CIE is an income-focused listed investment company, with a portfolio of companies largely outside of the ASX top 20. CIE’s objective is to pay quarterly dividends that provide investors with an attractive and sustainable income stream that is franked to the maximum possible extent. We select companies that, in aggregate, have a history of paying consistent dividends. 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 6.31%, or 8.13% including franking credits. Dividend yield is calculated as the dividends paid over the 12 months to 31 August 2019 relative to the closing share price at the beginning of the period.
CIE’s investment portfolio outperformed the broader market over the month of August returning -0.76%. The S&P/ASX 300 Index fell 2.97% over the period. The NTA before tax of the portfolio was $0.954 per share.
The investment strategy is such that we expect the portfolio to out-perform in down markets and this was again the case in August.
Results season peaked in August, with over 250 listed companies within the S&P ASX 300 Index reporting FY19 earnings. Results overall were mixed with the consumer sectors showing the greatest variability. For example, earnings for the discretionary retailers proved to be resilient against low expectations whilst other subsectors, including advertising and fuel retailing, were weak.
As expected, the impact of the downturn in residential activity hit the earnings of those companies exposed to building. CIE has only a modest exposure to this sector.
The inconsistency of results led to a large dispersion in share price performance. Those companies that reported disappointing results and/or guidance were treated harshly. On the other hand, those that delivered reasonable numbers and/or offered up an improving outlook saw their share prices push higher.
For companies owned by CIE, the earnings season was tilted toward the positive – more companies met or exceeded expectations versus disappointed. Considering the challenging economic backdrop this was a pleasing result.
CIE’s cash position at the end of the month was 4.5%, compared with a target cash weight of 5%. During the month the cash weight peaked at close to 10% after taking profits on several positions ahead of their results announcements. These included IRESS, McMillan Shakespeare, carsales.com, Harvey Norman and AGL Energy. Towards the end of the month, this cash was put back to work. Existing positions in defensive exposures were increased in companies including APA Group, GPT Group, AusNet Services and Viva Energy REIT. CIE’s position in Reliance Worldwide was increased after a better than expected result. The Reliance share price had been quite weak after an earnings downgrade a few months ago.
Reliance Worldwide Corporation Ltd
Two new companies were added to the portfolio in August. Origin Energy effectively replaced AGL Energy in the energy utility space. The company owns power generation, LNG exporting facilities and energy retailing operations. After struggling with excess debt for several years, Origin has rebuilt its balance sheet and has recommenced paying dividends. The company gives the portfolio some exposure to the oil price rather than the coal focus of AGL, which we believe is a positive.
Orora is the other addition. Orora was spun out of Amcor several years ago and has been successful in the cardboard, glass and aluminium packaging space. Recently growth has slowed. We expect a flat year in 2020 before growth resumes. Increased costs and delayed integration benefits (the two main factors which caused the slowdown) are expected to be temporary and, in our opinion, the share price now offers an attractive entry price.
World markets were volatile over the month and ended down with European and Asian markets suffering the largest falls. Major US markets largely recovered their intra-month losses to finish marginally weaker.
Markets continue to be vulnerable to trade US and China trade frictions, with little indication to what a potential outcome may look like. Markets were also concerned over the inverting of the yield curve (where long term interest rates fall below shorter-term rates). While historically this has been an omen for a recession, large-scale quantitative easing has changed the structure of bond markets meaning this may not be such a reliable indicator this time around.
Growth in leading indicators and US corporate earnings are also showing signs of slowing. Investors continue to invest in “safe havens” assets such as bonds and gold. Global bond markets have rallied strongly (lower interest rates) with the US 10-Year bond falling 50 basis points to yield 1.50% whilst the Australian 10-Year bond fell below 1.00% for the first time.
The Australian S&P/ASX200 Index fell 3.0% in August. The result season was mixed but not as poor as some feared. After displaying surprising resilience, the iron ore price fell 28% over the month, sending the Materials index 7% lower.
Most sectors were lower with Healthcare (3%) and REITs (2%) bucking the trend. Healthcare was assisted by a series of good results while REITs benefited from lower interest rates. Energy was 6% lower over the month.
Stock performance was largely driven by the results delivered. Smart Group Corporation (21%), Lendlease Group (19%), McMillan Shakespeare (18%) and IPH (13%), were amongst the best performers whilst oOh!media (-31%), Virtus Health (-20%) and Viva Energy REIT (-18%) were the major laggards. Overall the varied share price dispersion in the portfolio netted out. The poor performers in the portfolio were amongst our most modest holdings.
The level and trajectory of interest rates indicate that growth will remain scarce and company earnings, especially those exposed to cyclical activity, will remain vulnerable. The opposing view is that the positive impacts from personal tax cuts, lower interest rates and a stabilization in the housing market are expected to flow through to Australian corporate profits.
CIE has largely pruned the portfolio positions that it considered to be vulnerable. We continue to build up the secure earnings streams that we believe are increasingly valuable in a world of low rates.
As for the rest of the market, we intend to be opportunistic. The volatility in stock prices does offer some prospects for gain and we intend to move to realise these. We will also be more active in reducing exposure as risks begin to be identified and use any volatility to add to or establish positions in companies if we see opportunities moving forward.
The ongoing decline in interest rates should be a positive for yield-focussed strategies like CIE. Although there may be a bounce in yields post any trade resolution, underlying world growth remains modest at best.