Transcription of Finance News Network Interview with NorthWard Capital Equity Income Fund Managers, Darren Thompson and John MooreDonna Sawyer: Hello I’m Donna Sawyer from the Finance News Network. And joining me for an update on the large cap and high yielding section of the market is NorthWard Capital Equity Income Fund Managers, Darren Thompson and John Moore. Darren and John welcome back.
Darren Thompson: Thank you, great to be here.
John Moore: Yes thanks, great to be here Donna.
Donna Sawyer: Darren the RBA cash rate is now at 2.75 per cent, the lowest in 30 years following that surprise cut in May. What effect did that have on the high yielding stocks in particular?
Darren Thompson: Well as interest rates have fallen both domestically and internationally, that has had a very positive impact on very high yielding stocks over the last 18 months. However, the recent cut in May didn’t have that impact. I think that goes to the underlying reason for the cut and that is that the economic conditions in Australia, are quite weak.
Secondly, the impact that’s had on the Australian dollar has seen the Australian dollar fall. And that has meant that offshore investors in Australian stocks have tended to discard their stocks. They look to protect their Australian dollar gains.
Donna Sawyer: Now just in the last couple of weeks we’ve seen a selloff in the banks and Telstra given their big run-up this year. Is this likely to reverse or is this the start of a rotation into the materials and more growth oriented stocks?
Darren Thompson: Yeah well certainly, as I mentioned with interest rates falling high yielding stocks have been pushed up over the last 18 months - in our view, to unsustainable levels. So they’ve pulled back now eight to 15 per cent to more reasonable valuation levels. However, with the US economy showing signs of continuing to strengthen, we would see an ongoing rotation out of high yielding stocks into the material sector and into those leveraged to global earnings, such as Brambles
(ASX:BSB), News Corp
(ASX:NWS) and so on.
Donna Sawyer: So John now to your Fund. Is this sort of volatility a good or a bad thing?
John Moore: Donna, for our Fund it’s a good thing because what we do is we sell calls against our existing long stock positions. So this helps us generate income and it also helps cushion the downside.
Donna Sawyer: So where a long only Fund would have seen its performance fall, yours is cushioned. Can you put a figure on how much better you performed during the market selloff, particularly in May?
John Moore: Yeah, like in May we outperformed our benchmark by 2.39 per cent. This was largely attributable to our index hedging, where we use index options to hedge the downside. So this in conjunction with our call overriding, helps to reduce the volatility of our Fund quite significantly. Since inception, the volatility of the Northward Equity Income Fund is less than half the volatility of our underlying benchmark.
Donna Sawyer: So John when we get a pullback like that, do you buy stocks or is that only where you are underweight?
John Moore: Look when stocks pullback to levels where it’s supportive of valuation, we opportunistically look to go long stock and sell calls against those positions to generate income. Also opportunistically, we look to sell puts to generate income and target entry into stock price levels as well.
Donna Sawyer: Darren how has the Fund performed over the last quarter and since its inception in March 2011?
Darren Thompson: Yeah well certainly, we feel the Fund’s performed well and to expectations. And that is in the strong markets of March and April, the Fund did lag but, however, it’s performed strongly as the markets pullback during May and the first couple of weeks of June, as we would expect.
Since inception and from March 2011, it’s important to I guess, measure performance against objectives. Our key objectives are to deliver distributions of eight to 10 per cent per annum, with moderate volatility and in a tax effective manner. And to that extent, the Fund’s delivered a running yield of on average 9.3 per cent over those two years and it’s done that with less than half the market volatility. So we’re very pleased with the performance to date.
Donna Sawyer: Let’s talk about some of your holdings. What are your largest positions and what sectors are you overweight?
Darren Thompson: Well the Northward Equity Income Fund will traditionally have positions in the top 50 stocks over time. And at the moment, it holds a well-diversified portfolio of top 50 stocks. Where we’re more overweight is in the areas of materials as I mentioned earlier, as we expect there’d be rotation into more global growth oriented stocks. And certainly in that vein, we have stocks such as Brambles, News Corp and Amcor
(ASX:AMC) which are leveraged to US dollar earnings. We also have a reasonable position in the general insurance sector through ING, Suncorp and QBE which we believe, are less economically sensitive than other areas of the economy.
Donna Sawyer:Finally Darren, where do you see the interest rates and the S&P/ASX 200 going in the next six months?
Darren Thompson: Well as I mentioned, we see lots of management teams coming through our offices and essentially, they’re reflecting what you see in the public data. And that is that economic conditions continue to be weak. So we view the RBA to be likely on an ongoing easing bias and interest rates to be lower within the next six months. As regards the market levels, our anticipation is that the market has pulled back to more reasonable valuations and we’re probably likely to trade in a range from 4,600 to 5,200 over the next six months.
Donna Sawyer:Darren and John, thanks for the update.
Darren Thompson: Thanks for having us.
John Moore: Great, thanks Donna.
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