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EIGA October 2019 Monthly Report & Update

Overview
  • The ASX300 Accumulation Index finished the month down -0.4%, weighed down by the banks and the major miners.
  • It was notable that, over the month, a number of very expensive growth stocks, were sold off sharply. We do not hold these sorts of stocks on the basis of valuation and lack of yield.
  • Better performing stocks included Star Entertainment (+7.8%), Seven Group (+7.7%), Perenti (+4.3%), Caltex (+3.6%) and Crown Resorts (+3.4%).
  • Stocks which detracted from performance included Flight Centre (-10.5%), Graincorp (-8.6%) and Coca-Cola Amatil (-4.7%).
Performance
Month (%)Quarter (%)FYTD (%)1 Year (% p.a.)Since Inception* (%)
Income Distribution0.41.31.812.89.3
Capital Growth-1.7-1.9-0.7-0.4-2.9
Total Return-1.2-0.51.112.56.5
Franking Credits*0.20.60.85.94.3
Income Distribution including Franking Credits0.61.92.618.713.6
Benchmark Yield* Franking Credits0.01.71.86.96.4
Excess Income to Benchmark*0.60.20.811.87.2

^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 October 2019 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

The Australian market declined in October, with the ASX300 Accumulation Index finishing the month down -0.4%, weighed down by the major banks, which fell as RBA interest rate cuts pressure their margins, and the major miners, which were weaker on softer iron ore prices.

Value, as a style, underperformed during the month, with the market being dominated by the expensive defensive sectors such as Healthcare and REITs. We remain underweight these sectors on the basis of valuation, with their share prices being very sensitive to any movement in interest rates up from their current historically low levels.

Stocks which contributed to performance included gaming stocks Star Entertainment (+7.8%) and Crown Resorts (+3.4%), following positive AGM updates, mining services companies, Seven Group (+7.7%) and Perenti (+4.3%) on positive sentiment towards resources capex, Caltex (+3.6%) on improving refiner margins and Downer (+3.2%).

EIGA also benefitted from not holding a number of tech stocks, whose lofty valuations have begun to be questioned by the market. Examples include Wisetech Global (-24.6%) and Afterpay (-19.5%), both of which still trade on very expensive valuations despite the sharp sell-offs.

Holdings which detracted from performance included Flight Centre (- 10.5%), which fell on softness in its Australian leisure business and Graincorp (-8.6%), which declined after the ACCC delayed the sale of its terminals business. This, in turn, delayed its proposed demerger into separate grains and malt business, a transaction which we believe will the be catalyst to recognising significant value in the business.

EIGA Activity

During the month, we took profits and trimmed our holdings in Star Entertainment, Rio Tinto, IAG and Tabcorp. Proceeds were used to increase our position in Macquarie Group.

At month end, stock numbers were 32 and cash was 9.4%.

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 October of 1.72 cents, bringing the total income return for the last 12 months to $0.48. This represents an income yield for the last 12 months of 12.8% or 18.7% 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 FY20 P/E ratio of 16.1x and offering an attractive gross dividend yield of 5.5%.

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.