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

Performance Summary

The portfolio delivered a return of 0.12% in March 2023 compared with the S&P/ASX 200 Accumulation Index benchmark return of -0.16%.

Over the past 12 months, SWTZ has paid a distribution yield of 5.53% or 7.34% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 31 March 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 ASX 200 fell modestly (-0.20%) in March despite the elevated uncertainty caused by banking stress in the US and Europe. The swift action by regulators to stem contagion risk by protecting uninsured deposits in the US provided investor relief. Nevertheless, markets remained on alert to the prospect of tighter credit conditions, which was felt most acutely in the ASX Real Estate sector, down 6.4% for the month.

At a portfolio level, the Resources sector led by BHP Group, Northern Star resources and the telecommunication company Spark NZ, were notable strongly performing stocks. Conversely, Cleanaway Waste Management, Macquarie Group and National Australia Bank weighed negatively on performance. The collapse of Silicon Valley Bank and the subsequent tightening in financial conditions have led to sharp underperformance in the banks.

In March we travelled to the Europe to attend the investor strategy briefings by CSL, Ramsay Health Care and Sonic Healthcare. We also met with several Australian companies (outside of Health Care) that have significant operations in the region, including Brambles, Computershare, Macquarie Group, QBE Insurance group, Rio Tinto, Worley and Xero. The key insights from these discussions were:

• CSL – Plasma collection volumes have recovered to >10% vs pre-COVID-19 levels. Manufacturing focus is on improving immunoglobulin yields from existing volumes.
• Ramsay – Post COVID-19 revenue recovery is gaining month-over-month, with end 3Q23 run-rate the best in over 3 years.
• Brambles – Manufacturers are de-stocking and right sizing inventory levels. Normalisation of supply chains has allowed Brambles to look for new business opportunities.
• UK/European banks are cautious in their outlook, but the sector remains well capitalised and the level of impairments is low.
• Commercial property is expected to deteriorate further due to the higher cost of capital, availability of credit and slowing rental growth weighing on sector valuations.
• Inflation is easing with lumber and transport costs moderating.
• The global economy is at the early stage in the energy transition. The transition will continue despite the slowing global economy, with supportive policy regimes in the US and Europe set to fund an explosion of energy transition projects. Key challenges for energy transition are regulatory/permitting delays, labour shortages, supply of raw materials and capacity constraints of grid infrastructure.
• The Inflation Reduction Act provides further support for traditional renewable technologies (offshore wind and solar). This is likely to accelerate the industrialisation of hydrogen, clean fuels and carbon capture.

Undoubtedly, concerns over banking stress in the US & Europe have contributed to investor uncertainty over the outlook for interest rates and economic growth. The prospect of tighter financial conditions drives our preference for investments in companies that operate in resilient industries (i.e. Consumer Staples and Health Care), have strong balance sheets (i.e. Energy and Materials) and offer attractive dividend yields.

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.