Welcome to the November 2021 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 -1.02% over the month of November, compared with the S&P/ASX 200 Accumulation Index return of -0.54%.

Over the past 12 months, SWTZ has paid a distribution yield of 2.98%, or 4.21% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 30 November 2021 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 closed modestly lower in November for the third consecutive month. The top contributor to returns over the month was Materials (+6.3%) whilst Financials (-6.9%) and Energy (-8.3%) were the underperformers. At a stock level, BHP Group (BHP), Goodman Group and Woolworths Group contributed most to returns, while earnings results from Commonwealth Bank of Australia and Westpac Banking Corporation and lower energy prices for Santos weighed on returns.

Banks have been a key beneficiary of the recovery in the housing market and the rally in cyclical stocks since the nadir of equity markets in early 2020. While banks have enjoyed a strong recovery in earnings and dividends, we believe that the tailwinds underpinning their performance are now firmly fading. During November we reduced our exposure to the banks as their most recent profit results highlighted a marked deterioration in earnings quality, with margins impacted by rising price competition in mortgage lending, combined with persistently high expense growth. Our cautious stance toward the banks was further reinforced by intervention from the Australian Prudential Regulation Authority (APRA) announcing a tightening of serviceability measures for new home loan applications. A further round of prudential measures is expected in the new year as APRA takes a “targeted and judicious” approach to strong housing loan growth. The effect of current and further prudential restrictions on borrowing is expected to dampen housing finance. Notwithstanding a more challenging backdrop, the banks still offer income investors an attractive dividend yield supported by strong capital buffers and will remain a core part of the portfolio.

We have used the proceeds from reduced bank holdings to add to our portfolio positions in BHP and Telstra. BHP’s share price has declined ~25% since the iron ore benchmark price peaked at ~US$224 in May. Although iron made up 57% of FY21 revenues for BHP, market expectations have already factored in a steep decline in iron ore prices during FY22. Since the FY21 result, BHP has announced the unification of its dual-listed structure, the sale of BHP Petroleum to Woodside Petroleum and the approval of the US$5.7bn Jansen Potash project. BHP also plans to exit its remaining coal assets. We view these developments favourably. With gearing below its target range and a simpler capital structure expected to be in place next year, we see potential for BHP to exceed its 50% dividend payout ratio and consider a share buyback.

Equity markets may be impeded in the near term by the uncertainty of the COVID-19 Omicron variant, and the prospect of more persistent inflationary pressures pushing central banks to consider tightening monetary policy settings. With this mind, the importance we place on investing in companies that continue to demonstrate earnings and balance sheet resilience remains steadfast.

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.