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EIGA January Monthly Report & Update

Overview
  • Global markets sold off in January, as investors moved to risk-off mode, due to fears about the impact on economic growth of the unfolding coronavirus epidemic.
  • Despite this, the Australian market delivered a very strong return of +4.9%.  Falling bond yields and risk aversion saw a flight to defensive sectors such as Healthcare (+12.0%), Consumer Staples (+7.8%) and Telcos (+7.7%), while more cyclical sectors such as Metals and Mining (+0.7%) and Energy (+0.6%) lagged.
  • The major positive contributors to performance were Woolworths (+15.7%), Coles (+11.5%), Graincorp (+10.8%) and Wesfarmers (+9.2%).
  • IMPQ continues to target a pre-tax distribution yield for FY20 of around 7.0%.
Performance
Month (%)Quarter (%)FYTD (%)1 Year (% p.a.)Since Inception* (%)
Income Distribution0.51.43.213.48.9
Capital Growth2.51.60.93.9-1.6
Total Return2.93.04.117.27.3
Franking Credits*0.30.61.46.14.0
Income Distribution including Franking Credits0.72.04.619.512.9
Benchmark Yield* Franking Credits0.01.02.96.96.2
Excess Income to Benchmark*0.71.01.712.66.7

^Since inception May 2018. EIGA 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 January 2020 was of 1.72 cents per unit.

Have you thought about reinvesting your distributions? If you don’t rely on the cash payment of distributions every month it might be worth considering reinvesting them so your invested capital can build and grow through the DRP Plan. You can do this by logging onto your Link account or emailing [email protected] or call 1300 554 474.

EIGA Review

Following a strong finish to 2019, global markets sold off in January, as optimism around an improving macroeconomic backdrop was replaced by fears about the impact on economic growth of the unfolding coronavirus epidemic. This move to a risk-off setting saw the S&P500 -0.2%, Nikkei 225 -1.9%, FTSE100 -3.4% and the Shanghai Composite -2.4%.

By contrast, the Australian market delivered a very strong return of +4.9%.  Falling bond yields and risk aversion saw a flight to defensive sectors such as Healthcare (+12.0%), Consumer Staples (+7.8%) and Telcos (+7.7%), while Financials (+4.7%) also performed well, with the banks recovering some of their recent losses. These combined to drive the market higher, while more cyclical sectors such as Metals and Mining (+0.7%) and Energy (+0.6%) lagged.

Stocks which positively contributed to performance included Woolworths (+15.7%) and Coles (+11.5%), both of which rallied due to the announcement that Kaufland had decided not to enter the Australian market. Graincorp (+10.8%), Wesfarmers (+9.2%), Janus Henderson (+8.9%), Telstra (+8.5%) and Coca-Cola Amail (+8.3%) also performed well.

Stocks which detracted included Flight Centre (-10.8%) and Qantas    (-9.8%), due to the risk to tourism from the coronavirus, as well as Downer (-9.3%), which issued an earnings downgrade. EIGA’s Resources and Energy exposures also weighed on performance. More significantly, the rotation to expensive defensive sectors presented  headwind to EIGA, which is underweight the defensive sectors on account of their excessive valuations and low dividend yields.

EIGA Activity

During the month, we exited our position in Link Administration after a rally in the stock following it making an acquisition in Europe. While the acquisition was well-received, we believe there are a number of risks emerging in the core business.

At month end, stock numbers were 32 and cash was 10.0%.

Distribution

In order to provide a regular income stream, EIGA 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 January of 1.7 cpu, bringing the total income return for the last 12 months to 48.1 cpu. This represents an income yield for the last 12 months of 13.3% or 19.5% including franking credits.

The distribution yield over the past 12 months was boosted as a result of the Fund participating in 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 slightly above its long-term average, with a FY21 P/E ratio of 17.7x and offering a gross dividend yield of 5.1%.

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.