Antares June 2020 Dividend Builder Fund Quarterly Investment Update
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Quarterly Investment Update Antares Dividend Builder– June 2020 For adviser use only Highlights for the quarter Performance: The Fund’s twin objectives are to provide a yield above that of the S&P/ASX 200 All Industrials Total Return index, as well as moderate capital growth over the medium term. Yield: The annual income yield to 30 June 2020 was 4.38% versus the benchmark’s yield of 3.21%. Many companies have announced changes to their dividend payments due to the coronavirus pandemic. We emphasize the importance of not using past performance as a guide to future performance. However, it is our objective to deliver income in excess of our benchmark. During the June quarter, dividends were paid by Boral, Nine Entertainment, Treasury Wine Estates, Viva Energy, Amcor and Harvey Norman. Contributors to capital returns: Positive contributors – CSL (underweight), Boral, Viva Energy; Negative contributors – Metcash, Afterpay (not owned), Macquarie Group (not owned). Stock Activity: Buys- Boral, CocaCola Amatil, GPT, Iress, Metcash, NAB; Sells – Treasury Wine Estates, Bank of Queensland, Harvey Norman, Tabcorp, Star Entertainment, Spark Infrastructure, Sydney Airport, Nine Entertainment Stock activity: Buys/additions – ; Sells/reductions – Fund snapshot Inception date 6 September 2005 Benchmark S&P/ASX 200 Industrials Total Return Index Deliver higher levels of tax effective dividend income than Investment objective the S&P/ASX 200 Industrials Total Return Index, and moderate capital growth Investment returns as at 30 June 20201 Since Period 3 months 1 year 3 years pa 5 years pa 10 years pa inception pa Portfolio3,4 income - 4.38 5.05 4.80 4.45 4.13 yield % Benchmark5,6 inc yield % - 3.21 3.90 3.99 3.94 - Net return2 % 14.7 -15.7 -2.3 0.7 7.5 5.8 1 Past performance is not a reliable indicator of future performance. Returns are not guaranteed and actual returns may vary from any target returns described in this document. 2 Investment returns are based on exit prices, and are net of management fees and assume reinvestment of all distributions.3 Calculated as the sum of the income yields over the period where the yield is income distributed during the period divided by the unit price (before fees) at the start of the distribution period. 4 Income yield at 30 June. 5 Calculated as the sum of the monthly returns of the S&P/ASX 200 Industrials Total Return Index minus the monthly returns of the S&P/ASX 200 Industrials Index (price index). 6 Income yield at 30 June. Strategy, outlook and portfolio activity Overview The surprisingly strong returns achieved by global equity markets over the quarter have bewildered many. For example, at the start of the quarter most would have thought it very disturbing for the US to be experiencing over 50,000 new coronavirus cases daily at quarter end. Yet the DOW, S&P and Nasdaq share market indices are approaching pre coronavirus levels. What is behind this market strength? The positive case for equities 1 • Economic data has suggested the downturn will be not as severe as initially expected, and that a “V” shaped recovery is occurring. • Equity markets are typically forward looking, with share valuations representing the expected future cash flows over the life of a business. As such, the direction of earnings expectations is more important than the quantum, so an improvement in business conditions signals better future cash flows and therefore warrants an increase in value. • Central banks and governments globally have forced interest rates low, and signalled they will keep them low. As cash flows from shares are compared against returns from bonds and fixed interest, lower rates can imply higher equity valuations, This assumes these rate changes are permanent. Cynics might suggest the US Federal Reserve’s actions in producing liquidity, and buying bonds, including the unprecedented action of buying corporate bonds is designed to boost markets. And some suggest earnings and valuation tools such as price earnings ratios are unnecessary, as the Fed and other authorities act to boost asset prices. The following chart measures global excess liquidity. Chart 1. World Industrial Production and excess liquidity Source: Credit Suisse Australian Equity Strategy Concepts, Damian Boey, 18 May 2020 Another short term side effect (that may lead to negative unintended longer term consequences), has been the driving down of low-rated credit spreads on the expectation of central bank buying, which has provided investors with confidence. • Governments around the world have pushed out unprecedented levels of stimulus. For example, the Jobkeeper, Jobseeker and other programs in Australia dwarf the stimulus packages of the GFC. Both government stimulus, and Central bank policies, have created huge levels of liquidity, much of which finds its way into asset prices. • During almost every recessionary market downturn, there is a period when equity markets rise, even as unemployment rises and earnings fall, as the market starts to price in the recovery. Hence it could be argued the share market performance in the June quarter was like other traditional market recoveries. But there is a possibility that markets have overshot the rebound. • Valuations are back to extremely high levels. Fear of missing out has caused a panic to buy equities. This is premised on the belief that governments and central banks will always bail out the share market. Such a belief was prevalent early in the year, prior to the coronavirus pandemic, yet it did not stop the market tumbling during the March quarter. • After every recession, there is a period in which markets rebound before earnings, however, the current problem is that the recovery is based on massive stimulus programs that due to their size must be temporary, and therefore the ongoing level of corporate earnings will be lower than that now expected. Also, another question is that given the acceleration of the market downturn and upturn relative to normal cycles, maybe this recovery phase of the market is already complete. • What happens when the Fed and other Central bank balance sheets contract? What happens when governments reach the limit of their ability to debt fund fiscal expansion? Surely this means that at some point in the future, economic growth must be lower and there must be some doubt that interest rates can stay low forever. • Ironically, perhaps the time of most risk for equities will be during a strong economic expansion, as the market will be faced with the withdrawal of public stimulus measures. • The market rebounded initially on the expectation that coronavirus cases might be peaking around the end of March. Yet cases have risen in a second wave, and the market has risen, creating a disconnect. The issue is not that the virus will not eventually moderate, more that the extension of shutdowns will create more irreversible economic damage, especially on small businesses and employment. Dividends 2020 has been a tough year for income seeking investors. Interest rates on government bonds are minute, short term cash rates are miniscule, and many companies have cut or cancelled dividends resulting in a much lower yield than would have been Antares Dividend Builder Quarterly Investment Update – June 2020 2 expected at the start of the year. Even investors owning direct property will in some cases have been required to provide rent relief to tenants. Our portfolio activity around the dividend outlook can be broken into two categories. 1. Moving out of stocks where we believe there may be a permanent diminution in yield into stocks with higher and safer yields. 2. During the coronavirus sell off, we decided that some of the share price falls were way out of proportion to the likely decline in long term value of the business. As such, we elected to hold some stocks where we assessed the yield cut would be temporary, and that the share price had overshot to the downside. As it turned out, the safe earners underperformed badly in the June quarter, and some of the stocks we held which had, or likely will cut dividends (such as Star Entertainment, Boral, and Tabcorp) rebounded very strongly, ie the percentage share price increases were in excess of the dividend cut. One of the surprising features of the coronavirus related uncertainty is that both high and low yielding stocks have seen cuts or cancellations in dividends. Cuts to bank dividends were likely due to the regulator; cyclical stocks cut for prudence, and some due to a lack of earnings; but surprisingly, even growth stocks such as Cochlear, James Hardie, Aristocrat and Seek have cancelled a dividend. Perhaps most surprising of all was that even a strongly performing gold stock, Northern Star, postrponed its dividend. We think that although many of these cuts were prudent given the economic and market uncertainty, we expect Australian companies will, after a recovery in the economy, return to lower payout ratios resulting in a lower yielding market. This is not all bad news, as it will increase the sustainability of dividends and improve the level of reinvestment in businesses, which in turn should improve the future growth in dividends. Using the banks as an example, we expect dividend payouts to return to around 50% to 60% of profit, which will take a lot of pressure off share issuance, still provide extremely high yields, especially relative to bonds and cash, and should result in an improvement in the growth rate and level of volatility of their dividends. Australian Equities There have been a number of material issues occur over the quarter. Currency The strength of the AUD relative to the USD has been material. This means Australian companies with overseas businesses earn less when these overseas earnings are translated into AUD.