Antares Prof Dividend Builder (PPL0002AU) Report & Performance

Australian shares made strong gains on lower inflation and hopes that China will pursue more stimulatory policy settings. The energy sector led the market gains as oil prices surged. Financial shares also rebounded with optimism that the Reserve Bank interest rate hiking cycle was coming to an end. Information Technology continued to perform well, fuelled by the mania for AI related shares. Resources shares gained on China stimulus hopes. But there was some weakness in the Consumer Staples and Health Care sectors given concerns that the Australian consumer is struggling.

The annual distribution return to 31 July 2023 for the Antares Dividend Builder Fund was 5.6%. The fund delivered a total return of 3.5% (net of fees) for the month of July which compared to a return of 2.9% for the S&P/ASX200 Total Return Index. Dividends were received from ANZ, CSR and NAB during the month.

Sector allocation Contributing to the Fund’s performance were overweight holdings in CSR and Nine Entertainment (NEC) as well as an underweight holding in CSL. CSR shares benefitted as sentiment towards building product manufacturers has become more positive on expectations that the housing market appears to have bottomed.

Despite weaker ad market data, NEC shares rallied in July in line with the broader consumer discretionary sector ahead of August reporting season as investors are increasingly pricing in a soft landing. CSL’s share price has continued to languish since issuing disappointing FY24 guidance in June following news that margin recovery in its Behring plasma collection division would take longer than the market expected.

Detracting from performance were overweight holdings in Ventia Services (VNT), Aurizon (AZJ) and Telstra (TLS). VNT shares were relatively weaker in July, having performed strongly over the past months. This was despite being included in the S&P/ASX200 from 24 July. AZJ shares finished the month weaker. Late in the month the company held an investor day where it provided FY23 EBITDA guidance towards the bottom end of its previous target range of $1.42-1.47bn due to the impact of wet weather, production issues and labour shortages. In addition, the company provided FY24 EBITDA guidance of $1.59-1.68bn. At the investor day, Aurizon announced bullish FY30 targets for its Bulk business and containerised freight strategy, which the market is not yet giving the company credit for as it is early days on execution. Having earlier enjoyed investor support on news of its post-paid mobile price increases, TLS shares lagged the broader market in July. During the month, its rival Optus announced it had struck a deal with Elon Musk’s Starlink for Mobile to Satellite services. This increases Optus’ coverage which has always been one of TLS’ competitive advantages. This followed the previous month’s decision by the Australian Competition Tribunal to disallow TLS’ proposed network sharing agreement with TPG.

Australian shares made mild gains in June given signs that inflation pressures were abating and hopes that China will pursue more stimulatory policy settings.

The Resources sector surged on China growth hopes with strong gains in iron ore prices. The Information Technology sector also made strong gains on the back of investors’ enthusiasm for anything remotely connected with AI. Financials rebounded, reversing May’s weakness with signs of resilience in the Australian economy mitigating credit risks. Healthcare was weak as investors became more cautious about the sector’s prospects.

The annual distribution return to 30 June 2023 for the Antares Dividend Builder Fund was 5.6%. The fund delivered a total return of 2.3% (net of fees) for the month of June which compared to a return of 1.8% for the S&P/ASX200 Total Return Index. Dividends were received from Aurizon, CBA, Region, Westpac and Woodside Energy during the month.

Contributing to the Fund’s performance was an underweight CSL holding and overweight positions in Ventia Services (VNT) and Aurizon (AZJ). CSL provided a trading update indicating currency headwinds would impact its FY23 result. More significantly it noted margin recovery in its Behring plasma collection division would take longer than the market expected, as both donor fees and labour cost inflation remain higher than anticipated. This meant that CSL’s FY24 guidance was below consensus and the stock was sold down. In June, VNT continued to win new business and extend its existing contracts. We have liked VNT for its contract risk management processes and its exposure to contracts in relatively economically insensitive areas, such as defence. AZJ benefitted from a realisation in the market that its Central Queensland Coal Network asset is a beneficiary of the higher inflationary environment. This led to several broker upgrades which took the stock higher as investors sought inflation havens.

Australian shares fell in May as lower commodity prices, higher interest rates and weak consumer spending cautioned investors. The sharpest falls were in the consumer discretionary and staples sectors given signs of a retail recession for consumer spending. The combination of higher mortgage interest rates, rising rents and stubborn inflation pressures is squeezing purchasing power. There was also notable weakness in the resource sector given lower coal and iron ore prices on China concerns. Financials also disappointed given the prospect of lower profit margins with higher deposit interest rates and more sedate credit demand. Echoing the US market and the surge of investment interest in anything remotely related to artificial intelligence (AI), the Australian Information Technology sector posted a double-digit gain for May.

The annual distribution return to 31 May 2023 for the Antares Dividend Builder Fund was 5.6%. The fund delivered a total return of -2.2% (net of fees) for the month of May which compared to a return of -2.5% for the S&P/ASX200 Total Return Index. Dividends were received from BHP, Medibank Private, Transurban and Ventia Services during the month.

Contributing to the Fund’s performance were overweight positions in Suncorp (SUN) and Ventia Services (VNT) together with not holding a position in Wesfarmers (WES). SUN shares moved counter to the broader financials in May on no particular news including on ANZ’s proposed acquisition of its banking business. At VNT’s AGM which was held in May, the company reaffirmed its guidance and confidence for 2023 and beyond, citing the strong and growing markets in which it operates and its diverse and resilient portfolio of businesses. The company also announced the extension of a facilities maintenance contract with the Auckland City Council late in the month. WES flagged uncertain market conditions at its May investor day. The company also noted there were challenges with wage inflation and labour productivity which is likely to put downward pressure on margins in the near term.

Detracting from performance were overweight holdings in Metcash (MTS), Nine Entertainment (NEC) and NAB. With consumers becoming very price sensitive and looking to house brands, the independent supermarkets are reported to be Top 10 share holdings (alphabetical order) losing share to rivals Coles and Woolworths. NEC presented at an investor conference early in the month where it noted TV markets remained challenging.

Notwithstanding this, the company indicated it would continue to grow market share and flagged further cost reductions. NAB shares were under pressure after the bank released its first half results for 2023. Despite some positives, including a lift in dividend, the market reacted to comments from the bank on the impact of lower house prices and volume growth amid increased competition. This was reflected in a $393m credit impairment charge.

Australian Shares made solid gains in April given the global share rebound and signals from the Reserve Bank for a pause in raising interest rates. The strongest gains were from the AREITs which benefitted from the lower rates and the Information Technology sector which followed its global peers higher. The Resources sector was dragged down by the Materials stocks as iron ore prices corrected on weak steel demand, but this was partly mitigated by gains in Energy and Gold stocks.

The annual distribution return to 30 April 2023 for the Antares Dividend Builder Fund was 5.7%. The fund delivered a total return of 1.7% (net of fees) for the month of April which compared to a return of 1.8% for the S&P/ASX200 Total Return Index. Dividends were received from CSL, Nine Entertainment, Orora, South32 and Woodside Energy during the month.

Sector allocation Contributing to the Fund’s performance were overweight positions in CSR and Medibank Private (MPL) together with the decision not to own Rio Tinto (RIO). As a major supplier of building products, CSR has been seen as a beneficiary of the growing discussion that Australia has a housing shortage and a need to build more homes. The news that the Australian housing market has bottomed was also positive for sentiment. Investor interest in Medibank (MPL) shares has returned post the huge sell-off when the company announced it had been subject to a cyber security attack. Contrary to concerns that the attack on MPL would lead to a significant deterioration in policyholder numbers and earnings, MPL has been able to increase policy holder numbers and delivered a much stronger than expected 1H23 result. Despite some positive economic signals from China, steel demand was weak which saw iron ore and metals prices drop in April – as did RIO’s share price.

Australian shares slipped into negative territory in March. The sharpest falls were in the real estate and financial sectors given the turmoil in the global banking system and lower bond yields. However, strength in the resource sector on hopes of a Chinese economic recovery helped limit the downside in Australian share markets. There were also gains for communications, consumer discretionary and consumer staples sectors on hopes that the Reserve Bank would pause on further interest rate increases.

The annual distribution return to 31 March 2023 for the Antares Dividend Builder Fund was 5.5%. The fund delivered a total return of -0.2% (net of fees) for the month of March which compared to a return of -0.2% for the S&P/ASX200 Total Return Index. Dividends were received from Ansell, APA Group, Aurizon, BHP, IAG, Medibank Private, Suncorp, The Lottery Corporation, Telstra and Viva Energy during the month.

Contributing to the Fund’s performance were overweight positions in Ventia (VNT) and BHP together with not owning Macquarie Group (MQG). VNT shares were stronger after delivering a CY22 result in late February that beat consensus expectations and prospectus guidance and a major share sell-down by its majority shareholders. The result highlighted the predictability of its contracted revenue stream and a business that has managed costs well in an inflationary environment. VNT also provided guidance for CY23 NPATA growth of 7-10%, underpinned by strong pipeline visibility and record work-in-hand. VNT’s share price rallied after Apollo and CIMIC sold down 93 million shares in March, representing 22% of the company’s issued capital which has improved liquidity in the stock and reduced the stock overhang concerns that had affected the share price. BHP shares performed well on hopes of Chinese economy recovery following the release of a larger than expected increase in the China Manufacturing PMI Index. The global banking turmoil impacted the sector in Australia and MQG shares were not exempt.

Detracting from performance were overweight holdings in NAB and Suncorp (SUN) and not holding a position in Newcrest Mining (NCM). NAB and SUN reflected the general weakness in bank stocks. NCM shares were beneficiaries of the higher gold price and were underpinned by the scrip takeover offer of former owner and gold producer, Newmont

Australian shares slipped into negative territory in February. The sharpest falls were in the resource sector with some disappointments over the profit reports of BHP and Rio. Financial shares fell with the banks being squeezed by lower net interest margins and concerns over falling house prices. Real estate sector shares were also negatively impacted by rising bond yields. There were some positives with Insurers performing well on positive news from Medibank Private together with a general sector lift as higher bond yields drive high investment income given asset class restrictions for insurers. Utilities also delivered solid gains on a higher than expected (albeit lower) revised bid for Origin from Brookfield. Information technology recovered some ground after the sector was savaged in 2022.

The annual distribution return to 28 February 2023 for the Antares Dividend Builder Fund was 6.5%. The fund delivered a total return of -1.6% (net of fees) for the month of February which compared to a return of -2.4% for the S&P/ASX200 Total Return Index. Dividends were received from Transurban during the month.

Contributing to the Fund’s outperformance were overweight positions in Medibank (MPL) and Orora (ORA) together with not owning CBA. We have maintained our view that the market over-reacted to the potential impact on MPL’s customer retention after its cyber security incident. This was partially vindicated in its half year result as policy numbers stabilised and began to grow again in February, whilst claims inflation was lower than expected. These factors helped support the stock. ORA shares jumped after the company announced a boost to interim net profit and dividend and indicated it expects continued growth in its North American business in the second half. Banks have generally underperformed on concerns about net interest margins peaking amid fierce competition for home mortgages and the prospect of higher bad debts as interest rates increase.

Detracting from performance were overweight holdings in BHP, NAB, and Aurizon (AZJ). Disappointing profit reports from BHP and AZJ saw their share prices weaker. Of particular concern for AZJ was that the growth engine of the business, bulk haulage, struggled in the half, following a disappointing 2H FY 2022. On further investigation, we have concluded the market has made some incorrect assumptions about this business given the impact of weather down Australia’s east coast. We also believe the market has overlooked the substantial progress being made in its transition away from bulk coal haulage with its major new contract win with Toll.

Australia’s economy appears to be softening judging by more subdued retail spending and falling house prices. Consumers have become more cautious with high inflation and rising mortgage interest rates. Even the labour market is cooling after the strong jobs growth in 2022 with the unemployment rate edging up from 3.5% to 3.7% in January.