Welcome to the October 2019 Investment Update for the Switzer Dividend Growth Fund (SWTZ). Click here to download the report.
The Switzer Dividend Growth Fund (SWTZ) is an income-focussed 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 to 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.
Over the past 12 months, SWTZ has paid a distribution yield of 7.88%, or 11.25% including franking credits. Distribution yield is calculated as the distributions attributable to the 12-months ended 31 October 2019 relative to the SWTZ unit 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. This was the case in October with the portfolio posting a small loss of 0.15% over the month, outperforming the benchmark S&P/ASX 200 Accumulation Index return which fell 0.35%. Similarly, for the three months ended 31 October 2019, the portfolio achieve a positive return of 1.05%, while the benchmark index fell 0.91%.
The SWTZ portfolio was active during October with profit taking in a number of holdings that have performed strongly having either hit or exceeded our target prices. Proceeds were invested into a number of the portfolio’s existing, defensive positions including Amcor, Transurban Group, Spark Infrastructure Group, Dexus and AusNet Services.
SWTZ also increased its position in ANZ Banking Group after the company reported earnings. The allocation was made just prior to the share price trading ex-dividend. The strategy of buying post-result often helps the investment team by allowing time to examine the result, thereby potentially avoiding any disappointment yet, when appropriate, retain the ability to invest and receive the dividend. Two of the strongest portfolio performers in recent times, James Hardie Industries and Aristocrat Leisure were exited.
The SWTZ cash weight rose slightly to 3.5% at month end, above the target of 1.5% – 2.0%.
Global markets were again stronger over the month with Japan (+5.0%), the US (NASDAQ +3.7%, S&P 500 +2.0%), Germany (+3.5%) and Hong Kong (+3.1%) leading the charge. The UK (-2.2%), Canada (-1.1%) and Australia (S&P/ASX 200 -0.4%) were the laggards. The uplift in markets in October came largely from the better than expected results from US companies reporting their third-quarter earnings.
Bonds continued to sell-off with the Australian 10-year government benchmark bond finishing 12 basis points higher at 1.14%. Its US 10-year counterpart finished at 1.69%, up 3 basis points. The bond sell-off in recent months appears to be driven by fading market expectations of any lasting economic downturn due to the US-China trade dispute.
In Australia, there was a large performance divergence amongst the sectors (within the ASX 200). The Information Technology and Financials sectors gave up considerable ground during the month, falling 3.9% and 2.8% respectively. Health Care (7.6%) and Industrials (+3.0%) were the best performing sectors. Sector performance proved to be a slight headwind for SWTZ.
There was minimal divergence in the performance of the portfolio holdings in October. The largest contributors over the period were CSL (+9.6%) and Sydney Airport (9.3%). CSL is currently a modest weight in the portfolio given its current yield is only around 1%. However, the company has, and we think will continue to, provide SWTZ with capital growth over the medium-term. Bank of Queensland was the worst performer in the portfolio, falling 8.8% after reporting earnings below market expectations. SWTZ will continue to hold Bank of Queensland for its attractive 9.0% gross yield.
The US Fed cut interest rates last month and indicated rates were likely to be on hold for some time to come. Whilst economic data remains positive, it is slowing, and important trade issues remain unresolved. Global central banks remain committed to supporting economic activity and liquidity in financial markets whilst there is no threat from higher inflation. This environment is positive, in general, for the market. However, volatility will likely return at the first sign of poor economic data or tightening liquidity. SWTZ remains predominantly invested in quality companies that that pay relatively high and sustainable dividends. This underwrites the SWTZ income objective. In a world of sustained, low interest rates, these companies are becoming increasingly valuable.
We also invest a small portion of the portfolio in companies that we expected can deliver capital returns. Any volatility in the market may provide opportunities to both invest in companies we believe offer good risk adjusted returns and allow us to realise profits in those companies that become overvalued.