Welcome to the January 2023 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 3.67% in January 2023 compared with the S&P/ASX 200 Accumulation Index benchmark return of 6.23%.

Over the past 12 months, SWTZ has paid a distribution yield of 5.74% or 7.60% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 31 January 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

Global equity markets had a strong start to the year, with the ASX 200 rally in January being the best start in over three decades. The strength in the ASX 200 was broad-based with all sectors (except Utilities) contributing to a positive performance. The cyclical sectors of Consumer Discretionary, Materials and Real Estate led the ASX 200 higher.

At a portfolio level, BHP Group, Macquarie Group and Northern Star were notable strongly performing stocks. Whereas the defensive stocks of Spark NZ, Amcor and Brambles weighed negatively on performance – these companies ironically being some of the best-performing stocks in the portfolio in 2022.

The start of 2023 has been markedly different to 2022 where risk assets were progressively priced lower by the weight of inflation, the unprecedented rise in interest rates and a Chinese economy closed due to COVID-19.

The recent appetite for risk has been driven by an improvement in global macroeconomic data that has eased financial conditions with expectations of inflation having peaked and a slower pace of interest rate rises. Moreover, the change in the mood of the markets has been further supported by a surprising COVID-19 U-turn by Chinese policymakers to reopen their economy to the world, a pivotal driver for higher commodity prices. Significantly, the resilience in consumer and employment data, combined with China’s reopening, suggests that the Australian economy will continue to grow this year, providing the foundation for corporate earnings to expand also (albeit at more moderate levels).

Nonetheless, the rapid rise in risk assets at the start of 2023 has largely priced in a ‘goldilocks’ scenario (not too hot, not too cold) whereby central banks successfully navigate a ‘soft’ landing for the global economy and avoid a serious global recession.

As such, much of the good news reflecting a more stable outlook, is largely priced into equity market valuations. In fact, valuations now sit comfortably above their long-term historical average. The ASX 200 Index is trading on a 12-month forward Price Earnings Ratio (PE) of ~15.5 times, well above its recent low point of ~12 times in June 2022, and above its 30-year average of ~14 times. This is at a time when the cost of capital (higher interest rates) is still rising and corporate earnings revisions are negative, highlighting further pressure on the outlook for corporate earnings. We expect in 2023 that the absolute level of interest rates will progressively weigh on equity market valuations.

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.