Interesting times

The Australian stock market has just recorded its strongest monthly performance (+9%), one month after recording its worst monthly performance since 1987. Given this backdrop, we are pleased to report that the fund generated a +10% return in April.

We wrote in our March commentary that the current market turmoil was unique in several ways. We have never before experienced a complete halt of economic activity that was self-induced. Equally, we have never before seen such a huge and swift stimulatory response in both fiscal and monetary terms. The result is that there is a huge range of outcomes that are plausible, albeit they are heavily skewed towards lower economic outcomes.

Read the full commentary HERE

Top Holdings (alphabetically)

ANZ Banking Group Australia Financials

BHP Group Ltd Australia Materials

Caltex Australia Australia Energy

CBA Australia Financials

Contact Energy New Zealand Utilities

Spark New Zealand Ltd New Zealand Communication Services

Telstra Australia Communication Services

Viva Energy REIT Australia Real Estate

Westpac Australia Financials

Woolworths Australia Consumer Staples

We live in interesting times.

The Australian stock market has just recorded its strongest monthly performance (+9%), one month after recording its worst monthly performance since 1987. Given this backdrop, we are pleased to report that the fund generated a +10% return in April.

We wrote in our March commentary that the current market turmoil was unique in several ways. We have never before experienced a complete halt of economic activity that was self-induced. Equally, we have never before seen such a huge and swift stimulatory response in both fiscal and monetary terms. The result is that there is a huge range of outcomes that are plausible, albeit they are heavily skewed towards lower economic outcomes.

Corporates have not been slow to react. Job losses, spending cuts, store closures and capital raisings have all featured. So, too have dividend cuts and deferrals. This presents a tricky issue for an equity income fund such as ours. Should we abandon good quality businesses on the basis that they may not pay a dividend for the next half-year or two? We believe that would be short-sighted. A lot of companies with a history of solid dividend payment are displaying a high degree of conservatism in their capital allocation decisions – including by deferring or cancelling dividends.

As the past couple of months have shown, the situation is very fluid and, given the extreme uncertainty of the next 6 months or so, strong companies are often choosing to conserve capital. They may be proved prudent or they may be proved overly cautious, in which case it is likely that dividends will be re-instated sooner than the market currently anticipates. ANZ Bank is an example of a company that has deferred (but not cancelled) its half-year dividend pending a review to be delivered in August.

We will continue to invest in companies for the long-term and are willing to make an exception for non-payment of dividends in the short term given the exceptional circumstances. Importantly, our Fund will continue to pay quarterly dividends, although possibly at a lower rate for the remainder of calendar 2020.

As we also mentioned in our March commentary, the extreme market volatility has presented good opportunities to refine our portfolio. In particular, we have taken advantage of capital raisings to initiate positions in businesses we like at very attractive prices. Examples include Auckland Airport, Credit Corp, InvoCare and Ramsay Health Care. On the other side of the ledger, we exited our two hybrid positions as well as some of our smaller REIT holdings, which had failed to provide the performance expected of them in the market sell-off.

We approach May with a mixture of trepidation and excitement. It would be a brave person who tries to predict how the economy will perform over the next few months, and braver still to predict how the stock market will react. However, we are excited by the prospects for our portfolio over the longer term and the opportunity to add yet more good businesses at temporarily depressed prices.