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    EIGA January 2022 Monthly Report & Update

    Overview
    • Global markets were weaker in January, as the comments by the US Federal Reserve were interpreted as suggesting that monetary tightening may be earlier and more aggressive than had previously been expected.
    • The Australian market was also down in January, with the ASX300 Accumulation index finishing the month down -6.5%. The Index was cushioned to some extent by very strong performances from the Resources and Energy sectors, driven by rallies in the iron ore and oil prices.
    • Looking to the current financial year, the Fund is currently targeting a 30% increase in FY22 monthly net distributions to 1.7 CPU. Based on the unit price at the start of the year, this equates to a cash distribution yield of around 5.5% and 7.5%, including franking credits.
    Performance
    Month (%)Quarter (%)FYTD (%)1 Year (%)3 Years (%)Since Inception* (% p.a.)
    Income Distribution0.441.353.025.797.937.02
    Capital Growth-3.09-0.94-4.475.18-0.13-1.83
    Total Return-2.650.40-1.4510.977.805.20
    Franking Credits*0.160.451.082.213.373.08
    Income Distribution including Franking Credits0.601.804.108.0011.3010.10
    Benchmark Yield* Franking Credits0.000.602.605.305.105.20
    Excess Income to Benchmark*0.601.201.502.706.204.90

    ^Since inception May 2018. EIGA 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 in January 2022 was 1.7 cents per unit.

    eigaHave you thought about reinvesting your distributions? If you don’t rely on the cash payment of distributions every month it might be worth considering reinvesting them so your invested capital can build and grow through the DRPPlan. You can do this by logging onto your Link account or emailing [email protected] or call 1300 554 474.

    EIGA Review

    The strong run global markets had been experiencing came to an abrupt end in January, as investors began to factor in the prospect of interest rate hikes and the end of bond buying by the Fed. This had been expected for some time, given the strength of the post-COVID economy and the high level of inflation, however, the tone of commentary from the Fed was more hawkish than some had hoped. The result was a sharp sell-off in those parts of the market most lacking in valuation support. In particular, expensive growth and loss-making tech stocks were hit very hard. By contrast, the better value parts of the market tended to outperform. This saw the Fund outperform by +4.0% over the month.

    Within the Australian market, commodities were again the standout in January, with the Energy (+7.5%) and Metals and Mining (+1.6%) sectors outperforming strongly. While over the long-term, the demand for oil and gas will decline as it is replaced by renewables, in the short-term, it is indispensable. The rebound in demand post-COVID, combined with a period of underinvestment has seen prices rising very strongly, with Brent crude finishing the month at over US$90 per barrel – the highest level since 2014. Gas prices have been similarly strong, exacerbated by the tensions in Ukraine. This saw a very strong performance from Woodside Petroleum (+14.3%).

    Moves by the Chinese government to stimulate their economy and support their property market have seen a strong rally in the iron ore price, which finished the month at over US$140 per tonne. At these levels, the iron ore miners are generating huge amounts of cash. Given their already de-geared balance sheets, this can be returned to shareholders or used to fund growth projects. This saw strong outperformance by the bulk miners, with BHP (+11.7%), Rio Tinto (+11.4%) and Fortescue Metals (+3.4%). During the month, BHP also completed the collapse of its dual listing structure, converting all of its shares into one class. This resulted in its index weighting in Australia increasing by around 60%, making it the largest stock on the ASX.

    UK challenger bank, Virgin Money UK (+8.2%), performed very strongly. Bank earnings are highly leveraged to interest rates and the expectation is that rates will soon rise in the UK. This stock is trading on a very cheap valuation and has the potential to re-rate strongly as the UK economy normalizes.

    Insurance stocks IAG (-0.5%) and Suncorp (-0.3%) also both outperformed, with continuing strength in premium rates, combined with the benefits they will receive from higher interest rates on earnings from their investment portfolios. We believe that the insurance sector is trading on an attractive valuation and offers significant upside at present.

    Fertiliser manufacturer, Incitec Pivot (+1.2%), also outperformed. Global fertilizer pricing is at record levels, with strong demand driven by positive agricultural conditions in most regions. Margins are at very high levels due to the dynamics of the gas market which have pushed up the cost curve of the marginal producer. Should this continue, we expect ongoing earnings upgrades over the coming year.

    Holdings which underperformed during the month included Sonic Healthcare (-18.7%) and Healius (-15.9%), as the level of PCR testing began to fall from its recent very high levels. These stocks provide something of a hedge should there be a resurgence or new COVID variant.

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    EIGA Activity

    January was a quiet month, with no significant changes to the portfolio. We are comfortable with our key exposures to the resources and banking sector, which should both generate attractive levels of dividend income and provide leverage to the ongoing economic recovery. We also see significant upside in the Energy sector to which we are exposed through Woodside Petroleum. These more cyclical exposures are balanced with high quality defensive holdings such as Woolworths and Telstra. At month end, stock numbers were 31 and cash was 4.1%.

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    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.

    Despite the current COVID outbreak, many businesses are seeing strong operating conditions. Further, corporate balance sheets are generally strong. In particular, the banks are holding significant surplus capital and the resources sector is largely debt free and generating very strong cash flows. This should underpin an attractive level of dividends in the year ahead. In addition, many companies are likely to undertake capital returns such as off-market buy-backs to return excess capital and franking credits to investors.

    As a result, the Fund is currently targeting a 30% increase in FY22 monthly net distributions to 1.72 CPU. At the opening unit price of $3.85, this represents a net distribution yield of 5.5% or 7.5% including franking.

    Outlook

    Looking ahead to 2022, assuming that vaccines prove to be effective against the Omicron COVID variant, we see the outlook as positive, with ongoing economic recovery, underpinned by relatively low interest rates and continuing stimulus measures. Further, we look forward to the return to a more “normal” economic environment, as tapering and rate rises start to see the distortions caused by extremely low interest rates and unconventional monetary policy abate.

    Domestically, the end of the COVID lockdowns and reopening of borders is set to see activity pick up and we would expect the economy to bounce back strongly, just as it did following previous lockdowns. Key economic indicators continue to be strong and while there are some concerns around supply chain issues and inflationary pressures, both corporates and consumers are in good shape. If this improvement continues, then corporate earnings and dividends are likely to continue to grow over the coming year.

    The Fund is positioned to benefit from an ongoing economic improvement. In the meantime, the Fund 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 with strong balance sheets, 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.

    Interested in purchasing units in the fund? Contact your financial adviser or simply purchase via your online broker, and as always read the PDS for more information. This can be found 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.