- Global markets sold off in December, with the S&P500 -9.9%, FTSE 100 -3.6%, Nikkei 225 -10.5% and Shanghai Composite -3.6%.
- The Australian market performed much better, finishing the month nearly flat at -0.2%, bringing the total return for the last 12 months to a modest decline of -3.1%.
- Metals and Mining was the best performing sector, rising +7.6%. Otherwise, defensive sectors generally outperformed the more cyclical ones.
- Following the recent declines, the market is now trading below its long-term average forward P/E ratio of 14.5x and offering an attractive gross dividend yield of over 6.0%, presenting many very good value opportunities available for investors with a longer-term time horizon.
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.
Given the weakness in offshore markets, the Australian market performed very well over the month to close nearly flat at -0.2%. The Resources sector led the way (+4.8%), driven by strong performances from BHP (+11.5%) and Rio Tinto (+7.1%), on the back of ongoing resilience in the iron ore price. During the month, EIGA participated in the BHP off-market buy-back, which generated a significant fully-franked dividend and a strong after-tax return.
Other stocks which performed well included Graincorp (+25.6%), which received a conditional takeover proposal at a 43.0% premium to the current share price. While the company’s earnings are depressed due to the drought in Eastern Australia, this serves as a reminder of the opportunities the market’s short-termism often presents for investors with a longer-term time horizon. As a value investor, we seek to identify these sort of situations where the market has become overly pessimistic on the outlook for stocks due to transient factors. AGL Energy (+9.7%), Downer (+7.8%), Star Entertainment (+4.1%), Wesfarmers (+2.0%) and Woolworths (+1.7%) also outperformed.
Stocks which detracted from performance included Flight Centre (-12.1%), Caltex (-7.4%) on lower refining margins and Coca-Cola Amatil (-5.2%) on a subdued trading update.
Financials were also generally weaker, with the major banks down an average of -4.0% on housing market concerns and Clydesdale Bank (-8.0%) on Brexit worries. Janus Henderson Group (-7.8%) and Macquarie Group (-4.0%) fell on weaker global markets. These companies are trading on very attractive valuations and, in our view, offer significant long-term upside potential.
During the month we initiated positions in Amcor, Ausdrill and Seven Group Holdings and added to our position in Downer. This was funded by reducing our holdings in AGL Energy, BHP and Macquarie Group. At month end, stock numbers were 32 and cash was 11.5%.
Following the recent sell-off, the market is now trading below its long-term average, with a one year forward P/E of 14.1x 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.