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EIGA August Monthly Report & Update

Overview
  • Macroeconomic concerns saw global markets fall in August, with the S&P500 -1.8%, FTSE 100 -5.0%, Nikkei 225 -3.8% and the Shanghai Composite -1.6%.
  • The Australian market also fell, finishing the month -2.3%, despite the reporting season seeing many companies deliver solid results. Across the portfolio, dividends increased by an average of 10% for the financial year.
  • Defensive sectors outperformed, with Healthcare (+3.4%), REITs (+1.3%) and Consumer Staples (+0.1%), while cyclical sectors such as Metals and Mining (-8.0%), Energy (-5.6%) and Financials (-2.6%) underperformed.
  • The key positive contributors included Tabcorp, Downer and Woolworths, while our resources holdings lagged.
Performance
Month (%)Quarter (%)FYTD (%)1 Year (% p.a.)Since Inception* (%)
Income Distribution0.48.00.911.89.7
Capital Growth-3.0-6.7-1.8-8.1-4.0
Total Return-2.61.3-1.03.75.7
Franking Credits*0.33.60.45.44.5
Income Distribution including Franking Credits0.711.61.317.214.2
Benchmark Yield* Franking Credits1.01.31.06.36.6
Excess Income to Benchmark*-0.310.30.310.97.6

^Since inception May 2018. Fund returns are calculated using net asset value per unit at the start and end of the specified period and do not reflect the brokerage or the bid ask spread that investors incur when buying and selling units on the ASX. Benchmark yield is calculated based on the difference between the return of the S&P/ASX300 Franking Credit Adjusted Daily Total Return Index (Tax Exempt) and return of the S&P/ASX300 Index. #Franking credits are an estimate only as tax components will only be known with certainty at the end of the financial year. Past performance is not a reliable indicator of future performance.

 

Distribution

The EIGA distribution for August 2019 was of 1.72 cents per unit.

EIGA Review

Following several strong months of performance, trade war concerns and other macro risks caught up with global markets in August. Most major markets sold off over the month, with the S&P500 -1.8%, FTSE100 -5.0%, Nikkei 225 -3.8% and the Shanghai Composite -1.6%.

The Australian market was not immune, with the ASX300 Accumulation Index finishing the month down -2.3%. These macro factors were the dominant influence on the market over the month, with risk aversion and falling interest rates leading to strong performances of the defensive parts of the market. This saw outperformance of sectors such as Healthcare (+3.4%), REITs (+1.3%) and Consumer Staples (+0.1%), which rallied despite their already very expensive valuations. By contrast, the more cyclical parts of the market were sold off, with Metals and Mining (-8.0%), Energy (-5.6%) and Financials (-2.6%) all lagging.

While macro uncertainty dominated markets during the month, at the micro level, the reporting season highlighted that many companies continue to perform well, growing earnings and increasing dividends. Many portfolio holdings delivered strong results, including, Tabcorp (+7.3%), on a strong result driven by the lotteries business, Downer (+6.8%), on a solid operational performance and Woolworths (+6.0%), on improving sales momentum. Across the portfolio, dividends were increased by an average of 10.0% for the financial year.

Stocks which detracted from performance included Platinum Asset Management (-17.5%), on soft funds flows and Caltex (-11.1%), on weak refining margins. Resource holdings BHP (-11.0%) and Rio Tinto (-8.1%), were also weaker on softer commodity prices.

EIGA Activity

During the month, we trimmed out holdings in the major banks and Macquarie and reinvested the proceeds in a new position in Qantas, where we intend to participate in their upcoming off-market buyback.

At month end, stock numbers were 32 and cash was 1.95%.

Distribution

In order to provide a regular income stream, the Fund pays monthly distributions. We aim to pay equal cash distributions each month, based on our estimate of the dividend income to be generated over the year. Franking credits, surplus income and any realised capital gains will then be distributed, as per usual, with the June distribution.

EIGA declared a distribution for August of 1.72 cents per unit, bringing the total income return for the last 12 months to 47.86cpu. This represents an income yield for the last 12 months of 11.8% or 17.2% including franking credits.

The distribution yield over the past 12 months was boosted as a result of the Fund participating inn a number of off-market buy-backs. This is not expected to be repeated in the current year.

For the FY20 financial year, we are targeting a 7.0% distribution yield, comprising a 5.0% cash yield plus 2.0% in franking credits.

Outlook

The market is currently trading close to its long-term average, with a FY20 P/E ratio of 16.0x and offering an attractive gross dividend yield of 5.7%.

Within the overall market, we are currently finding many good value, high-yielding investment opportunities. Across both the industrial and resources sectors, we are seeing many quality companies trading on attractive valuations which should deliver solid returns to investors from these levels.

By contrast, there remain large numbers of expensive growth and momentum style stocks which present significant de-rating risks if the lofty growth rates implied in their valuations are not able to be met. We do not hold these types of stocks as they do not meet our value criteria.

EIGA continues to offer a higher forecast gross yield than the overall market and, as always, our focus will continue to be on investing in quality companies which are offering attractive valuations  and have the ability to deliver high levels of franked dividend income to investors. Further, we believe the current very low interest rates highlight the relative attractiveness of financially-sound, high  dividend yielding equities.

 

To read more about eInvest Income Generator Fund (Managed Fund) ASX: EIGA, click here.

Past performance is not a reliable indicator of future performance. Please read the PDS prior to investing. This information is general in nature and is subject to the terms and conditions outlined here.