- Global markets rallied strongly in November, as the US election results and positive vaccine announcements caused markets to look optimistically towards a post-Trump, post-COVID future. This saw all major global indices deliver double-digit positive returns.
- The Australian market also performed strongly, with the ASX300 Accumulation Index delivering its strongest return in many years, finishing the month up +10.2% to be only 9% below its pre-COVID high.
- 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 (% p.a.)||Since Inception* (%)|
|Income Distribution including Franking Credits||0.60||1.90||2.60||6.90||11.00|
|Benchmark Yield* Franking Credits||0.30||0.90||1.80||3.70||5.40|
|Excess Income to Benchmark*||0.30||1.90||0.80||3.20||5.60|
^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 November 2020 was 1.29 cents per unit.
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Global markets rallied strongly in November, as the US election result and positive vaccine announcements caused markets to look optimistically towards a post-Trump, post-COVID future. This saw all major global indices deliver double-digit positive returns on the prospect of a recovery in economic activity and growth as well as a return to a more stable global political environment.
The Australian market also performed strongly, with the ASX300 Accumulation Index delivering its strongest return in many years, finishing the month up +10.2% to be only 9% below its pre-COVID high. The Fund delivered a very strong return of +13.1%, outperforming the market by 2.9%, as improving global growth prospects saw markets begin to rotate out of expensive growth stocks and towards the better value, more cyclical parts of the market.
Energy (+28.2%) was the best performing sector over the month, as the prospect of economic reopening lifted the oil price, which had been languishing at low levels since the onset of COVID. The Fund’s holding in Woodside Petroleum (+27.7%) performed strongly as a result.
Financials (+16.1%) also performed strongly, led by the major banks, which were up an average of +18.9%. Profit results and trading updates from the banks during the month highlighted that, while earnings were under pressure due to slow credit growth and low interest rates, the ultimate outcome in terms of bad debts due to COVID impacts is likely to be significantly less bad than initially feared. This is best highlighted by the fact that the vast majority of both mortgages and business loans have been able to resume full repayments once their deferral period has ended. Importantly, capital positions were strong and dividend payments were resumed. Given the high level of provisioning undertaken, and the strong capital positions, as conditions improve it is likely that the banks will be able to increase their dividends significantly over the coming years. Combined with their undemanding valuations, we still see meaningful upside and remain overweight the sector.
Other financial stocks which performed strongly on the rising market included asset managers Platinum (+36.4%) and Perpetual (+23.1%), while Tabcorp (+16.7%) rallied on takeover speculation and Telstra (+14.6%) rose following an investor day which highlighted the latent value in its infrastructure assets.
Agricultural stock Graincorp (+25.4%), rallied on the prospect of a very large east coast grain crop driving strong earnings over the coming year and into the following one and tourism and leisure stock Event Hospitality (+29.7%) performed well with the reopening of borders and easing of other restrictions. Mining services companies Monadelphous (+39.9%) and Seven Group (+13.3%) also gained on continued strength in the resources sector.
Ampol (+18.2%) outperformed after announcing a $300m off-market buy-back, in which the Fund will participate. These transactions are used to distribute surplus franking credits to investors and are structured in such a way as to generate attractive after-tax returns to investors on low tax rates.
Holdings which detracted from performance over the month tended to be the more defensive holdings, including Sonic Healthcare (-5.4%) which eased after a strong run, Woolworth (-3.1%), Coles (+0.6%), Orora (+2.7%) and Amcor (+3.9%). We remain comfortable with each of these holdings.
November was a quiet month in terms of portfolio activity, with the only changes being taking profits and reducing holdings in Amcor and Sonic Healthcare as well as reducing the holding in Suncorp, which faces some risk from business interruption insurance claims. Proceeds were used to increase the holding in Macquarie Group.
At month end, stock numbers were 35 and cash was 5.1%.
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 November of 1.29cpu, bringing the total income return for the last 12 months to 4.8% or 6.9% 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 the Fund by undertaking limited call-writing. At this stage, we are targeting a pre-tax distribution yield of approximately 7.0% for FY21.
November 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 growth. Importantly, 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 win with a Republican Senate, means there is likely to be increased fiscal stimulus, although not of the scale originally proposed. Similarly, tax increases are less likely and interest rates are likely to remain low. On balance, this should be positive for economic growth, corporate earnings and markets overall.
The domestic outlook seems increasingly positive, with COVID largely under control, activity levels increasing, restrictions being eased and borders reopening. Key indicators around employment, loan deferrals and the property market are all surprising to the upside. Further, 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.
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.
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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.