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

Performance Summary

The portfolio delivered a return of -2.42% during the month compared with the S&P/ASX 200 Accumulation Index benchmark return of -2.84%.

Over the past 12 months, SWTZ has paid a distribution yield of 4.00% or 5.43% including franking credits. Distribution yield is calculated as the distributions received over the 12 months to 30 September 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 in September as rising bond yields weighed heavily on global stock market valuations. At both an Index and company level, equity markets have now started to respond negatively to the pressure of higher interest rates. A renewed ‘hawkish’ stance by the US Federal Reserve has unsettled investors, concerned that interest rates could remain ‘higher for longer’ due to renewed inflation fears.

The goldilocks economic scenario has dimmed with the possibility of another Federal Reserve rate hike this year and less rate cuts planned for 2024. Undoubtedly, higher bonds yields and evidence of slower economic growth present a challenging backdrop for investors.

Whilst the ASX 200 12-month forward Price Earnings Ratio (PER) is trading at ~15.5 times, a modest premium to its long-term average of ~14.3 times, a quickening pace of negative earnings revisions by analysts has further potential to dampen market sentiment. Combined with the ASX 200 dividend yield now being below the 10-year government bond yield for the first time since 2011, equity investors are rightfully wary.

At the sector level, Energy, Insurance and Materials were the strongest performers in September, whilst Health Care, Real Estate and Technology underperformed. At a portfolio level, this translated into the Energy and Materials sectors exhibiting greater resilience. Specifically, BHP Group, Santos, and Treasury Wine Estates were notable strong performing stocks. Whereas CSL, Goodman Group and Northern Star Resources weighed on performance.

Understandably, it is a challenging period for investors, as equity markets undergo a meaningful downward valuation adjustment. A longer period of higher interest rates will continue to be a headwind for those parts of the market leveraged to bond yields and a higher cost of debt. This includes growth companies without the benefit of solid cash flows, REITs, infrastructure stocks and highly leveraged industrial companies. We believe that it is prudent to be positioned in companies that exhibit ‘earnings resilience’ and suitably conservative balance sheets. As such we have further adjusted the Fund’s portfolio to reflect these attributes.

Furthermore, an area of concern has been the underperformance of Health Care in the portfolio. Whilst we readily acknowledge the recovery out of the pandemic has been slower than anticipated, our investment thesis remains that the structural industry dynamics, namely: population growth, chronic disease and demographics provide pivotal support. Moreover, Health Care remains one of the few sectors positioned in the ASX 200 to deliver double digit earnings growth over the next 12 months.

In summary, whilst we expect that higher bond yields and slower earnings growth will continue to be a headwind for equity markets, we believe the Fund’s portfolio is well positioned for these conditions.

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.