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EIGA March 2020 Monthly Report & Update

Overview
  • The escalating coronavirus crisis saw markets fall sharply in March, with the ASX300 Accumulation Index declining -20.8%.
  • In what was a very tough month for Value style investing globally, EIGA did well to deliver a pre-tax total return of -21.2%, largely in line with the Index.
  • EIGA continues to expect to deliver a pre-tax distribution yield for the FY20 financial year close to its 7.0% target.
  • The near term outlook is highly uncertain, however at current levels, a significant amount of bad news is factored into share prices. History has shown that selloffs like this present exceptional opportunities for investors with a longer term time frame.
Performance
Month (%)Quarter (%)FYTD (%)1 Year (% p.a.)Since Inception* (%)
Income Distribution0.51.13.19.27.3
Capital Growth-21.7-27.2-28.3-30.3-17.5
Total Return-21.2-26.0-25.2-21.2-10.2
Franking Credits*0.20.61.44.23.2
Income Distribution including Franking Credits0.71.74.513.410.5
Benchmark Yield* Franking Credits0.71.33.44.6 5.5
Excess Income to Benchmark*0.00.41.18.85.0

^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 March 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

The escalating coronavirus crisis saw markets fall sharply in March, with the ASX300 Accumulation Index declining -20.8%, as investors factored in the impact of a very sharp, but potentially short, disruption to the global economy.

All sectors of the market delivered negative returns, with many large companies experiencing share price falls of up to -50% in what appeared, in many cases, to be panic selling.  Despite this, in what was very tough month for Value style investing globally, the Fund did well to deliver a pre-tax total return largely in line with the market.

Examples of stocks caught up in this selling included Macquarie Group (-36.4%). While near-term earnings will be impacted, Macquarie will likely emerge from this disruption in an even stronger position. The company has shown an unwavering ability to seize the opportunities presented in a crisis and will no doubt use this as an opportunity to acquire assets and businesses at prices which will deliver outstanding profits for years to come.

The best performing sector was Consumer Staples (-3.5%), driven by Coles (+6.7%) and Woolworths (-8.4%), as supermarket sales are being boosted as people stock up on various essentials. The Fund holds overweight positions in both of these stocks.

EIGA benefited from its overweight position in the Metals and Mining sector, with Fortescue Metals (+6.7%), Rio Tinto (+0.9%) and BHP (-10.8%) all outperforming on the resilience of the iron ore price. The major miners are well-placed going forward, with their strong balance sheets and the expectation Chinese stimulus measures.  Other stocks which performed well included more defensive holdings such as insurers IAG (-2.8%) and Medibank Private (-4.0%), packaging companies Amcor (-8.0%) and Orora (-11.4%) and Telstra (-10.5%).

The major banks underperformed (down an average –30.0%) as the market factored in rising bad debt levels and lower dividends. We currently forecast that while the banks will modestly reduce their dividends, they will continue to offer an attractive yield. Further, the banks are going into this downturn in a very strong financial position, having significantly increased capital and liquidity in recent years and are well placed to play a critical role in supporting the economy through this period. The Fund currently holds an index weight in the majors.

EIGA’s position in Woodside Petroleum (-34.8%) detracted, as energy stocks were sold off on the fall in the oil price. The coronavirus driven decline in demand for oil, compounded by the Saudi-Russia price war, saw Energy (-37.9%) the worst performing sector for the month. Oil is currently trading at unsustainably low levels and will likely rise at some point over the coming months. In the meantime, we remain comfortable with our holding in Woodside on account of its strong balance sheet and low production costs.

Other stocks which detracted were our travel-related stocks, with Flight Centre (-69.6%) and Qantas (-39.2%).  Both these stocks have moved aggressively to protect their balance sheets in the face of unprecedented disruptions to their operations.

EIGA Activity

During the month, we did not make any significant changes to the portfolio, as we remain comfortable with our key holdings. The only stock added to EIGA was United Malt Group, which was demerged from Graincorp. This is a solid business with globally diversified  operations and a stable earnings stream. As such it is well suited to the current environment.

At month end, stock numbers were 35 and cash was 10.7%.

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 March of 1.72cpu, bringing the income yield for the last 12 months to 9.2% or 13.4% including franking credits.

Across the market, a number of companies have announced the suspension of their dividends in order to conserve cash in the face of the downturn. However, the Fund has now banked over 75% of the dividends budgeted to be received in the FY20 financial year, with the remainder still expected to be received over the coming months. As a result, at this stage, we are still expecting the Fund to deliver a pre-tax distribution yield for the FY20 financial year close to the target level of around 7.0%, comprising a 5.0% cash yield plus 2.0% in franking credits.

Looking forward, we will assess the outlook for dividends for FY21 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.

Outlook

The fall in March brings the market’s total decline since its February high to -28.6%, making it one of the sharpest selloffs on record. While the 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.  Australia’s relatively low levels of infections and recent move to more stringent isolation measures sees us well placed versus other parts of the world to weather this storm.

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.

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.