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EIGA September Monthly Report & Update

Overview
  • The Fund delivered a strong return of 0.7%, including franking credits, in September.
  • This strong performance was driven by a rotation towards value-style stocks, on the back of positive market sentiment, while expensive growth and defensive stocks underperformed.
  • Holdings which contributed positively included, Janus Henderson (+15.6%), Ausdrill (+11.8%), Coles (+11.3%), Caltex (+11.2%) and NAB (+8.6%).
  • Holdings which detracted from performance included, Telstra (-5.6%), Medibank Private (-3.9%).
  • The Fund continues to target a 7% gross distribution yield for the FY20 year.
Performance
Month (%)Quarter (%)FYTD (%)1 Year (% p.a.)Since Inception* (%)
Income Distribution0.51.41.412.29.7
Capital Growth2.91.01.0-5.3-1.9
Total Return3.42.42.46.97.8
Franking Credits*0.20.60.65.54.3
Income Distribution including Franking Credits0.72.02.017.714.0
Benchmark Yield* Franking Credits0.81.81.86.56.8
Excess Income to Benchmark*-0.10.20.211.27.2

^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

The EIGA distribution for September 2019 was of 1.72 cents per unit.

EIGA Review

An easing of concerns around the trade war and other macro risks saw global markets resume their rise in September. Most major markets rallied over the month, with the S&P500 +1.7%, FTSE100 +2.8%, Nikkei 225 +5.1% and the Shanghai Composite +0.7%. The Australian market also rallied, with the ASX300 Accumulation Index finishing the month up +1.9%.

A key driver of stock and sector performance over the month was the movement in interest rates, as improved investor sentiment saw US bond yields rise modestly. This, in turn, drove a rotation away from “rate-sensitive” sectors of the market, such as expensive growth and defensive yield stocks, with Telcos (-2.8%), REITs (-2.7%) and Healthcare (-2.2%) sectors all underperforming.

The current valuations of these styles of stocks are heavily dependent on the assumption that interest rates will remain very low for a very long time. This makes them highly susceptible to being sold off sharply should interest rates begin to rise from their current record low levels and is the reason that the Fund generally continues to avoid these types of stocks.

By contrast, the more cyclical parts of the market outperformed, with Energy (+4.5%), Financials (+4.2%), Consumer Discretionary (+3.3%) and Metals and Mining (+2.3%) all rallying.  The Fund is overweight this part of the market as it is where we see the better value opportunities and therefore the greater long-term upside for investors.

Key contributors included Janus Henderson (+15.6%), Ausdrill (+11.8%), Coles (+11.3%), Caltex (+11.2%) and NAB (+8.6%).

EIGA Activity

During the month, we took profits and reduced our holding in Woolworths following a strong share price performance, with the stock up +36.7% over the past 12 months.

At month end, stock numbers were 32 and cash was 5.19%.

Distribution

In order to provide a regular income stream, the Fund 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.

The Fund declared a distribution for September 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 12.2% or 17.7% 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 close to its long-term average, with a FY20 P/E ratio of 16.2x and offering an attractive gross dividend yield of 5.4%.

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.