Welcome to the April 2023 Investment Update for the Switzer Dividend Growth Fund (SWTZ or the Fund).

Performance Summary

The portfolio delivered a return of 1.91% in April 2023 compared with the S&P/ASX 200 Accumulation Index benchmark return of 1.85%.

Over the past 12 months, SWTZ has paid a distribution yield of 5.57% or 7.39% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 30 April 2023 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.

Portfolio Commentary

All sectors of the ASX 200 added value in April except Materials. In this calendar year, equity markets have weathered multiple interest rate rises, stickier inflation and a US regional banking crisis.

One of the key reasons why equity markets have been so resilient despite many risks, is because corporate earnings and margins have held up better than expected, supported by low unemployment and a resurgence of migration levels. Moreover, volatility in equity markets remains low, seemingly pricing in slowing economic growth but no recession. The most recent earnings reporting periods in Australia, the US, and Europe have generally exceeded expectations, underpinning the view that earnings are holding up better than feared.

At a portfolio level in April, Medibank Private (MPL), Northern Star Resources and Spark NZ were notable strongly performing stocks. Whereas Amcor, Ramsay Health Care and Cleanaway Waste Management weighed on performance. During the month, we reduced our position in MPL, using the proceeds to initiate a new position in Rio Tinto (RIO). In December 2022, we increased our holding in MPL following a sharp retracement in its share price due to a cybercrime incident. Since then, the stock has rallied strongly, with a total return of 25.7% year-to-date in 2023. Given the strong share price performance, MPL’s valuation now looks relatively full on a forward 12-month Enterprise to EBITDA (earnings before interest, tax, depreciation, and amortisation) multiple of 12.3x.

We have added RIO to the portfolio after a ~9% decline in the stock price over the second half of April, eliminated its year-to-date gain and its outperformance of the ASX200, which now lags by ~5%. The correction came amid a decline in the iron ore benchmark price, accompanied by slower-than-expected industrial production growth in China, as its economic recovery has so far been led by consumer spending in retail and services rather than a rebound in property, infrastructure and manufacturing. In addition, RIO’s exposure to copper is expected to rise from 9% of earnings (EBITDA) in 2022 to 25% in 2024. Critically, cooper is one of the key commodities in the energy transition for its role in electricity grids, renewable power generation and electric vehicles.

In a world with a higher cost of capital, we continue to prefer quality defensive businesses (consumer staples and health care) together with energy and resources which remain well placed to benefit from the green transition, whereby infrastructure spending should be a tailwind for these sectors in the coming years.

Investment Objective

The Switzer Dividend Growth Fund is an income-focused 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 deliver capital growth over the long term.