Welcome to the July 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 4.62% over the month of July, compared with the S&P/ASX 200 Accumulation Index return of 5.75%.

Over the past 12 months, SWTZ has paid a distribution yield of 5.58%, or 7.39% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 31 July 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

A bold recovery in July saw the ASX 200 rise 5.8%, with Banks, Technology and Real Estate sectors benefiting from lower-bond yields. On the other hand, concerns over China’s economy weighed on commodity prices with Materials being the only detractor for the month.

Equity markets proved remarkably resilient in the face of deteriorating economic data with rising inflation and the United States GDP declining for a second consecutive quarter, suggesting that the economy is showing signs of ‘stagflation’. Offsetting this pessimism was a better-than-expected second quarter results season for the S&P 500, where earnings are on track to deliver ~9% year-on-year growth, and the expectation that US rate rises are closer to peaking. However, we believe it is still too early to remove the guardrails as imbalances impacting the global economy remain prevalent. With this mind, the portfolio was further tilted towards defensive companies.

The speed and magnitude by central banks, including the Reserve Bank of Australia (RBA), to tighten monetary policy has had a negative effect on the housing market. National house prices fell 1.4% in July, registering the third consecutive month of declines. Over the past decade, there has been a strong correlation between bank share prices and the direction of Australian housing values. The weighting of the portfolio to the banks has been reduced in expectation of housing credit growth moderating as house prices decline and auction clearance rates fall.

The telecommunications sector is regarded as more favourable as rising interest rates slow the economy and inflation. An improved industry structure in Australia has seen Telstra and Optus announce matching price rises of ~5% during July, with Telstra indexing prices to inflation amid continuing strong demand for mobile data services. Moreover, the monetisation of both Telstra’s and Spark NZ’s mobile tower assets will provide the optionality for capital management initiatives, and the portfolio is invested in both of these companies.

As we commence the FY22 reporting season, we will be monitoring several key data points, namely:

• Is there evidence of demand slowing and are underlying earnings moderating?
• How are companies managing with higher cost inflation? Are they still able to pass through higher costs to the end consumer, with a key indicator being margin performance compared to 1H22?
• Are there companies exposed to changes in working capital ratios, inventory levels, and cash conversion?
• Are banks benefiting from an improvement in net interest margins from higher rates vs the slowdown in mortgage lending?
• Are commodity stocks being challenged on production and costs? What are the commodity producers view on capital expenditure and capital management?
• Do companies have visibility of earnings and confidence to provide guidance?

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.