Welcome to the February 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 1.44% over the month of February, compared with the S&P/ASX 200 Accumulation Index return of 2.14%.

Over the past 12 months, SWTZ has paid a distribution yield of 3.63%, or 5.14% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 28 February 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 rapid escalation in geopolitical risks has triggered a sharp rise in volatility for global equity markets. The Energy, Materials and Banking sectors were the strongest during the month, while the Healthcare, Technology and Telecommunications sectors were negative over the month. Notably, value stocks continued to outperform growth stocks as investors remained focused on the persistence of inflationary pressures and the prospect of tighter financial conditions. Despite the challenging environment, the February 2022 reporting season delivered largely positive results. Overall, there were net earnings upgrades to ASX 200 profits of 0.9% or $1.3bn, the second strongest result since the Global Financial Crisis.

The key themes of the February 2022 reporting period were:

1. The ASX 200 delivered a solid reporting scorecard. Earnings momentum continued to deliver earnings per share upgrades above the long-term average. Net earnings upgrades of 0.9% equate to total ASX 200 profits for FY22 in the vicinity of $141bn.
2. Earnings momentum favoured cyclical and value stocks. The uplift in earnings was largest across the Banking, Energy and Material sectors, whereas the high price/earnings sectors of Healthcare and Technology broadly disappointed.
3. Cost pressures. Strong revenue growth was offset by persistent cost pressures resulting in modest compression of EBITDA (earnings before interest, taxes, depreciation and amortisation) margins, with industrial companies most affected.
4. Capital allocation discipline. Despite buoyant revenue growth, investment spending intentions remain modest. Firms continue to favour buy-backs and mergers and acquisitions. Capital returns were the second highest in the past decade.
5. Balance sheets remain conservatively geared. The current Net Debt/EBITDA ratio for ASX 200 companies of ~1.2x is close to 20-year lows, with rising interest rates not yet translating to higher interest costs.
6. Tight supply constraints for commodities. The disruption from the potential ban of Russian exports across the key commodities (energy, grains, metals) when global inventories remain extremely tight has further added to the risk of higher prices.

Currently, there are many sources of risk facing investors. The tragic events unfolding in Ukraine have introduced further unknowable challenges and risks to the global economy. Nevertheless, Australia’s distance to the epicentre of Europe and its abundance of natural resources in agriculture, energy and minerals provide a solid footing for the continued growth of the economy and corporate earnings. Amid the volatility, SWTZ remains focused on holding quality industry leaders underpinned by strong balance sheets.

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. 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.