Patersons Model Portfolio Update - March 2019
Patersons Model Portfolio Update - March 2019

Core Portfolio up 8.9% (formerly QVR Portfolio) and Income Portfolio up 13.0% for the 12 months to 28 February, compared with the benchmark at 7.1%

Please note, with the Model Portfolios shortly to be offered as Separately Managed Accounts (SMAs) on HUB24, we have taken the opportunity to rename the Model Portfolios to better reflect the style and focus.

The QVR Portfolio has been renamed the Patersons Australian Core Portfolio.
  • The Patersons Australian Core Portfolio is designed for investors looking for a Core Equities Portfolio exposure to high quality ASX listed securities, seeking both capital growth and dividend income, selected on quality, value and momentum factors.
The Income Portfolio has been renamed the Patersons Australian Income Portfolio.
  • The Patersons Australian Income Portfolio is designed for investors looking for an Income Portfolio exposure to high quality ASX listed securities paying a high, sustainable dividend yield.Please note, with the Model Portfolios shortly to be offered as Separately Managed Accounts (SMAs) on HUB24, we have taken the opportunity to rename the Model Portfolios to better reflect the style and focus.

Changes 

  • There were no changes to the model portfolios this month.
  • The following dividends were accrued this month. Income Portfolio: TLS (8cps), TAH (11cps), WES (200cps), WPL (127.cps), CBA (200cps), MFG (73.8cps), AWC (19.6cps) and AGL (55cps).  Core Portfolio: TLS (8cps), WPL (127.1cps), CBA (200cps), CGF (17.5cps) and JHG (50.6cps).
  • Our cash position in the Core and Income Portfolios is 19.6% and 21.1% respectively.  

Performance Snapshot

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* Inception 31st Dec 2010

Overview of Markets

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International Equity Market Performance

International equities were up 3.0% for the month of February, with the quarter booking a gain of 2.6%  for the MSCI All-Country Total Return Index (incl. dividends) as markets recovered a substantial amount of the losses incurred in the latter stages of 2018.  Markets rallied on rising expectations that the US and China will consummate a trade deal, while bond yields continued to fall as the global economy continued to weaken.  US markets were up on average 3.4% for the month, outperforming international markets. The Dow Jones industrial Average was the key outperformer, up 3.7% for the month, up 1.5% for the quarter, while the S&P500 was up 3.0% for the month and up 0.9% for the quarter, in US$ terms.  The NASDAQ was the best performer, up 3.4% in the month, and up 2.8% for the quarter. 
 
European markets were up on average 3.2% for the month and were up on average 2.8% for the quarter to 28 February, outperforming International and US markets for the quarter. The UK’s FTSE 100 was the worst performing European index for the quarter, up 1.4%, as the ongoing uncertainty around Brexit persisted.  The French CAC40 was up 4.7% for the quarter, while the German DAX was up 2.3%.  Asia Pacific markets were up on average 2.2% for the month, with Singapore the key underperformer. Asia Pacific markets were up on average 0.8% for the quarter, dragged down by the Japanese market.  Emerging Markets were up on average 2.4% for the month with the Shanghai composite the strongest market globally, after having been oversold, while Emerging Markets were up on average 7.5% for the quarter. For the 12 months to 28 February 2019, the NASDAQ is still the best performing developed market index, up 3.6%, closely followed by the Dow Jones, while the Turkish market is the worst performer, down 12.1%. 

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US data was mixed over the last month, although some forward-looking indicators are moving up. December quarter GDP growth slowed but to a stronger than expected annualised pace of 2.6% thanks to solid growth in consumer spending and business investment. More negatively, December housing starts fell a sharp 11%, personal consumption also fell in December and the February manufacturing conditions ISM fell to (albeit a still solid) 54.2. However, permits to build new homes held up in December, pending home sales bounced in January after several weak months, consumer confidence rose sharply in February (which along with a rebound in tax refunds to above year ago levels points to stronger consumer spending) and various regional manufacturing surveys showed improvement too. So while GDP growth is likely to slow further this quarter (partly due to weather-related seasonal weakness) it is expected to pick up again into the second half.
 
Meanwhile Fed Chair Powell provided no surprises in indicating that current conditions are “healthy” and the outlook is “favourable” but there are some “cross currents and conflicting signals” so the Fed is “patient” and “will continue to be data dependent.” The pause on interest rate hikes is expected to continue into the second half.
 
Eurozone economic sentiment slipped a bit further in February, lending growth slowed and core inflation fell to 1% year-on-year, adding pressure on the ECB for further monetary easing.
 
Japanese jobs data remained strong in January, but this is being helped by the falling population and meantime industrial production fell sharply in January.
 
Chinese official business conditions PMIs fell a bit further in February, but the services sector continues to hold up well, manufacturing sector new orders rose and the Caixin manufacturing conditions PMI rose, suggesting policy stimulus may be starting to impact, particularly for smaller businesses which had been harder hit by the slowdown.

ASX200 Performance

Australia’s ASX200 Accumulation Index (including dividends) was up 6.0% for the month of February significantly outperforming global markets. For the quarter ended 28 February 2019 the accumulation index was up 9.9% while for the 12 months ending 31 December the index was up 7.1%, well ahead of MSCI Global Accumulation Index, and ahead of the US indices which were up, on average 3.2%.
 
Australian data was generally soft. House prices continued their slide in February, credit growth remained soft in January with housing credit growth slowing to its weakest on record and construction activity showed broad-based falls in the December quarter. Against this, plant and equipment investment saw a modest rise in the December quarter and business investment plans continue to improve, suggesting that business investment should help contribute to keeping the economy growing as the housing cycle turns down.
 
The Australian December half earnings reporting season is now complete and while better than feared it showed a slowdown for companies exposed to the domestic economy and caution regarding the outlook. 54% of companies have seen their share price outperform on the day of reporting (which is in line with the long term average), but only 38% have surprised analyst expectations on the upside which is below the long run average of 44%, 36% have surprised on the downside which is above the long run average of 25%, the proportion of companies seeing profits up from a year ago has fallen to 59% and only 52% have raised their dividends which is a sign of reduced confidence in the outlook – six months ago it was running at 77%. Concern has been most intense around the housing downturn and consumer spending. While 2018-19 consensus earnings growth expectations have drifted up to 6% (from 5% at the start of the reporting season), this was due to an upgrade for resources stocks as higher iron ore prices were factored in. For parts of the market exposed to the domestic economy, particularly the consumer, consensus earnings expectations have slipped to just 2% reflecting the tougher domestic environment. While several cashed-up companies announced special dividends ahead of Labor’s proposed excess franking credit cutback, overall dividend upgrades have fallen.

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Australian economic data was generally soft: House prices continued their slide in February, credit growth remained soft in January with housing credit growth slowing to its weakest on record and construction activity showed broad-based falls in the December quarter. Against this, plant and equipment investment saw a modest rise in the December quarter and business investment plans continue to improve, suggesting that business investment should help contribute to keeping the economy growing as the housing cycle turns down.
 
The Australian December half earnings reporting season is now complete and while better than feared it showed a slowdown for companies exposed to the domestic economy and caution regarding the outlook. 54% of companies have seen their share price outperform on the day of reporting (which is in line with the long term average), but only 38% have surprised analyst expectations on the upside which is below the long run average of 44%, 36% have surprised on the downside which is above the long run average of 25%, the proportion of companies seeing profits up from a year ago has fallen to 59% and only 52% have raised their dividends which is a sign of reduced confidence in the outlook – six months ago it was running at 77%. Concern has been most intense around the housing downturn and consumer spending. While 2018-19 consensus earnings growth expectations have drifted up to 6% (from 5% at the start of the reporting season), this was due to an upgrade for resources stocks as higher iron ore prices were factored in. For parts of the market exposed to the domestic economy, particularly the consumer, consensus earnings expectations have slipped to just 2% reflecting the tougher domestic environment. While several cashed-up companies announced special dividends ahead of Labor’s proposed excess franking credit cutback, overall dividend upgrades have fallen.

Sector Performance 

11 of the 12 sectors in the Australian market were stronger in February, with Financials ex Property, Technology, Energy and Mining the key contributors.  Only the Consumer Staples sector was a detractor.  For the February quarter, all 12 sectors were higher, with the Mining, Materials and Energy sectors the biggest contributors.

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The Resources, Info Tech and Property Trust sectors have had the best returns (capital gains plus dividends) in the 12 months to 28 February 2019, displacing the Health Care sector.  The Banks, Telecommunications and Financials ex Property recorded negative returns over the past year.

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Small cap stocks (exASX100) underperformed large cap stocks (ASX100) in February.  Very large cap stocks (ASX20) are trending just above large cap stocks and have performed better during the recent market correction and recovery. 

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ASX200 Best and Worst

Automotive Holdings Group Limited (AHG), Appen Limited (APX) and Breville Group Limited (BRG) were the three best performing stocks in the ASX200 for February.  Blackmores Limited (BKL), Pact Group Holdings Ltd (PGH) and Saracen Mineral Holdings Limited (SAR) were the three worst performing stocks in the ASX200 for February.

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Portfolio Performance

The Core portfolio outperformed the ASX200 Accumulation index for the month of February, by 0.6%, while the Income portfolio was in line with the benchmark.  Both portfolios remained ahead of the benchmark for the rolling quarter to February. The Core portfolio has outperformed the benchmark ASX200 Accumulation Index for the 12 months to 28 February 2019, up 8.9%, with 1.8% of outperformance relative to the benchmark, while the Income portfolio is up 13.0% for the 12 months, 6.0% ahead of the benchmark.  Both portfolios have significantly outperformed the benchmark on two, three and five year timeframes, on both absolute and risk adjusted measures.

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NB: Prior to March 2013, the performance of the portfolios was calculated assuming an equal weighting to each stock.
 
Note that it is not unusual for the Income portfolio, which is defensive in nature, to outperform the market during bear markets and underperform during bull markets. On the other hand, the Model portfolio is expected to outperform its benchmark in all market conditions over the long term.

 
Both portfolios have significantly outperformed the benchmark on two, three and five year timeframes, on both absolute and risk adjusted measures.

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Patersons Australian Core Portfolio

The Core Portfolio outperformed the benchmark ASX200 Accumulation Index for the month of February as a result of our exposures to Financials ex Property, specifically Janus Henderson (JHG), Challenger (CGF) and ANZ Banking Group (ANZ), Resources, in the form of South32 (S32) and Rio Tinto (RIO), as well as Ramsay Health Care (RHC).  Only CSL Limited (CSL) was a detractor for month, although our exposure to Cash, Telstra (TLS) and National Australia Bank (NAB) underperformed the market.

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Income Portfolio

The Income Portfolio performed in line with the benchmark this month, with our exposure to Financials in the form of Magellan Financial Group (MFG), QBE Insurance (QBE), ANZ Banking Group (ANZ) and Westpac Banking Corporation (WBC) the key outperformers.  Our Cash position included the benefit of dividends received from TLS (8cps), TAH (11cps), WES (200cps), WPL (127.cps), CBA (200cps), MFG (73.8cps), AWC (19.6cps) and AGL (55cps) during the month
 
Coles Group (COL), Arena REIT (ARF) and Spark Infrastructure were the key detractors for the month.

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Sector Breakdown

In the charts below, we have distinguished the Miners separately from the Materials GICs sector and the Banks from the Financials GICs sector. We remain underweight Banks in both portfolios.

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Warning: This report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate to your particular investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from your Adviser, on whether any relevant part of this report is appropriate to your financial circumstances and investment objectives.