While the portfolio has been resilient during the recent downturn in markets, staying in positive territory over the past 12 months, there are some tweaks we have been assessing over recent weeks to improve the composition of the portfolio further.
- Our exposure to ‘markets’ via wealth management company Insignia (IFL) and fund manager Magellan (MFG) has cost us, with IFL down ~13% and MFG down over 50%. We are now looking to liquidate both and rationalise into one new position, namely Pendal Group (PDL) that we see has better upside prospects. The entire fund’s management sector screens on the very cheap side and PDL is no exception, trading on ~8x and a forecast yield above 10%, and while we appreciate that a stock/sector can stay cheap for longer than many expect, PDL is a higher quality operator, has a better outlook for earnings growth and has some takeover appeal from rival Perpetual. PDL has experienced the same sort of share price decline over the past year down by 46.5% mirroring our combination of IFL & MFG. We are liquidating IFL & MFG and buying PDL.
- Smart Group (SIQ) downgraded earnings expectations by ~8% a few weeks ago and also announced the loss of a major contract. We now see a company with few prospects to grow earnings (& thus dividends) in the coming 12 months that has risk around supply chains tightening again due to rising Covid cases. We simply see lower risk prospects for yield elsewhere, and can now get ~7% in a Hybrid with no earnings risk. We are selling SIQ for a ~14% profit, keeping the stock on our Hitlist to revisit at a later date.
- Critical asset management business Service Stream (SSM) had a tough FY21, however, the outlook improved in FY22 and we think that trend will continue. We have a 3% weighting currently and plan to increase it.
- Retailers have been sold off and our recent acquisition of Wesfarmers (WES) in May is down 9%, while the stock has fallen more than 20% over the past year. In times of economic upheaval and uncertainty, those companies with the strongest balance sheets, diversity in earnings and a management team that can execute well will take advantage of the opportunities, and WES has these three elements in spades. We are using current weakness to increase our position in WES.
- The portfolio holds a collection of Hybrid securities primarily from the major banks, however, we also hold the CWN Hybrid (CWNHB) which is being redeemed shortly. Today we are adding the most recent NAB Hybrid (NABPI) to the portfolio to add some duration to holdings while the current yield to first call (in 7.44 years) of 7.4% is very attractive. We are buying the NABPI.
