In this portfolio update Peter Switzer talks to Shawn Burns, Portfolio Manager of the Switzer Dividend Growth Fund (SWTZ), to discuss one of the Fund’s best performing stocks in May, and Shawn provides his outlook on the year ahead.

Peter Switzer (PS): Hello, welcome to our monthly catch up, with Shawn Burns, the portfolio manager of the Switzer Dividend Growth Fund. Shawn, good to see you.

Shawn Burns (SB): Good to see you, Peter.

PS: Particularly notice the 1.5 meters, or three pizza boxes apart we are.

SB: That’s exactly right, a safe distance.

PS: It’s been an unusual time, and you and I have never seen anything like this before, a pandemic-driven crash. What would be some of the things you’d like to point out that was so different, and difficult, for someone like you running a fund like this?

SB: That’s a really great question, Peter. I think that no one has been through this before, and it was interesting that a lot of people have focused on the virus and what that meant, and how fast it was spreading.

So I thought, well, let’s take one step from that and see. You’ve got the government stimulus – the biggest since World War II – coming on one side, and then the lockdown sort of restricting activity on the other. I felt that is would be really hard to work out what would happen.

It’s very important to watch what happens to the debt markets and the high yield bond markets and questions – those people who really need the money, can they get it? So, I focused on that as the guiding light. And these, typically, they are the canary in the coal mines, these high yield bond funds. When they bottomed and started rallying strongly in late March, it gave me confidence that the scales were tipping towards the stimulus outweighing the lockdown.

PS: I remember you sent me an email at the time….

SB: That’s right, yes and that has proved to be correct, so far.

PS: That’s good. What about the Fund and what’s happened to the Fund over that time?

SB: Switzer Dividend Growth Fund is invested in the best companies in Australia, as we see it. The companies we believe will survive and we are confident will get through this. When we look at all the equity raisings that have been made over the last few months, there’s only two companies that have raised equity within the Fund portfolio.

PS: Two out of what number?

SB: About 40, 35-40. So, very small. And that’s a sign of the strength of the underlying companies.

But I think dividends are the real issue, over this next year. We are trying to work out which companies will pay dividends and how low they’ll be, and trying to reposition the portfolio to keep a reasonable level of income without adding undue risk.

PS: Okay, you and I always try to guess what kind of dividend will come through, and obviously they’re going to be down because the banks have told us they’re either deferring or cutting the dividend. Shawn, what’s the ballpark guess for where the dividend might be, before franking.

SB: So after fees, before franking, probably between two and a half and three. Although that’s a lot of assumptions in there.

PS: That’s a fairly conservative three, two and a half, three?

SB: I’d say two and a half is maybe conservative, three probably isn’t.

PS: Adventurous. And add franking on top?

SB: And add franking. You know, we hope to be fully franked, we hope to maintain franking through that. Although that’s still using a crystal ball more than normal. But we are also moving the portfolio around to try and add those stocks that we think will pay distribution, but we don’t want to add them just for the sake of that and pay too much or add risk in the portfolio, because you’ll end up losing on capital down the track.

PS: The unit price has a filter, a bit like everybody else, but it has responded pretty well. Is that because, a lot of those companies you talked about actually had to raise capital?

SB: Yes, that’s one of the reasons. I think that also the value traders come back into favour a bit more, so that’s helped. A lot of these companies, I believe, were oversold on fear and now we are starting to see Australia coming out of this. There is Australian bias in the portfolio for the franking and Australia looks like a reasonable place to be at the moment.

PS: Do you think there’s going to be another significant leg down, possibly bigger than the first?

SB: I don’t think bigger from the first as I believe the first time is always the scariest, because people just don’t know what will happen.

If we see a second leg, it could be two things that drive it, either the virus gets out of control again, or the governments take out stimulus too quickly, because the economy is being held up by a lot of government spending at the moment. They are the two big risks, as we can see at the moment. But I don’t see it resetting to those March lows.

PS: Okay, so, despite the crisis, property company Stockland Group was the best performing stock in the portfolio. Can you explain why?

SB: Yes it’s up 24% at 31 May 2020. I think that’s probably one of the reasons why the portfolio has come back. Stockland has shopping centres, office towers, and residential, so it’s a mixed property group that was sold off quite severely. As time has gone on, people have realized it’s not quite as bad. And they’re able to put their arms around the problem and value it, rather than having this uncertainty, which really pervaded the market in March, and sent a lot of share prices down to oversold levels.

PS: Shawn, you know that I’m a little bit more optimistic than you by nature, but given the fact that the economy seems to be heading in a better direction than we might’ve thought, say, two or three weeks ago, if this economy does actually come through a lot better than was expected, do you think the banks could revise their view on deferring dividends?

SB: Well, the next interesting one will be Commonwealth Bank in August, everyone will be watching that to see what they, as the strongest bank, will do with their dividend. I suspect they’ll cut it, but I’m expecting they’ll pay something. The others will start around Christmas, November, that’s plenty of time. If the market or the economy is improving very strongly, maybe we’ll see small interims come out, and then we’ll see a bigger final in May next year.

PS: So that could turn your two and a half conservative into a three, if banks start to rally?

SB: That’s correct.

PS: Well, that’s something we should pray for, shall we?

SB: Certainly!

PS: That was Shawn Burns, and I’m Peter Switzer, for our monthly check up on the Switzer Dividend Growth Fund. Thanks for joining us.