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EIGA June 2020 Monthly Report & Update

Overview
  • Global markets continued to recover in June, as the peaking of coronavirus infections saw many countries moving to ease lockdowns and restart their economies.
  • The Australian market was also strong, with the ASX300 Accumulation Index logging its third consecutive positive month, rising +2.4% in June and having now risen +30.6% from its March low.
  • EIGA delivered a pre-tax distribution yield for the FY20 financial year of 7.3%. Looking to FY21, while market dividends will be lower, the EIGA will seek out the best dividend opportunities and may seek to supplement income generation by undertaking limited call-writing.
Performance
Month (%)Quarter (%)FYTD (%)1 Year (% p.a.)Since Inception* (%)
Income Distribution0.551.935.005.007.74
Capital Growth1.3115.22-17.36-17.36-9.95
Total Return1.8517.15-12.37-12.37-2.21
Franking Credits*0.250.872.302.303.46
Income Distribution including Franking Credits0.802.807.307.3011.20
Benchmark Yield* Franking Credits0.200.404.304.305.40
Excess Income to Benchmark*0.602.403.003.005.80

^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 for June 2020 was of 1.72 cents per unit.

Have 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 DRP Plan. You can do this by logging onto your Link account or emailing [email protected] or call 1300 554 474.

EIGA Review

Global markets continued to recover in June, as many countries began moving to ease lockdowns and restart their economies. While the continuing rise in the number of COVID cased in the US is causing significant concern, markets have been comforted by ongoing support from the Federal Reserve and other Central Banks.

The Australian market was also strong, as infection rates fell to very low levels in most parts of the country and restrictions began to be eased. The ASX300 Accumulation Index logged its third consecutive positive month, rising +2.4% in June and having now risen +30.6% from its March low.

The best performing sectors in the market in June were Consumer Discretionary (+5.1%) and Consumer Staples (+4.8%). EIGA benefited from strong performances from holdings in consumer exposed stocks such as Coles (+11.8%), Wesfarmers (+11.0%) and Woolworths (+5.5%).  Each of these companies provided strong retail sales updates during the month.

The generally more positive sentiment to the outlook for the domestic economy saw the Financials (+4.3%) also outperform. This was led by the major banks (up an average of +4.9%), which continued to rally on optimism that the ultimate extent of bad debts would be less than expected. The major banks have faced significant headwinds in recent years, exacerbated by the impacts of the Royal Commission. Critically, however, the banks have entered the current crisis in a very strong financial position and have the opportunity to perform a crucial role in nursing the economy through this difficult period.  We maintain our view that, in spite of its various shortcomings, the Australian banking system is unquestionably one of the best in the world, and the stability that it has provided to the economy is often underappreciated in public debate. Over the medium term, we see significant valuation upside to the banks from current levels and the Fund holds a slight overweight position in the sector.

Macquarie Group (+7.8%), one of our largest active positions, also performed well. One thing that can be said of Macquarie is that they never waste a good crisis. It is likely that they will be using the current market disruptions to acquire assets at very attractive prices, which will deliver significant profits in years to come. This is on top of the long-term growth to be delivered by their global leadership position in infrastructure investment. This is likely to be a key focus area for governments seeking to support economic activity, creating yet more opportunities for Macquarie.

Seven Group Holdings (+5.8%), rallied after providing a positive trading update, highlighting strong demand in its Westrac mining equipment business.  Interestingly, Seven Group was also revealed as having acquired a 10% stake in Boral. The Boral share price has fallen sharply in recent times, as a result of issues in its US operations. Seven Group has proven itself to be a savvy investor and clearly sees an opportunity for realising value in Boral.

Other strong performers included Ampol (+8.2%), which stands to realise value from the sale of a 49% stake in its service station portfolio, as well as Tabcorp (+5.0%) and Medibank Private (+4.9%).

The key negative contributors over the period included Flight Centre (-15.0%), Monadelphous (-8.5%), United Malt Group (-8.3%) and Event Hospitality (-7.6%).

 

EIGA Activity

During the month, we took profits and reduced our holding in Rio Tinto, Wesfarmers and Macquarie Group following strong share price performances in recent times. We also exited our position in Qantas. The stock had rallied very strongly and more than doubled from its low. While Qantas will survive the current downturn, a return to dividend payments will be some time away. Proceeds were used to establish positions in Coca-Cola Amatil, Dexus and TPG Telecom.  At month end, stock numbers were 37 and cash was 6.9%.

Distribution

In order to provide a regular income stream, EIGA 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.

EIGA declared a distribution for June of 1.7167cpu, bringing the total income return for the last 12 months to 5.0% or 7.3% including franking credits.

Looking forward, the outlook for dividends for FY21 will become clearer over the next few months. While it is certain that many companies will be reducing their dividends, the market overall should still be expected to generate an attractive level of dividend income in the year ahead, particularly compared to other alternative sources of yield.

In addition, we may seek to enhance the income generation of EIGA by undertaking limited call-writing.

Outlook

Despite the rally, the market is still well down from its February highs. While the sharp slowing of activity means that forecasting near term earnings for many companies is difficult, the market’s fall means a significant amount of bad news is now factored being factored into share prices.

Looking forward, while the current situation is unprecedented, so too has been the response of governments, with coordinated policies covering monetary easing, fiscal stimulus and legislative actions.  While it is impossible to know how this will ultimately play out, signs are emerging that worst of the health crisis may be behind us and the first steps towards normalisation may not be too far away.

Further, Australia has so far fared very well relative to most other countries, meaning it is reasonable to expect that we are well placed to lead others in terms of a recovery in activity.

The silver lining of a downturn such a this is that it provides the long-term investor with opportunities to buy quality businesses at very attractive prices. Indeed, having stress tested our key portfolio holdings, we believe they offer exceptional upside from the current oversold levels.

In the meantime, 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 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.