of $300m–330m set at the interim result in February – putting it within the range of $320m–355m originally set last year. The stock jumped 10% in July and has now gained 50% since we bought it for both portfolios in January.

Both portfolios also benefited from strong performances from BHP (ASX: BHP) and South32 (ASX: S32), which gained 11% and 9% in July helped by higher commodity prices. GBST Holdings (ASX: GBT) also chipped in with 11%.

The Growth Portfolio was also helped by a 13% rise in Fleetwood (ASX: FWD), with activist investors joining the register and agitating for higher dividends, and a 12% rise in Ainsworth Game Technology (ASX: AGI).

Neither portfolio made any trades in July.

Since they opened for investment in July 2015, the portfolios have made annualised returns of 12.7% (Growth) and 14.6% (Equity Income), after costs, compared to 7.2% for the All Ordinaries Index.

Since they were established as models in 2001, they have made annualised returns of 9.4% (Growth) and 12.5% (Equity Income), after assumed costs of 0.97% a year (in line with current levels), compared to 8.0% a year for the All Ordinaries.

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