Welcome to the December 2022 Investment Update for the Switzer Dividend Growth Fund (SWTZ or the Fund). Click here to download the report.

Performance Summary

The portfolio delivered a return of -1.97% in December 2022 compared with the S&P/ASX 200 Accumulation Index benchmark return of -3.21%.

Over the past 12 months, SWTZ has paid a distribution yield of 5.89% or 7.84% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 31 December 2022 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

The benchmark index fell in December as central banks remained determined to further tighten financial conditions by pushing official interest rates higher. The path of higher interest rates has had a harmful impact on equity valuations in 2022.

A common theme for global equity markets in 2022 was a significant de-rating in valuations. The combined impact of persistently high inflation and the rise in bond yields provided a major headwind for price-to-earnings (PE) ratios in 2022. The decline was most prominently felt in the cyclical and technology stocks that are sensitive to rising rates.

This was exemplified with the US NASDAQ index enduring a decline of -32% over the course of the calendar year as the PE ratio contracted from 32 times to 23 times. From a global perspective, the Australian share market fared comparatively well, with the S&P/ASX 200 Accumulation Index delivering a total return of -1.1% in 2022, supported by larger exposures to the Banking, Commodities and Energy sectors. Notwithstanding this, the S&P/ASX 200 PE ratio contracted from ~18 times to ~14 times during 2022 and is now back in the vicinity of its long-term average (i.e., being neither materially cheap nor expensive on a historical basis).

At a portfolio level, Spark NZ, Northern Star, and Integral Diagnostics were the best performing stocks. Whereas Macquarie Group, Commonwealth Bank of Australia and Atlas Arteria weighed negatively on attribution.

With the prospect that interest rates will continue to push higher in 2023 and at a time when earnings growth is set to moderate, we have reduced the portfolio’s exposure to higher PE stocks that offer only modest dividend yields. In December, we divested our position in Coles which trades on a 12-month forward PE of >20 times and a dividend yield below the market average. We used the proceeds of the Coles divestment to initiate a position in Metcash, a leading wholesale distribution company with operations across food, liquor and hardware. Metcash’s most recent 1HFY23 was encouraging, with sales growth of 8% and EBIT growth of 10%. Metcash’s growth relative to the market combined with its PE ratio of ~13.5x and a dividend yield of ~5.3% provided an attractive entry point.

We are cognisant that tighter financial conditions (a higher cost of capital) for Australian corporates will place a burden on earnings momentum and margins in 2023. With this in mind, valuations and balance sheet strength will remain our focus. The portfolio is balanced across defensive industrial value sectors and companies providing dividend yields above the market average.

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.