Welcome to the June 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 -6.97% over the month of June, compared with the S&P/ASX 200 Accumulation Index return of -8.77%.

Over the past 12 months, SWTZ has paid a distribution yield of 3.37%, or 4.77% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 30 June 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 Australian equity market continued the sell-off in June with the ASX 200 falling close to 9% in the month and finishing the fiscal year down 6.5%. The broad falls in June flowed through to most sectors of the ASX 200 with only Consumer Staples enjoying positive returns, while Materials, Financials, and Information Technology led the biggest underperformance.

Over the course of the COVID-19 pandemic, central banks spent considerable time reassuring investors what might lie ahead for both interest rates and inflation. Unfortunately, the glide path back to a ‘goldilocks’ economy assumed that inflation would be transitory in nature. In the end, inflation has prevailed. Now the unfortunate combination of errant inflation and an unwelcomed slowing of economic growth is the central challenge.

Investors are not currently focused on what the shape of the recovery will be, rather whether the forthcoming downturn will be soft, hard, or finely balanced. What is evident is that foretelling the outcome is not possible. Our working assumption is that heightened vigilance is warranted, with a portfolio layered with a combination of industry leaders that have exhibited greater resilience through economic cycles. In times of heightened uncertainty, leaders in vital industries provides a safer harbour, and can enhance their competitive advantage in times of economic duress. The hallmarks of durable earnings and conservatively financed balance sheets remains the course of the day.

While there may be further adverse factors to navigate, there has been a silver lining with the reopening of international borders which has allowed the Fund to visit companies and industry participants face-to-face in the jurisdictions in which they operate. Many of the companies on the ASX 200 in which the Fund invests have significant operations abroad and firsthand interactions in their local markets have provided invaluable insights. We recently returned from meetings in the UK and Europe across Banking, Healthcare, Logistics and Mining sectors. Our key observations were:

• Brambles (BXB) – Pricing & surcharge mechanisms in contracts have been effective tools in passing through cost inflation. Demand & pallet scarcity is providing pricing power for BXB. Longer inventory cycles remain an ongoing risk as companies are holding onto pallets longer, which has led to pallet shortages.
• CSL & Healthcare – After two years of supply disruption, there has been a recovery in the supply of plasma, an important step in meeting the structural demand for plasma therapies globally. Higher collections are helping to improve unit economics with meaningful margin uplift expected in FY23. The private healthcare market is coming back strongly in the UK as the backlog for general practitioners & the National Health Service are at near record levels.
• Mining – Across the mining industry, the difficulties in bringing on new supply in either brownfield or greenfield developments should not be underestimated. Scarcity of supply and underinvestment will a key challenge for decarbonisation. The mining industry remains disciplined on capex, debt and focused on shareholder returns.

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.