Welcome to the October 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 4.54% in October 2022 compared with the S&P/ASX 200 Accumulation Index benchmark return of 6.04%.

Over the past 12 months, SWTZ has paid a distribution yield of 5.40% or 7.14% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 31 October 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

Global equity markets staged a dramatic recovery in October, reversing much of the declines from the September low point. The ASX 200 rallied 6.0% in October led by the retail banks benefiting from the rapid rise in cash rates. Overall, the strongest performing sectors were Banks (+14.5%), Energy (+9.5%) and Real Estate (+9.3%), whereas Consumer Staples (-0.2%) was the worst performing sector in October.

For the portfolio, Northern Star, Spark NZ, and Waypoint REIT positively contributed while Medibank Private (MPL), Integral Diagnostics and Cleanaway Waste Management were the key detractors. A notable observation from first quarter 2023 (1Q23) reports and Annual General Meeting (AGM) commentary is that companies have made a solid start to the year, but the outlook points to slower demand.

There are tangible signs that global supply chain pressures have started to ease due to weakening activity. The 1Q23 updates from Amcor and Brambles highlighted that operational momentum has started to slow as consumer companies begin to de-stock from the elevated levels built up over the COVID-19 pandemic.

A regrettable development over the last month has been the exposure of significant cyber-attacks on corporate Australia that resulted in disclosure of customers’ personal data, which had an adverse flow on impact on the portfolio. The most prominent cyber-attacks included:

• Optus – which notified customers of a material breach of customer data on 22 September 2022;
• MPL – which reported a cyber-attack resulting in a data breach on 13 October 2022; and
• Australian Clinical Labs – which notified the ASX of a cyber security incident that involved the personal information of its patients and staff on 27 October 2022.

The cyber-attack on MPL has forcefully illustrated the difficulty of dealing with these incidents. An initial assessment of the breach indicated that no sensitive customer data had been accessed and only its AHM/international student systems had been impacted.

However, subsequent investigations revealed that the data breach had extended to the MPL brand as well as to all policy holders. While the fallout on MPL’s share price was immediate (~-18%) following its reinstatement on the ASX, the longer-term damage to its brand name is yet to be determined. In its most recent update, MPL announced:

• a $25-35m support package for customers;
• the deferral of the CY22 premium increase until January 2023;
• the withdrawal of the previous FY23 policy holder growth outlook of ~2.7%; and
• that its business operations were continuing because to date its IT systems had not been encrypted by ransomware.

In the near term we expect MPL’s share price to be impacted by negative investor sentiment until the full extent of the cyber breach has been understood. Nevertheless, the impact on consensus earnings remains modest, with MPL trading on ~16 times earnings and a dividend yield of ~5% on FY23 estimates, providing valuation support.

The outlook provided by companies has raised concerns that tightening financial conditions have increased the risk of earnings downgrades heading into the new year. In an environment where slowing growth poses a key risk to earnings, we believe that it makes sense to maintain the portfolio’s overweight positions in Industrial defensives, Energy, Health Care and Telecom stocks.

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.