Positioning for income in volatile markets

Funds Management

by Carolyn Herbert

Transcription of Finance News Network Interview with Northward Equity Income Fund Portfolio Manager, John Moore
Clive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me from the Northward Equity Income Fund is Portfolio Manager, John Moore. John welcome back.
John Moore: Thanks Clive, good to be here.
Clive Tompkins: The local market’s been through a volatile couple of months. What’s been going on?
John Moore: It has been a volatile couple of months. The tone was really set by the potential Greek exit and the ECB’s (European Central Bank) response, to what could have been potential contagion. What was notwithstanding, we saw a decline in commodity prices, uncertainty around potential Fed rate heights. That and also concerns around Chinese growth, all set the tone for quite a volatile quarter.
Clive Tompkins: Rates were kept steady at the August Reserve Bank Board meeting. Was there anything of note in the Statement?
John Moore: As you said, the rates were kept unchanged in the Reserve Bank Statement. We obviously saw a rally in the Aussie dollar, as a response out of that. But we’ll be looking forward more to the Statement of Monetary policy this Friday, and potential changes to economic growth forecast. And what that would do for potential rates. We still think there’s a good chance that we’ll see another cut in official interest rates, by the end of this year.
Clive Tompkins: Now to your Fund John, volatility should benefit the Fund. Has that in fact been the case, and how much of the total return has been attributable to income versus growth?
John Moore: We had a good quarter. We outperformed our benchmark, which is a good thing. We were minus 2.5 per cent for the quarter, including franking credits versus our benchmark, which was minus 6.7 per cent for the quarter. Most of that was attributable to the increase in volatility and hence, increased option income. And also the hedge contributed to that as well.
Clive Tompkins: For investors not familiar with your Fund; how many stocks do you typically hold, what is the maximum exposure permitted to any one particular stock, and how much can be in cash?
John Moore: Typically we hold 25 to 40 stocks; currently we hold 33 stocks in the Fund. We don’t hold greater than plus seven per cent over the benchmark, that’s the maximum we can hold within the Fund. And the maximum cash we can have in the Fund is 30 per cent.
Clive Tompkins: On average, what percentage of the portfolio do you sell calls against, and how much does this vary from one quarter to the next?
John Moore: Typically we sell calls against 70 to 75 per cent of the Fund. But it does vary according to what the volatility is, but typically as mentioned, 70 to 75 per cent of the Fund. And then we’ll vary that according to the total return we can generate, from the option income.
Clive Tompkins: Now to some of your bigger positions. What does the Fund hold, and have you added to these in the last three months?
John Moore: What we hold typically, are stocks that you expect in terms of big caps like Telstra Corporation Limited (ASX:TLS). And we have added to that recently because of its solid dividend yield, good free cash flow, supportive valuation. It’s all those normal things that you’d expect, so we’ve added to that recently.
Offshore earners, Macquarie Bank (ASX:MQG), CSL Limited (ASX:CSL), we’ve added to those recently and they’ve sort of started to play out. We’re getting a little bit crowded, but we’ve certainly had overweights in those positions within the Fund.

Insurers, we added to those on the pull back over the quarter. Undemanding multiples, you know, potential capital management, solid dividend yield as well. So they’re our main positions or our overweights within the Fund currently.
Clive Tompkins: On the flipside, what have you exited and why?
John Moore: We have exited a few positions, but the main two we exited were Ansell Limited (ASX:ANN) and Asciano Limited (ASX:AIO). Asciano was obviously under takeover, so we’d hit our total return expectations there. And the same with Ansell, Ansell just got a little bit expensive and again, we’d hit our total return expectations. So we exited those two investments.
Clive Tompkins: What is the Fund’s exposure to BHP Billiton Limited (ASX:BHP) and Rio Tinto Limited (ASX:RIO) at this time?
John Moore: We don’t own Rio in the Fund; we haven’t owned Rio for about 18 months. We exited basically, January last year, really because we took a bearish view in iron ore. So we only have BHP, which we think is a good quality company. We’ve got a market weight position within the Fund, so it’s very conservative in terms of our expectations around that. We’re still able to generate good option income around that core holding as well. So just BHP is the only stock we hold within the Fund.
Clive Tompkins: Last question. Where do you see the best opportunities over the remainder of the year?
John Moore: I think there’s going to be some very good opportunities going forward. I think we’re going to see an increase in volatility, which is good from an option income perspective. And also having a hedge to smooth out the volatility, we think that’s good. We think the offshore earners are quite crowded. But we do see, whilst that’s crowded at the moment, we do some opportunities going forward to reset those positions and add to those positions, going forward.
Clive Tompkins: John Moore thanks for the update.
John Moore: Great, thanks Clive.

Carolyn Herbert

Finance News Network
Carolyn joined FNN in August 2015 as the Head of News and also presented the Market at Midday and the Market Wrap. With more than five years of broadcast journalism experience, Carolyn has worked as a finance anchor on the Sky News Business channel and as an anchor and reporter for ABC News. She is also a qualified corporate lawyer specialising in IPOs, takeovers and mergers and acquisitions.