Switzer Dividend Growth Fund July 2023 Portfolio Update

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

Performance Summary

The portfolio delivered a return of 1.60% in July 2023 compared with the S&P/ASX 200 Accumulation Index benchmark return of 2.88%.

Over the past 12 months, SWTZ has paid a distribution yield of 3.74% or 4.41% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 31 July 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

The rise of the ASX 200 in July was supported by the belief that central banks are now close to the end of the interest rate tightening cycle thus avoiding a hard landing for the global economy.

With interest rates at a two-decade high, there was warranted concern that a broad-based contraction was inevitable. We believed that the cumulative effect of multiple rate rises would have a harmful impact on the economy and equity market valuations. Our proposition was that in an environment where interest rates moved from virtually zero to be up over 400 basis points in 14 months, corporate balance sheets and earnings would be strained. As such, we prepared the portfolio to have more defensive characteristics – to be overweight in Consumer Staples, Health Care and the Telecommunication sectors.

Instead, what has transpired has been a more benign outcome where the economy has remained resilient, supported by strong employment and high migration levels. At the same time, inflation has peaked and now is in an orderly decline, suggesting that monetary policy could achieve a soft landing for the economy.

Under this backdrop, cyclical Industrials (Energy, Materials and Discretionary) and Information Technology companies have been strong outperformers relative to quality and defensive companies. Moreover, the July bounce in the ASX 200 has now pushed valuations above average, with the price earnings ratio trading on more than 15 times for the 12 months to December 2023.

Nevertheless, we remain cautious heading into the upcoming FY23 earnings season. Recent company announcements and an increase in downward earnings revisions suggest Australian companies have begun to experience a slowdown, as higher interest rates and cost of living pressures weigh on the consumer. We expect a moderate downturn in corporate profits, with bottom-up expectations for the ASX 200 EPS forecasting a low single digit contraction for the 12 months to December 2023.

At a portfolio level, Industrials, Banks and Energy sectors led by Cleanaway Waste Management, National Australia Bank and Woodside Energy were strong performing stocks. Notably, the major banks (+6.6%) outperformed the broader equity market (+2.9%) following the RBA’s decision to hold the cash rate steady. Whereas CSL, Woolworths Group and Northern Star Resources weighed negatively on performance. Overall, the Health Care sector was the weakest sector for the second month in a row, weighed down CSL (-3.2%) where the pace of recovery post-COVID is slower than expected. While the Health Care sector has lagged materially over the last six months, we do expect a strong recovery in earnings over FY24-25.

In an environment where corporate profits are expected to slow, we remain defensively positioned in the key defensive Industrials sectors (Consumer Staples and Telecommunications) and Health Care, which should offer greater earnings resilience.

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.

DISCLAIMER: AGP Investment Management Limited (AGP IM) (ABN 26 123 611 978, AFSL 312247) is a wholly owned subsidiary of Associate Global Partners Limited (AGP) (ABN 56 080 277 998), a financial institution listed on the ASX (APL). AGP IM is the Responsible Entity and Vertium Asset Management Pty Ltd is the investment manager of Switzer Dividend Growth Fund (Quoted Managed Fund) (ARSN 614 066 849) (the Fund).

This material has been prepared for general information only. It does not contain investment recommendations nor provide investment advice. It does not take into account the objectives, financial situation or needs of any particular individual. Investors must, before acting on this material, consider the appropriateness of the material.

Any references to ‘We’, ‘Our’, ‘Us’, or the ‘Team’ used in the context of the portfolio commentary, is in reference to Vertium Asset Management Pty Ltd, as investment manager for the Fund.

Neither AGP IM, AGP, their related bodies corporate, entities, directors or officers guarantees the performance of, or the timing or amount of repayment of capital or income invested in the Fund or that the Fund will achieve its investment objectives. Past performance is not indicative of future performance.

Any economic or market forecasts are not guaranteed. Any references to particular securities or sectors are for illustrative purposes only and are as at the date of publication of this material. This is not a recommendation in relation to any named securities or sectors and no warranty or guarantee is provided that the positions will remain within the portfolio of the Fund.

Investors should seek professional investment, financial or other advice to assist the investor determine the individual tolerance to risk and needs to attain a particular return on investment. In no way should the investor rely on information contained in this material.

Investors should read the Fund’s Product Disclosure Statement (PDS) and consider any relevant offer document in full before making a decision to invest in the Fund. The Fund’s Target Market Determination and other relevant information can be obtained by visiting www.associateglobal.com.