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EIGA October Monthly Report & Update

EIGA Overview

  • EIGA paid a distribution of 1.67 cents per unit in October. This was in line with our distribution estimate.
  • The Australian market fell in line with offshore markets, to finish the month down -6.2%, bringing the total return for the last 12 months to +2.9%.
  • Following the decline, the market is now trading in line with its long-term average forward P/E ratio of 14.6x and offering an attractive gross dividend yield of over 6.0%, with many very good value, high-yielding opportunities available.
  • The sell-off was broad-based, with all sectors of the market delivering negative returns. However, many of the more expensive parts of the market such as Healthcare and IT, which we avoid on the basis of overvaluation, were hit particularly hard.

EIGA benefited from being underweight on valuation grounds in a number of expensive growth stocks

 

EIGA Review

The broad-based, global macro nature of the sell-off in October saw both Industrials (-6.1%) and Resources (-6.5%) decline by a similar amount. Despite this, several holdings were able to deliver positive returns, with Graincorp (+4.3%) rallying as seasonal conditions normalise, Cocal-Cola Amatil (+1.5%) rising due to its defensive nature and Woolworths (+1.2%) higher on the prospect of improving sales. Other holdings which outperformed included Rio Tinto (-3.0%) which is undertaking a $3.2bn buy-back program, Suncorp (-3.1%) and Telstra (-3.4%)

EIGA also benefited from being underweight on valuation grounds in a number of expensive growth stocks including REA Group (-16.7%), Seek (-14.0%),  Treasury Wines (-13.6%) and Cochlear (-11.5%). EIGA also benefited from not holding AMP (-22.6%) which fell sharply after announcing the sale of its life business for a price which disappointed the market.

The major banks performed in line with the market, delivering an average return of -6.1%. 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, justifying a position in EIGA.

The main detractors from performance included Boral (-18.8%) which fell on negative sentiment to the US housing market and Flight Centre (-12.7%) on a weaker outlook.  Woodside (-9.7%), fell on the weaker oil price, however, we view this as temporary and have a positive medium-term view on oil and LNG prices.

EIGA Activity

During the month, we increased our holding in ANZ, which is offering an attractive valuation and a gross dividend yield of 8.9%. At month end, stock numbers were 29 and cash was 3.9%.

Distribution

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, EIGA 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.

Outlook

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 14.6x 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.

To read more about eInvest Income Generator Fund (Managed Fund) ASX: EIGA, click here.