- EIGA paid a distribution of 1.67 cents per unit in November. This was in line with our distribution estimate.
- The Australian market fell, finishing the month down -2.2%, bringing the total return for the last 12 months to -1.0%.
- Financials was the best performing sector, with the banks outperforming as the Royal Commission drew to a close, while the resources sector declined on softer commodity prices, with oil down sharply.
- Following the recent declines, the market is now trading in line with its long-term average forward P/E ratio of 14.5x and offering an attractive gross dividend yield of over 6.0%, with many very good value opportunities available.
EIGA targets a 7% pre-tax annual income yield, comprising a 5% cash yield plus 2% franking credits. In order to give investors more certainty over their income payments, the fund aims to pay equal monthly cash distributions, based on our estimate of the income to be generated over the year. Franking credits and any realised capital gains will then be distributed with the June year-end distribution
The market finished the month down -2.2%, with the resources sector the main drag, falling -6.6% on the back of softer commodity prices, with oil in particular falling sharply. Financials was the best performing sector, rising +1.4%.
The major banks performed strongly, delivering an average return of +2.8% as the Royal Commission drew to a close. While the softening housing market and slowing credit growth is leading to a very muted growth outlook for the sector, the banks are trading on attractive valuations and offering compelling and sustainable dividend yields, justify their overweight position in EIGA.
Other holdings which performed well included Platinum Asset Management (+10.4%), Flight Centre (+5.3%), AGL Energy (+4.5%), Woolworths (+1.7%) and Event Hospitality (+1.5%).
Stocks which detracted from performance included Coca-Cola Amatil (-12.8%) which fell following a weak trading update but is still up strongly over the past year. Woodside Petroleum (-10.9%) fell on a weaker oil price. However, we view this as temporary and have a positive medium-term view on oil and LNG prices.
The market is currently taking a very short-term view of stocks and overreacting to transient issues. For example, Graincorp (-10.4%), which is held in EIGA, has seen its share price sold down in recent months due to the drought in Eastern Australia. Shortly after month end, however, the company received an indicative takeover proposal at a 43.0% premium to the current share price, showing the opportunities these mispricing’s can create for investors with a longer-term view.
During the month, we increased our holdings in the major banks and Macquarie. EIGA also participated in the Rio Tinto buy-back, generating a strong after-tax return. At month end, stock numbers were 30 and cash was 6.1%.
Following the recent sell-off, the market is now trading in line with its long-term average, with a one year forward P/E of 14.5x and offering an attractive gross dividend yield of over 6.0%.
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 pockets of expensive growth and momentum style stocks which present significant de-rating risks both as interest rates rise and 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.
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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.