Investment Objective

The Switzer Dividend Growth Fund (SWTZ) is an income-focussed exchange traded managed fund with a mix of yield and quality companies. The objective of the fund is to generate an above-market yield while maximising franking where possible and to deliver capital growth over the long-term. We select companies that, in aggregate, generate sustainable dividend income. The fund is characterised by a strong and diverse portfolio of companies that exhibit good cash flows and strong business models.
Performance Summary

Over the past 12 months, SWTZ has paid a distribution yield of 7.5%, or 9.9% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 30 April 2019 relative to the price at the beginning of the period.

Given its focus on income and capital preservation, over the long term we expect SWTZ to marginally underperform in rising markets and marginally outperform in falling markets. The portfolio performed well over the month, being up 2.9% against a market move of 2.4%.

Portfolio Commentary

The targeted cash level in the fund is usually 1.5-2%. At 30 April, cash was below this target at around 0.9%. The fund paid a 4.54c distribution (fully franked) on 16 April. The ex-date for this distribution was 1 April.

Activity was modest over the month. We sold some of our holdings in CSL and Charter Hall Group, both at a substantial profit. We trimmed our holding in CBA after a jump in the share price. CBA is the only major bank that will not pay a dividend this result season (it paid one earlier in the year). We exited our position in Magellan Financial Group after a very strong upward move in the share price.

We also increased our position in Unibail-Rodamco-Westfield (ASX:URW) as the company appears to have stabilised and is showing improving underlying growth. URW is the owner of some of the world’s best shopping centres and the company has an attractive yield.

URW share price

Source: Bloomberg

We have also added Lendlease to the portfolio. The company is a blue-chip property developer and has a huge work book. Over the last year, several contracts in its road building division encountered problems resulting in large losses. The share price subsequently fell from over $21 to below $13 and we see this as an opportunity. Importantly, the balance sheet remains sound and management has taken the initiative to wind down or sell the road division. We have added a modest position and will monitor the company’s progress.

Source: Lendlease

Market Commentary

Global markets again mostly pushed higher over April, led by the bellwether NASDAQ index up 4.7%. The German and Japanese markets were also higher by 7.1% and 5.0% respectively.
Whilst the bond market rally seems to have stabilised, interest rates remain near historical lows. The US earnings season has commenced and looks to have a positive skew at this stage. The

Chinese economy appears to have stabilised with leading indicators starting to turn positive. All these factors combined are giving investors confidence that the world’s equity markets can continue to rally.

Sector performance was very tight with the best performing sector, Financials, being 1.4% higher while the poorest performer, Materials, was down 0.4%. The month was mainly about individual company share price performance.

The best performing company in the portfolio was Reliance Worldwide (ASX:RWC) (+13.2%). The company’s share price was recently affected by a sell down by the Chairman, but now appears to have worked through this issue. Reliance also continues to make headway in its operations in the US and UK.

Reliance share price

Source: Bloomberg

Other companies whose share prices performed well included Star Entertainment (+8.6%), Coles (+6.4%) and James Hardie (+6.3%). There were no companies in the portfolio whose prices fell more than -5% for the month.

Portfolio Outlook

Given the strong rally post the large falls back in December, markets now look close to fair value in our view. The ongoing rally in bond markets implies that future growth is unlikely to be strong and low interest rates are likely to persist. The fund will focus on secure yield and growth companies where valuations appear reasonable.
The underlying earnings (and dividend) outlook for the companies in the fund remains solid. Moreover, their balance sheets remain very strong. These are both positive signs of the health of the portfolio. The fund participated in the Caltex buyback and intends to participate in the Woolworths buyback. These buybacks will help sustain the level of franking in the fund.
Interest rates remain low and economic activity, although slowing, appears to have stabilised and remains positive. While volatility in equity markets is expected to continue, indications are that inflation will remain largely benign giving confidence that the investment outlook remains favourable.