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May EIGA Update - Hands up in the air

EIGA May Monthly Report & Update

Overview
  • Rising trade tensions saw global markets weaker in May, with the S&P500 -6.6%, FTSE 100 -3.5%, Nikkei 225 -7.4% and Shanghai Composite -5.8%.
  • The Australian market performed better, finishing the month +1.7%, following the surprise Coalition victory in the Federal election.
  • Communications (+7.1%), Healthcare (+3.5%), Metals and Mining (+3.3%) and Financials (+2.6%) led the market higher, while Energy (-3.8%) and Consumer Staples (-4.2%) lagged.
  • The market is currently trading close to its long-term average, with a FY20 P/E ratio of 15.8x and offering an attractive gross dividend yield of 5.6%, presenting many very good value opportunities for investors with a longer-term time horizon.
Month (%)Quarter (%)FYTD (%)1 Year (% p.a.)Since Inception* (%)
Income Distribution0.41.34.74.94.4
Capital Growth0.21.4-1.22.21.3
Total Return0.62.63.57.15.8
Franking Credits*0.20.62.12.22.0
Income Distribution including Franking Credits0.61.96.87.16.4
Benchmark Yield* Franking Credits0.81.76.06.56.7
Excess Income to Benchmark*-0.20.20.80.6-0.3

^Since inception May 2018. Fund 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

EIGA distribution of 1.67 cents per unit for May 2019. This is in line with our estimate.

In order to provide a regular income stream, EIGA pays monthly distributions.  We will 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.

As a result of participating in a number of tax-effective, off-market buy-backs over the past year, the June distribution is anticipated to be significantly above the usual level. Investors who do not require this additional income may wish to consider reinvesting this back into the Fund 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

Rising trade tensions saw global markets weaker in May, with the S&P500 -6.6%, FTSE 100 -3.5%, Nikkei 225 -7.4% and Shanghai Composite -5.8%.

By contrast, the Australian market performed better, finishing the month +1.7%. This followed the surprise Coalition victory in the Federal election, which was widely perceived to be positive for the economy. In particular, it removed the concerns around the potential impacts of changes to negative gearing. This, combined with an easing of lending limits announced by the regulator, saw confidence return to the housing market, leading banks stocks to rally, finishing the month up an average of +5.5%. Importantly for investors, the election outcome also saw the risk to franking credit refunds removed.

Other stocks which performed well post-election included Medibank Private (+15.7%), which no longer faces the prospect of a 2.0% cap on premium increases, as well as Flight Centre (+13.5%) and Boral (+12.0%), with their exposure to the domestic economy. Telstra (+8.0%) continued to rally with the launch of their 5G network ahead of their competitors. Amcor (+2.0%) was also up after receiving final regulatory approval for their merger with Bemis, giving them a leading position in the US.

Stocks which detracted from performance included Link Holdings (-21.4%), which downgraded earnings due to a range of factors, most of which are likely to prove transient. Macquarie Group (-8.0%), delivered a strong result, with earnings up +17.0% but fell after guiding for a softer result in the coming year. We view this as being a conservative outlook which the company is likely to exceed. Downer (-7.9%), also fell after flagging potential issues at one of the wind farm projects it is constructing.

EIGA Activity

During the month, we exited our position in AGL Energy due to increasing regulatory risk and reduced our holdings in Suncorp and Medibank. Proceeds were reinvested into Macquarie Group. At month end, stock numbers were 32 and cash was 7.3%.

Outlook

The market is currently trading close to its long-term average, with a FY20 P/E ratio of 15.8x and offering an attractive gross dividend yield of 5.6%.

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 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.

The above figures are forecasts only. While due care has been used in the preparation of forecast information, actual outcomes may vary in a materially positive or negative manner.

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.