Transcription of Finance News Network Interview with Northward Capital Equity Income Fund Manager, Darren ThompsonDonna Sawyer: Hello I’m Donna Sawyer from the Finance News Network and joining me for an update on the large cap high yielding section of the market, is Northward Capital Equity Income Fund Manager, Darren Thompson. Darren welcome back to FNN.
Darren Thompson: Thanks Donna, great to be here.
Donna Sawyer: The market has rallied quite strongly since we last met in June. Is the rally justified by Company results we’ve seen in the recent reporting season?
Darren Thompson: Yeah look the recent reporting season was quite sound. There had been downgrades coming in and they started to abate. So the market is now priced at around 15 times, with expectations of earnings growth in the order of 14 per cent for next year, so reasonably bullish expectations. However in aggregate, companies did deliver on that and gave reasonable outlook statements. So I think last time we were here, thought the market was trading towards the low end of a trading range. I think it’s probably trading towards the high end of a trading range, but reasonably supported by current results.
Donna Sawyer: What were some of the key themes to emerge from your meetings with management teams?
Darren Thompson: Well essentially as I said, the reporting season essentially delivered in aggregate, but what we probably found was that at the revenue line, it was a little weaker. And that’s probably reflected in that, although we’ve had sort of a resolution of uncertainty around political situation and a little bit more optimism coming in, consumers still aren’t spending in aggregate. So revenue lines are a little bit softer, so companies were meeting their end results by cost cutting and so good cost control, was a feature of the results season. And managements for that reason were cautiously optimistic about the results ahead, but they do need to see that top line start to move.
Donna Sawyer: So what were some of the stand out results for you?
Darren Thompson: There were good results across the board. We certainly saw Flight Centre
(ASX:FLT) was a very strong result, leveraging off the weakening Aussie dollar and continue travel both in and outbound. IAG
(ASX:IAG) was a very strong result, Lend Lease
(ASX:LLC), it started to deliver on expectations and certainly with a positive outlook statement. Woolworths
(ASX:WOW) again was a strong result. So I think across the board, corporate management delivered well and as I said, good cost control and reasonable returns in terms of return and equity, and also earnings growth.
Donna Sawyer: Let’s talk about the US. Law makers have now reached a deal on the nation’s borrowing limit, and the US Fed continues to say withdraw stimulus as the economy picks up. How is that uncertainty in the US monetary and fiscal policy impacting your investment decisions?
Darren Thompson: Yeah the question about US tapering has taken up a lot of column inches and airspace. I guess we would see that the US economy has certainly got the underpinnings of a good sustained recovery. However the pull back of easing we think will happen, when it’s able to absorb that. So we do definitely think that US policy makers are very conscious of not looking to stall that recovery. And so tapering is likely to be pushed out until such times as it is likely to happen.
I guess more importantly from a portfolio positioning, we do think that overall growth will come through the US, as I said. That essentially, the Asian economies continue to have reasonable growth levels and that it supports a cyclical bias to our portfolio.
Donna Sawyer: How has Northward Equity Income Fund performed over the last quarter and since inception in March 2011?
Darren Thompson: Oh look, we’re pleased with performance. Essentially the Northward Equity Income Fund is targeted to generate eight to 10 per cent income, and to also capture some capital growth. Since inception it’s delivered 9.1 per cent running yield, plus also 1.6 per cent of franking credits. So that’s certainly well within our targets. Over the last quarter, our market exposure tends to average around 50 per cent and we’ve captured round 60 to 65 per cent of the market, gained through the last quarter. And we’re very pleased with that; we think that’s an excellent outcome.
Donna Sawyer: Let’s talk about your holdings. What are your largest positions and what levels have you sold options against them?
Darren Thompson: Essentially, the nature of the portfolio continues to be holding a diversified portfolio of essentially top 50 companies. Our key positions have been consistent over a period of time. FOX International
(ASX:FOX) has been a position which we’ve held for a significant period of time, and continue to both write calls against that. And also sell puts, as we’re happy with the level of option premium we are able to get. Again, that delivered a very strong result in the recent reporting season and we’re confident in the delivery of double digit growth going forward, out of its strong portfolio of entertainment offerings.
Another key position is in the materials space, Rio Tinto
(ASX:RIO) and BHP
(ASX:BHP). We’ve certainly geared our exposures in the materials area to large liquid, low marginal cost producers. And certainly Rio’s recent, you know, quarterly production report certainly supported our significant overweight to that stock. Further in the insurance space stocks like IAG and QBE
(ASX:QBE), we think we are well exposed to the insurance cycle and also provides some diversity, because they’re less economically exposed.
Donna Sawyer: So what sectors are you overweight and why?
Darren Thompson: We’re overweight the materials sector, reflecting our view on balance to having some cyclical exposure in the portfolio. That’s reflected in stocks like Rio and BHP as I mentioned, which we think are well exposed to the global growth, global growth view, particularly with robust as in iron ore prices that we’re currently seeing. Although we anticipate that they will come back, we still think the valuations are compelling.
Other stocks which are also leveraged to that global growth and managed, such as Amcor
(ASX:AMC) and Brambles
(ASX:BXB), certainly are appealing stocks which we think are attractively valued. And we also have the ability to generate income through writing options over those stocks. I mentioned the insurance sector and its insurance and financials, are an area where we’ve got significant exposure. And one key holding is Challenger Financial
(ASX:CGF), which had a very pleasing result in June has just had very strong sales numbers through annuity. So essentially it’s a well-diversified portfolio of top 50 stocks, with targeted positions in clearly the stocks which we think have good long term value.
Donna Sawyer: Finally Darren, what’s your outlook for interest rates and the S&P ASX200 in the next six months?
Darren Thompson: As regards to the interest rates, I think that the RBA is basically towards the end of their easing cycle. You know, interest rates where they are essentially, are low enough in our view to stimulate demand. And whether there’s another 25 points or so, is probably not going to have too great an impact. So there maybe one further cut, but we essentially think we’re towards the end of that cycle. And certainly you are starting to see the impact of that through sectors which are leveraged to interest rates, such as the housing sector starting to, you know, get a kick start along.
In regards to the market, we do think the market is reasonably getting towards you know, fully priced at 15 times with strong earnings growth expectations over the next year. So we’d probably see that as towards the top end of a trading range, but still with the ability to go ahead. Particularly given that interest rates aren’t looking to be sustainably low, and global growth will continue on.
Donna Sawyer: Darren Thompson thanks for the update.
Darren Thompson: Thank you very much.
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