Please click here to download a copy of CIE’s latest NTA statement and portfolio update.

Investment Objective

Contango Income Generator Limited (ASX: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 5.80%, or 7.54% including franking credits. Dividend yield is calculated as the dividends attributable to the 12-months to 31 October 2019 relative to the closing share price at the beginning of the period.

Performance Summary

CIE’s investment portfolio returned -0.83% for month of October. The NTA before tax of the portfolio was $0.95 per share.

The market, as measured by the S&P/ASX All Ordinaries Accumulation Index, returned 0.37% for the month. After removing the top 20 companies by market capitalisation to better reflect CIE’s investment universe, the index returned 0.07%.

Portfolio Commentary

CIE’s cash weight at the end of the month was 5.3% relative to its 5.0% target. The portfolio was active during the month of October, either exiting or trimming holdings that had reached or exceeded our price targets. Proceeds were re-deployed into our existing, more defensive holdings, reflecting our cautious market outlook.

Companies in which we realised profits included, IPH, Aristocrat Leisure, Brickworks, SmartGroup Corp, ASX, Bapcor and Western Areas. We exited IPH and Western Areas, realising a healthy profit in both.

IPH Limited share price

Source: Bloomberg

CIE increased positions in its existing defensive, yield investments including Ausnet Services, Spark Infrastructure Group, Dexus, APA Group, Sydney Airports and initiated a position in Charter Hall Retail REIT during the period.

CIE’s holding in Southern Cross Media Group was increased when the company’s share price plunged after a significant profit downgrade. The downgrade appears mostly the result of cyclical weakness in the advertising market which impacted the group’s radio operations. We believe the lower share price provided an attractive opportunity to add to the exisiting holding.

CIE participated in the McMillan Shakespeare buyback over the month. The price received included a lucrative $11.96, fully franked, dividend.

Market Commentary

Global markets posted another strong month of gains. Leading the charge was Japan (+5.0%), the US (NASDAQ +3.7%, S&P 500 +2.0%), Germany (+3.5%) and Hong Kong (+3.1%). The UK (-2.2%), Canada (-1.1%) and Australia (S&P/ASX 200 -0.4%) were the laggards. The uplift in markets in October came largely from the better than expected results from US companies reporting their third-quarter earnings.

Bonds continued to sell-off with the Australian 10-year government benchmark bond finishing 12 basis points higher at 1.14%. Its US 10-year counterpart finished at 1.69%, up 3 basis points. The bond sell-off in recent months appears to be driven by fading market expectations of any lasting economic downturn due to the US-China trade dispute.

In Australia, there was a large performance divergence amongst the sectors (within the ASX 200). The Information Technology and Financials sectors gave up considerable ground during the month, falling 3.9% and 2.8% respectively. Health Care (7.6%) and Industrials (+3.0%) were the best performing sectors.

Company, rather than sector selection, was the main performance driver for CIE in October. Iluka Resources (+17.6%), IRESS (+10.0%) and Sydney Airport (+9.3%) were the best performers with the investment in Iluka being an example of adding value to the portfolio where we see an appropriate opportunity in a company outside of the mid-cap yield universe.

Southern Cross Media Group (-33.6%), GWA Group (-14.5%), Bank of Queensland (-8.8%) and IPH (-8.4%) were the largest detractors. We have added to the Southern Cross position and will continue to hold GWA on the back of our belief in the strength of their business models and management teams.

Portfolio Outlook

The US Federal Reserve cut interest rates towards the end of the month and indicated that rates were likely to be on hold for some time to come. Whilst economic data remains positive, it is slowing, and important trade issues remain unresolved. Global central banks remain committed to supporting economic activity and liquidity in financial markets whilst there is no threat from higher inflation. This environment is positive, in general, for the market. However, volatility will likely return at the first sign of poor economic data or tightening liquidity. The stabilisation of interest rates at low levels should be a positive for yield-focussed strategies like CIE in the medium term.