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

Performance Summary

The portfolio delivered a return of -2.71% in May 2023 compared with the S&P/ASX 200 Accumulation Index benchmark return of -2.53%.

Over the past 12 months, SWTZ has paid a distribution yield of 5.76% or 7.66% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 31 May 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 market declined in May as Banks and Resources, the bell-weather sectors of the Australian equity market, weighed heavily on market returns. The 1H23 bank earnings results highlighted the near-term outlook remains challenging. The initial benefits of higher interest rates on bank net interest margins have been diluted by elevated competition for deposit and mortgage customers. A more cautious outlook for earnings and returns for the banks has further contributed to its relative underperformance.

The sell-off in resource stocks reflects rising recessionary concerns in the West and a weaker-than-expected economic recovery in China. The initial enthusiasm for a recovery in commodity prices from China’s re-opening out of the pandemic has been dampened in the short-term by disappointing domestic manufacturing and employment data suggesting a more sluggish economy. The Energy sector has also not been immune to recessionary concerns over a weaker outlook for global industrial production. In sharp contrast, optimism towards the Technology sector’s improving growth outlook and futuristic benefits of Artificial Intelligence underpinned the outperformance of growth stocks relative to value stocks over the month.

At a portfolio level, Industrial and Health Care sectors led by Cleanaway Waste Management, CSL and Integral Diagnostics were notable strong performing stocks. Conversely, BHP Group, Ramsay Health Care and Amcor weighed negatively on performance. Undoubtedly, there has been a material divergence in performance within the Health Care sector. CSL’s share price outperformance over the last year (~+15% relative to the ASX 200 ~+1%) has been underpinned by a robust recovery in its plasma therapies division. CSL’s plasma collection volumes are up ~30% year-on-year, providing an uplift in operating margins. With initiatives to improve further productivity and operating leverage, CSL remains well placed to deliver double-digit earnings growth over the forecast period. Ramsay’s 3Q23 update highlighted a more challenging operating environment. While there has been a solid recovery in elective surgical admissions in Australia and the UK, ongoing cost headwinds relating to labour availability and wage inflation have impacted operating margins. Over the medium-term, we believe Ramsay should be a beneficiary of a continued recovery in surgical volumes and momentum returning in its non-surgical categories driven by ageing demographics and chronic disease.

The recent US and Australian reporting periods have highlighted that corporate earnings remain relatively resilient despite the impact of rising interest rates. Earnings growth is expected to slow over the remainder of calendar 2023, but still record low single-digit earnings per share growth. The ASX 200 is trading on a 12-month-forward price earnings ratio of ~14.5 times and a dividend yield of ~4.3% (around their 30-year averages). While the ASX 200 is neither ‘cheap’ nor ‘expensive’ on historical metrics, we continue to be mindful that the backdrop for the global economy suggests a further slowing in activity. Our portfolio remains positioned in the key sectors of defensive Industrials, Health Care and Materials, all of which we believe continue to offer favourable long-term prospects.

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.