Contango Income Generator May 2019 Portfolio Update

Investment Objective

Contango Income Generator (ASX:CIE) is an income-focused listed investment company, with a portfolio of companies largely outside of the ASX top 30. CIE’s stated objective is to distribute 6.5% of the pre-tax Net Tangible Assets (NTA) per annum, while maximising franking where possible. We select companies that, in aggregate, generate a sustainable dividend income. The portfolio is characterised by a strong and diverse portfolio of companies that exhibit good cash flows and business models.

Over the past 12 months, CIE has paid a dividend yield of 6.2%, or 8.0% including franking credits. Dividend yield is calculated as the last four dividends paid over the 12 months to 31 May 2019 relative to the closing share price of $0.955 at the beginning of the period.

Performance Summary

CIE’s investment portfolio was positive over the month of May, with a return of +0.6%, underperforming the broader market, as measured by the S&P ASX 200 Accumulation Index, by about 1%. The result comes after a strong April number. The gain in NTA has recovered some of the fall that was seen at the end of last year. Dividends have been paid over this period as well. At the end of May, the NTA before tax of the portfolio stood at $0.930 per share.

Despite the positive portfolio performance, CIE’s share price is still at a significant discount to NTA. This seems to be a trend in the industry at present, with most listed investment companies trading at discounts to their NTA. Addressing the ongoing share price discount is something to which we are committed. The only way we will achieve this is by maintaining investment discipline and performance, increasing shareholder engagement and by growing our shareholder base.

Portfolio Commentary

CIE’s cash position at the end of the month was 6.0%, compared with a target cash weight of 5.0%. We will continue to be opportunistic with our investing so the cash level may move around this target.

Over the month activity in the portfolio was low. The portfolio added to existing holdings in Reliance Worldwide and Adelaide Brighton after the recent share price pullbacks. The potential bottoming of the residential housing market is a positive for both these stocks.

Adelaide Brighton Limited (ASX:ABC) Share Price

The portfolio continued to sell down its holding in Dulux to fund these purchases. Dulux was bid for last month at an attractive price.

The portfolio also sold down its AGL position at a profit. The regulatory outlook was not enhanced by the Federal election result.

Market Commentary

Global markets were buffeted over the month with all significant exchanges lower. The decline was led by the NASDAQ which was down 8.4%. The Dow Jones was down 6.7% while European exchanges and Asian exchanges were 6-8% lower.

The Australian market was marginally higher over the month, as the surprising Federal Election result helped the local index. Given the importance of franking to CIE investors, the CIE board supported the crusade against any proposed changes to franking credit legislation throughout the election campaign. The franking issue appeared to play a key role in the election outcome.

Bond markets around the world continue to rally (lower rates). The benchmark 10-year US government bond fell from 2.5% to 2.1% over the month, a significant move. The rally in bonds and sell off in equities reflect ongoing trade war concerns and a slowdown in world growth estimates, which, of course, may be related.

Sectoral performance was diverse over the month of May, with Communication Services (+7.3%), Healthcare (+3.3%) and Materials (+3.1%) being strongest. In contrast, Consumer Staples (-4.0%), Energy (-3.9%) and Information Technology (-4.1%) were the poorest. CIE doesn’t own significant positions in any of the above sectors.

On an individual company level, we saw a mixed bag of results. The best performing stocks were, SG Fleet Group (+30.6%), Stockland (+17.5%), Medibank Private (+15.7%) and Aristocrat Leisure (+12.5%).

The laggards were Reliance Worldwide (-24.8%), more than reversing the gain made last month, IOOF Holdings (-18.3%), GUD Holdings (-11.7%) and Unibail-Rodamco-Westfield (-11.4%).

Portfolio Outlook

Over the month there were two significant events for the portfolio. Firstly, the unexpected election win for the Coalition and secondly, the significant move lower in interest rates, both worldwide and in Australia.

The election outcome is undoubtedly positive for CIE, given the portfolio’s overweight position in Australia, with Financials being the largest sector in the portfolio. The ALP policy agenda brought significant uncertainty across many areas of the investment landscape, including housing, retail, banking and wealth management. These are large sectors of the economy and we would anticipate an increase in consumer confidence to occur, which will assist the portfolio after a sustained period of pressure.

The ongoing decline in interest rates will focus investors on the worth of securing yield. Although there may be a bounce higher in yield post any trade resolution, underlying world growth remains modest at best.

CIE remains significantly exposed to the bond-sensitive sector and will likely remain so. These investments should be increasingly valuable in a world of low rates.

Interest rates remain low and economic activity, although slowing, remains positive. While volatility in equity markets is expected to continue, indications of inflation remain largely benign giving confidence that the investment outlook remains favourable over the medium term.