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EIGA May Monthly Report & Update

Overview
  • Global markets continued to rally in May, as the peaking of coronavirus infections saw many countries moving to ease lockdowns and restart their economies.
  • The Australian market was also strong, as infection rates fell to very low levels and restrictions began to be eased. The ASX300 Accumulation Index rose +4.6%, building on April’s +9.0% rally and having now risen +27.5% from its mid-March low.
  • The Fund continues to expect to deliver a pre-tax distribution yield for the FY20 financial year close to its 7.0% target. Looking to FY21, 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.
Performance
Month (%)Quarter (%)FYTD (%)1 Year (% p.a.)Since Inception* (%)
Income Distribution0.581.564.4710.487.73
Capital Growth5.85-10.89-18.43-22.45-10.88
Total Return6.43-9.32-13.96-11.96-3.15
Franking Credits*0.320.742.034.823.47
Income Distribution including Franking Credits0.902.306.5015.3011.20
Benchmark Yield* Franking Credits0.201.004.004.405.50
Excess Income to Benchmark*0.701.302.5010.905.70

^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 May 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 rally in May, as the peaking of coronavirus infections saw many countries moving to ease lockdowns and restart their economies. The Australian market was also strong, as infection rates fell to very low levels and restrictions began to be eased. The ASX300 Accumulation Index rose +4.6%, building on April’s +9.0% rally and having now risen +27.5% from its March low.

Improving sentiment towards the economic outlook saw cyclical sectors lead the market higher, with the IT (+14.3%), Metals and Mining (+9.1%) and Consumer Discretionary (+6.9%) sectors all up strongly. Energy (+4.7%) also continued to recover and a strong rally from the major banks late in the month, saw the Financials sector (+5.3%) also outperform.

The Fund returned +6.7% net of fees and including franking credits, outperforming the market by 2.1%, with strong performances from a broad range of stocks. Key positive contributors included fund managers Janus Henderson (+35.4%) and Platinum Asset Management (+14.3%), mining services company Perenti (+30.8%), tourism operators Flight Centre (+19.0%) and Event Hospitality (18.2%) as well as Ampol (formerly Caltex +8.7%) and Downer EDI (+8.2%).

Resources stocks also performed well, on the strong iron ore price, with Fortescue Metals (+16.2%), BHP (+7.1%) and Rio Tinto (+6.7%). The strong cash flows the major miners are currently generating, along with their ungeared balance sheets, positions them well to deliver strong dividends in the year ahead.

May also saw the conclusion of the interim reporting season for the major banks. All four have now announced significant increases to their bad debt provisions ahead of expected coronavirus impacts. In addition, ANZ, NAB and Westpac have all either deferred or significantly reduced their half-yearly dividends. Concern over the impacts of coronavirus, as well as ongoing fallout from the Royal Commission, had seen the bank underperform significantly over the past 12 months, to trade at levels where they offered good long-term value. As a result, the increased optimism around the economic outlook saw a sharp rally, leaving the majors up an average of +5.0% for the month. Should conditions turn out to be not as bad as feared, then the banks may be able to resume paying dividends later in the year.

Macquarie Group (+8.9%) also reported its full-year result in May, delivering its second highest ever annual profit. This was achieved despite taking a significant increase in provisions, which one suspects may well turn out to be conservative. Graincorp (+24.9%) delivered a weak, drought-affected result but rallied strongly on the very positive seasonal outlook, while the recently-demerged United Malt Group (+5.2%) also outperformed. Packaging company Amcor (+7.0%) rallied after delivering a positive Q3 trading update, while Orora (+3.1%) announced a large special dividend to be paid in June.

The key negative contributors over the period included the Fund’s more defensive holdings such as Woolworths (-1.1%), Coles (-1.0%) and Suncorp (0.0%), while gaming stocks Crown Resorts (-3.0%) and Tabcorp (0.0%) also underperformed.

EIGA Activity

During the month, we took profits and trimmed our holdings in BHP, Rio Tinto and Fortescue Metals. The Fund also participated in a raising by United Malt Group. At month end, stock numbers were 34 and cash was 7.3%.

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 May of 1.72 cpu, bringing the total income return for the last 12 months to 10.5% or 15.3% 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 will not be repeated in the current year.

Across the market, a number of companies have announced the reduction or suspension of their dividends in order to conserve cash in the face of the downturn. However, the Fund has now banked the majority of the dividends budgeted to be received in the FY20 financial year. 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.

In addition, we may seek to enhance the income generation of the Trust 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.