Income Report / Introducing the Market Matters Income Portfolio

By Market Matters 05 July 17

Introducing the Market Matters Income Portfolio

The Market Matters Income Portfolio

Introducing the Market Matters Income Portfolio

At Market Matters, we write straight talking, concise notes about our experiences, the stocks we like, the stocks we don’t, the themes that you should be across and the risks as we see them. This same philosophy and direct approach will be replicated in our brand new Weekly Income Report, released to existing subscribers each Wednesday.

Let’s face it,  global interest rates are finally on the rise while US stock markets are flirting with all-time highs. We’re in the mature stages of a bull market  and risks are clearly rising - yet many investors require income to sustain a lifestyle. This is the conundrum faced by many Australians, including a large proportion of our Market Matters subscribers. With the launch of the Market Matters Income Portfolio and Weekly Report, we aim to manage these rising risks through active management, while maintaining a strong level of sustainable income.

Our Objective

Income and capital preservation over time. This certainly doesn’t mean the portfolio is immune from capital loss, however it does mean the portfolio aims to have lower capital volatility than the ASX 200, with a higher level of income. We also have the capacity to hedge the portfolio using an index fund during periods where we see a high chance of capital loss

Portfolio Composition

Markets are dynamic and economic circumstances change, so our portfolio composition will change with it. That said, the portfolio will include a selection of higher yielding equities that have strong underlying earnings, a selection of listed income securities such as Hybrids, and at times, the portfolio may include high yielding listed funds. The portfolio will be actively managed with the ability to ‘hedge’.


The Weekly Income Report will be released each Wednesday, covering topics specific to income investing. Additionally, a published portfolio of income securities with specific portfolio weightings, cash levels and current recommendations will be available to subscribers through the website, just as the current Market Matters Portfolio is available to subscribers. Furthermore, email alerts will be sent whenever a change is made within the income portfolio.

Introducing the Portfolio

The initial portfolio as outlined below will deliver an expected income of 5.6%, including franking however this includes a high cash balance of 22% as we look for further opportunities. We include the benefit of franking within the expected yield table given  it’s a relevant, meaningful part of income investing. Furthermore, the portfolio has a combination of equities and listed income securities such as Hybrids, and franking is typically included when considering expected returns from these type of income securities. All securities included will be ASX listed.

The portfolio has a fundamental bias, whereas the Market Matters Platinum Portfolio more evenly balances out fundamental and technical measures. The portfolio has no specific mandate for investment, and can hold high levels of cash if deemed appropriate. Hedging would typically be through index funds that are negatively correlated to the market.

Equities (50.5%) – Grossed yield of 7.62% (incl franking)

Alumina (AWC) $1.96 Forecast P/E of 12.5x Forecast Yield of 6.1% FF

Not your typical income stock however AWC, which owns 40% of the world’s largest Alumina business is shaping up to be a very strong income producer over the next few years with the parent company (AWAC) now ex-capex, with high free cash flow, AWC is likely to get a good stream of earnings, 80/90% of which land in investor pockets. 2016 was a big year for AWC with a restructuring of the business, a new CEO appointed and what seems like clear air ahead for this ‘non-traditional’ dividend stock. We are keen on AWC at current levels for income and growth.

Alumina (AWC) Weekly Chart

HFA Holdings (HFA) $2.40 Forecast P/E of 9.60x Yield of 7.7% unfranked

HFA Holdings is the listed Australian holding company for US based Lighthouse Investment Partners which manage hedge fund portfolios. They have around $9.5bn of assets under management and advice with offices around the globe. Their returns have been strong (for a hedge fund) and if bond yields are to move higher over the next few years, as we think they will, diversified hedge funds should move back into favour as asset allocators look to add low volatility, positive returns to portfolios. We think HFA is cheap and it’s yield is sustainable.

HFA Holdings (HFA) Weekly Chart

AP Eagers (APE) $8.20 Forecast P/E of 15.7x Forecast Yield of 4.7% FF

A rough 12 months for the Nick Politis backed national car dealer, which has traded from a 12 month high of $12.50 to a low of $7.25, before closing yesterday at $8.20. APE own the 12 top selling car brands in Australia with a huge dealer network that is predominately on the East Coast of Australia. One of the interesting aspects of APE is their property ownership. They own around 65% of the land the dealers sit on, making them not only a ‘car’ play, but one that’s backed by real assets.  In May, they provided earnings guidance which was below market expectations and the stock was sold off. Market conditions remain challenging, which is clearly the case across most retailers in Australia, however they’ve been through this before, have a very experienced management team with a lot of skin in the game. The dividend is likely to stay around 35cps for the next few years, putting it on a yield of 4.7% fully franked, while importantly, this represents a 70% payout of earnings – so not stretched.  We are keen on APE around $8.00 as an income play.

AP Eagers (APE) Weekly Chart

NAB (NAB) $30.34 Forecast P/E of 13.9x Forecast Yield of 6% FF

NAB is cheap relative to history and currently resides in the Market Matters Platinum Portfolio. As readers would appreciate, we think global interest rates are headed higher and this will provide a strong tailwind for financial stocks in Australia. There has been some concerns around the sustainability of NAB’s dividend given its high payout ratio which currently sits around 83% of earnings, however we think if they do cut, the reduction would be minimal. The variable within this comes from the regulator who has been vague around the timing and extent of any further capital requirements for the banks. We expect a determination here in the coming months. On balance, we think NAB has done a good job of shedding low returning assets and lifting Return on Equity. We are keen on NAB around current prices for income and growth

NAB (NAB) Weekly Chart

Wesfarmers (WES) $40.75 Forecast P/E of 15.9x Forecast Yield of 4.6% FF

A big retailer with some conflicting trends playing out at present, however the recent decline in share price now makes WES an income opportunity, albeit with limited capital growth potential in our view. Competition in the supermarket space, a slowdown of growth in Bunnings and the emergence of Amazon in Australia are all negatives for WES, however on balance we think this is now in the price. We are keen on WES around $40.75 as an income play.

Wesfarmers (WES) Monthly Chart

Centuria Capital (CNI) $1.20 Forecast P/E of 10.1x (underlying) - Yield of 6.6% (40 % franked)

CNI is a listed funds manager that does a variety of things such as property funds management, insurance, investment bonds, reverse mortgages and the like. For those that attended Market Matters Live in Sydney, we had the Executive Director, Jason Huljich present on the night. The funds management business is growing and they now have around $3.6bn under management, with the bulk of this (around $3bn) in property. A large proportion of their revenue is now re-occurring (around 77%) and they have increased their scale following a large acquisition earlier in the year. They have a strong balance sheet, low gearing, on a reasonable multiple with a good yield that represents a payout of around 75% of earnings. A lack of meaningful liquidity is a negative, however we think this is in the price. We are keen on CNI around $1.20 as an income play.

Centuria Capital (CNI) Weekly Chart

Suncorp (SUN) $14.80 Forecast P/E of 15.2x Forecast Yield of 5.0% FF

Suncorp is held in the Market Matters Platinum Portfolio and has done well, however we expect it to continue to move higher over time, and pay a strong dividend with the potential for special dividends in on the way through. The recent announcement from IAG in terms of reserve releases has positive read throughs for Suncorp, given the basis for the bigger than expected reserve release was low inflation – something that will also impact the other insurers.  Suncorp already had excess capital on their balance sheet and these positive trends around further releases is another boon for the insurer – bigger profits, excess capital probably means special dividends for SUN shareholders! We remain keen on Suncorp from around current levels as an income play.

Suncorp (SUN) Monthly Chart

Nick Scali (NCK) $6.12 Forecast P/E of 14.6x Forecast Yield of 4.6% FF

One of Australia’s best performing retailers selling lounges and other household furniture that has traded from a high around $7.60 to $6.12. The threat of Amazon has clearly played into investor minds and Nick Scali, which is a stock that trades on reasonably low volume has been sold down on the back of that. The underlying business however continues to perform exceptionally well, like for like sales growth has been running at double digits and they have a number of new store openings muted for FY18. The threat of Amazon on the products they sell seems overstated. It has a solid balance sheet and is cheap, paying a reasonable yield on an undemanding payout of earnings. NCK should provide growth in dividends over time.  We are keen of NCK from current levels for income and growth.

Nick Scali (NCK) Weekly Chart

Commonwealth Bank (CBA) $83.81 Forecast P/E of 14.8c Forecast Yield of 5.2% FF

Australia’s biggest bank with a dividend coming up in August. Ideally we’re buyers nearer $80, however we look to add a portion into the income portfolio at current levels. Similar to NAB, we believe financials will be well supported in a world or rising interest rates. We are keen on CBA at current levels for income.

Commonwealth Bank (CBA) Monthly Chart

Hybrids (27.5%) – Grossed yield of 4.99% (incl franking) 

Hybrids are a listed security that combine some elements of debt and some of equity. If managed properly, Hybrids within a portfolio can increase yield and also improve capital stability (or reduce overall portfolio volatility). Many pay quarterly dividends (of distributions for some) and they are generally lower risk than equities. That said, they’re not a replacement for cash and are higher risk than a Bond or Subordinated Note. Hybrids will feature within the new Market Matters Income Portfolio and we will write about them weekly, giving investors a better understanding of the vagaries of the instrument and the opportunities in the market, in terms of existing listed securities and any new offers that come up.

On the ASX, there are around 36 Bank Tier 1 Hybrids, which make up the bulk of the Hybrid market,  around 7 Bank Tier 2 securities which are Subordinated Notes or Bonds and around 15 Corporate Issues of various structures , from companies like Crown, Ramsay Healthcare and the like. It’s a reasonably small market however with some active management, Hybrids can be a worthwhile proposition.

At this juncture, most relative value is obvious in the Tier 1 Bank Hybrids over and above the corporates, and over and above Tier 2 notes. Most Hybrids have rallied in price recently, making them less compelling however there are still some opportunities about;

ANZPD: Tier 1 hybrid security issued by ANZ Bank, paying yield to first call date of 5.47%, with first call date on 21st Sep 2021

WBCPD: Tier 1 hybrid security issued by Westpac Bank, paying yield to first call date of 4.36%, with first call date on 8th March 2019

CBAPF: Tier 1 hybrid security issued by Commonwealth Bank, paying yield to first call date of 5.93%, with first call date on 31st March 2022

GMPPA: Subordinated Note issued by Goodman Group, paying yield to first call date of 3.82%, with first call date on 2nd Jan 2018. This is a short dated security and we expect Goodman to roll this issue into a new note.

In the weeks ahead, we will expand on these securities and others  providing more information on their structure and our rationale for holding them.

Market Matters Income Portfolio


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday.


All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 05/07/2017.  1.00PM.

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