- Global markets performed strongly in March, driven by continuing positive sentiment around vaccine rollouts and the prospect of large stimulus in the US, with all major indices delivering positive returns. This was despite the ongoing increase in bond yields.
- The Australian market also performed strongly, with the ASX300 Accumulation Index finishing the month up 2.3%. While there was no strong theme in the market, the more defensive sectors tended to outperform, while the more cyclical sectors lagged.
- The Fund is targeting an FY21 pre-tax distribution yield of around 7%. While market dividends will be lower, the Fund will seek out the best dividend opportunities and may seek to supplement income generation by undertaking limited call-writing.
|Month (%)||Quarter (%)||FYTD (%)||1 Year (%)||Since Inception* (% p.a.)|
|Income Distribution including Franking Credits||0.60||1.60||5.10||9.10||10.40|
|Benchmark Yield* Franking Credits||0.90||1.60||3.90||5.00||4.90|
|Excess Income to Benchmark*||-0.30||0.00||1.20||4.10||4.90|
^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.
The EIGA distribution for March 2021 was 1.29 cents per unit.
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The Fund delivered a return, including franking credits and after fees of 2.6% in March, outperforming the index by +0.1%. Over the last 12 months, the Fund has performed strongly, delivering a return of +41.3%, outperforming the index by +1.7%. This performance highlights the Fund’s leverage to the improving, post-COVID economy. Historically, value style investing has delivered significant outperformance during economic recoveries.
As the economy recovers, inflation expectations are likely to increase and this will lead to higher bond yields and increasing interest rates. While rising rates will present a headwind to growth, the most at-risk sectors are those with the most extreme valuations such as the Technology sector. By contrast, the more cyclical sectors of the market are likely to outperform given their leverage to an improving growth environment and their less-demanding valuations. This is the environment in which value investing typically outperforms.
It is becoming clear that, if current economic trends continue, the banks are significantly overprovisioned for the level of credit losses that will ultimately be realised. The release of these provisions will support earnings growth over the coming years. When improving earnings are combined with strong capital positions, the prospects for strong dividends from the banks are very good. CBA increased its interim dividend significantly from the prior half and we expect similar increases from the other banks at their upcoming results in May. On the back of this improving outlook, the banks outperformed, up an average of +6.8%.
Holdings with leverage to economic reopening performed well, including hotel and cinema operator Event Hospitality (+18.6%) and packaging company Orora (+16.3%), which rallied as its struggling US operations have begun to recover.
Resource holdings performed well, with Rio Tinto (+15.3%), BHP (+12.8%) and Fortescue Metals (+10.6%) all up on stronger commodity prices. We view the outlook for the resources sector positively. Current commodity demand has been largely driven by China, which has remained strong throughout the last year. However, demand is expected to increase further as activity accelerates in the rest of the world, further boosting the sector.
Other holdings which performed well included Tabcorp (+13.4%), which rallied after receiving an offer to acquire its wagering business. While this division has struggled in recent times, it is a very attractive asset in a sector undergoing consolidation. We have long believed that a separation of Tabcorp’s businesses would realise value by allowing a significant re-rating of the lotteries business, which has very stable earnings underpinned by long-term licences.
The Fund also benefitted from not holding a number of expensive growth stocks which underperformed over the month, including Appen (-25.3%), A2 Milk (-16.0%), Altium (-14.5%), Wisetech (-12.8%), Afterpay (-11.5%) and Xero (-8.8%). Growth stocks such as these have performed very strongly in the low-rate, low-growth environment of recent years. However, life may become significantly more difficult for them should rates continue to rise and growth recover in the broader economy. Further, these types of companies pay little or no dividends.
Holdings which detracted from performance included Coles (-14.0%), which delivered a strong result, however guided to slightly softer than expected sales growth. United Malt (-9.0%), declined after downgrading earnings due to the impact on malt demand from European lockdowns. Ampol (-6.1%), was also weaker, as it continues to be impacted by its loss-making refining division. We expect this division to be closed, which should improve earnings over the medium-term. We remain comfortable with each of these holdings.
During the month, we increased our holdings in BHP and Rio Tinto, whose share prices had eased following news of steel production cuts. As mentioned previously, we remain positive on the outlook for the earnings of the resources sector and expect it to be a strong source of dividend income. This was funded by taking profits and trimming our holdings in Macquarie Group and packaging company Orora.
At month end, stock numbers were 32 and cash was 6.46%.
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 March of 1.29cpu, bringing the total income return for the 9 months of the financial year to date to 3.5% or 5.1% including franking credits. For the full financial year to June, we are targeting a cash distribution of approximately 5.0% or 7.0% including franking credits.
Looking forward to next financial year, the outlook for dividends is positive. Many businesses are seeing strong operating conditions and corporate balance sheets are generally strong. This should underpin an attractive level of dividends in the year ahead. In addition, we may seek to enhance the income generation of the Fund by undertaking limited call-writing.
The start of 2021 may well mark a significant turning point for the global economy and markets, with the prospects of a near-term roll-out of an effective COVID vaccine underpinning the reopening of economies and a return to global growth. Importantly also, the change of leadership in the US should usher in a period of stability in terms of domestic and international policy and, hopefully, a generally more harmonious backdrop. The election result of a Biden presidency and Democratic Senate means there is likely to be increased fiscal stimulus, which should be positive for economic growth, corporate earnings and markets overall.
Domestically, key indicators around employment, loan deferrals and the property market are all surprising to the upside. Finally, the economy is underpinned by historically low interest rates and meaningful fiscal stimulus. If this improvement continues, then corporate earnings and dividends are likely to rebound strongly 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.
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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.