Investment Objective

Contango Income Generator Limited (“CIE”) is an income-focused listed investment company, with a portfolio of companies largely outside of the ASX top-20. CIE’s objective is to pay quarterly dividends that provide investors with an attractive and sustainable income stream that is franked to the maximum possible extent. We select companies that, in aggregate, have a history of paying consistent dividends. The portfolio is characterised by a strong and diverse portfolio of companies that exhibit good cash flows and business models.

Over the past 12 months, CIE has paid a dividend yield of 5.84%, or 7.92% including franking credits. Dividend yield is calculated as the dividends attributable to the 12-months to 31 December 2019 relative to the closing share price at the beginning of the period.

Performance Summary

CIE’s investment portfolio returned -3.1% for month of December. The NTA before tax of the portfolio was $0.93 per share after payment of the 1 cent per share, fully franked dividend to shareholders on 20 December.

The broader market, as measured by the S&P/ASX All Ordinaries Accumulation Index fell 1.9% during the month. After removing the top 20 companies by market capitalisation to better reflect CIE’s investment universe, the index also declined 1.9%.

Portfolio Commentary

With its share price having risen over 35% in the second half of 2019, CIE took profits in Lendlease Group (LLC). As expected, the company announced the sale of its engineering division, though the terms of the sale were not as positive as we were expecting and we reduced the position.

McMillan Shakespeare (MMS) was added to the portfolio late in the month after issuing, what may be best described as, a subdued trading update on 12 December. CIE had earlier sold a significant portion of its holding in MMS into the share buyback, announced back in August 2019, at $16.60 per share and the repurchase price, post December’s trading update was $12.94.

December proved a difficult month to pick individual winners. The weak domestic economy continues to see an increasing number of companies announce earnings downgrades. Several CIE holdings suffered downgrades of differing proportions over the month including two fuel retailers Z Energy (ZEL) and Viva Energy Group (VEA). ZEL announced tougher competition was negatively impacting its margins and VEA followed suit not long after. Softer advertising markets are impacting companies including Southern Cross Media Group (SXL) whose share price weakened further in December whilst car leasing company, Smart Group (SIQ) also communicated a soft outlook to the market.

Market Commentary

The fall in the Australian equity market appeared to be the outlier in December given the majority of major developed global equity markets continued their moves higher. The Asian region performed strongest with the major Hong Kong and China indices rising 7.4% and 6.2% respectively. US and European share markets also enjoyed solid gains over the period driven by an improvement in the US-China trade relations and much needed clarity in the UK with respect to Brexit post the elections.

Some positives were also seen in US economic data for November (released in December), in particular labour, with strong payrolls growth for the month. Inflation data also ticked up, though not nearly enough to change the current loose monetary policy settings.

Bond markets were mixed with the US 10-year benchmark bond unchanged whilst the Australian 10-year equivalent rose 34 basis points to 1.37%, its highest level since July 2019. The rise in Australian rates was one reason for the sluggish overall local equity market with the interest sensitive sectors struggling most.

Australian equity market sector performance was mixed with those sectors exposed to growth and higher interest rates falling most. Included amongst these were the Information Technology, REIT’s and Consumer (discretionary and staples) sectors. Utilities was the exception amongst the interest rate sensitive group, posting a positive return. The more cyclical sectors did better with Materials the standout.

The ongoing weakness (or lack of growth) in the Australian economy may well lead to further downgrades to those companies whose businesses are leveraged to the domestic economy. Whilst it is difficult to avoid investing in what is a large part of the overall market, we will continue to look for opportunities to “upgrade” the portfolio by investing in those companies that we believe to be most resilient in a struggling economic environment.