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EIGA September 2018 Monthly Report & Update

EIGA Performance
Overview
  • EIGA paid distribution of 1.67 cents per unit in September. This was in line with our distribution estimate.
  • Australian stock market eased in September. EIGA’s value investment style was rewarded during the month as the market became more favourable towards value stocks after a long period of being dominated by expensive growth and momentum stocks.
  • Resources moved higher, +5.2%, on robust commodity prices, while the Industrials declined -2.7%, with many expensive stocks pulling back from recent highs and Banks weaker on continuing Royal Commission concerns.
EIGA Fund Review

The resources sector was the standout over the month, with Rio Tinto (+8.3%) rallying after announcing a $3.2bn buy-back program. In addition to continued healthy commodity prices, returns of capital and franking credits are a key part of our investment thesis supporting our positive view on the sector. BHP (+7.2%) is also cum-capital return following the sale of its shale assets while Woodside Petroleum (+ 4.6%) rallied on the positive oil price outlook and tightening LNG market. Other holdings which outperformed over the month included Telstra (+2.9%), Downer (+2.2%) and Tabcorp (+1.5%).

EIGA benefited from being underweight on valuation grounds in a number of expensive growth stocks including CSL (-11.0%), A2 Milk (-11.0%), Treasury Wines (-9.4%) and Transurban (-5.5%) all underperforming over the month. We have long argued that many of these stocks are trading on excessive valuations and at risk of being de-rated at some point.

The major banks underperformed marginally, delivering an average return of –2.1%. Sentiment towards the sector is still negative due to the combination of the Royal Commission and concerns around the outlook for the housing market. However, while the growth outlook for the banks is definitely very muted, they are trading on attractive valuations and offering compelling dividend yields.

The main detractors from performance were Suncorp (-6.6%), Flight Centre (-7.3%), AGL Energy (-6.2%) and IAG (-5.2%).

 

EIGA Activity

During the month, EIGA exited its holdings in Dexus and Scentre Group. Proceeds were used to increase our holdings in a number of stocks including HT&E, Flight Centre and Rio Tinto. At month end, stock numbers were 29 and cash was 2.5%.

EIGA Activity

During the month, EIGA exited its holdings in Dexus and Scentre Group. Proceeds were used to increase our holdings in a number of stocks including HT&E, Flight Centre and Rio Tinto. At month end, stock numbers were 29 and cash was 2.5%.

Outlook

Despite the ongoing negative political atmosphere, the economic backdrop continues to be positive, both domestically and offshore, with healthy growth and low unemployment in most major regions. This is supportive of ongoing moderate corporate earnings growth, healthy resources demand and financial system stability. The portfolio is exposed to this dynamic through its positions in the large-cap, low-cost resource stocks, the major banks and a range of quality Industrials.  We continue to avoid those sectors of the market where valuations are high and those which are exposed to the risk of rising interest rates such as Healthcare, REITs and Infrastructure.

EIGA continues to offer a higher forecast 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.

The Responsible Entity is Perennial Investment Management Limited ABN 13 108 747 637, AFSL: 275101. The Investment Manager is Perennial Value Management Limited ABN 22 090 879 904 AFSL: 247293. This report has been prepared by ETF Investments Australia Pty Ltd trading as eInvest Australia (‘eInvest’) ABN: 88 618 802 912, as the corporate authorised representative of Perennial Investment Management Limited. This report is for information purposes only. Accordingly, reliance should not be placed on this information as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation. While every effort has been made to ensure the information is accurate; its accuracy, reliability or completeness is not guaranteed. Past performance is not a reliable indicator of future performance. The current relevant product disclosure statement can be found at www.perennial.net.au/EIGA