What do lower rates mean for investing?


Transcription of Finance News Network Interview with Northward Equity Income Fund CEO and Portfolio Manager, Darren Thompson
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from the Northward Equity Income Fund, is its CEO and Portfolio Manager, Darren Thompson. Darren, welcome back to FNN.
Darren Thompson: Thanks Lelde, great to be here.
Lelde Smits: The Reserve Bank of Australia has just cut the key cash rate to a new record low of two per cent. What do you believe this will mean for equities?
Darren Thompson: In short it should be supportive for equities in two key ways. Firstly, as a relative investment, the yield on equities looks more attractive to fixed interest and bond markets. And secondly, as a stimulus to the economy, it should also encourage investment. And also hopefully, drive consumer sentiment and spending.
Lelde Smits: How do you anticipate the rate cut will impact option premiums?
Darren Thompson: I don’t think the rate cut will drive option premium. But what we have seen more recently, is greater levels of volatility, which does increase the ability to generate income through option premium. So that is a positive for our Fund.
Lelde Smits: As a result of lower rates, in which sectors are you expecting to see strength and weakness over the following year?
Darren Thompson: I think with interest rates coming down, as I said, it does increase the attractiveness of the yield in certain equity sectors. So that does play to sectors like the banks and telco’s. And to a lesser extent REITs, as investors are looking to generate income from their investments. Also it should stimulate economic activities. So areas like consumer discretionary, retailers and media should benefit from the rate cut.
Lelde Smits: Which stocks have you earmarked for performance as a result of the record low cash rate?
Darren Thompson: We do run a very high conviction Fund. So we’re looking for stocks, which are both performing in an earnings sense, but also will be well rated by the market. And, in that area we think that building material stocks, stocks such as CSR Limited (ASX:CSR) and James Hardie Industries (ASX:JHX) will benefit as strength in the housing sector and construction activity continues. Also Telstra Corporation Limited (ASX:TLS) is a key holding within our Fund. Very strong five per cent plus yield, resilient business and leveraged to the strong mobile and broadband markets. So that’s a key holding for us.
Lelde Smits: Taking a closer look now at Northward’s performance. How has the Fund been tracking?
Darren Thompson: We’re really pleased; we’ve just ticked over our fourth year of performance. And the key targets of the Fund are to generate consistent high levels of income. And also with lower volatility all up, compared to the share market. In that regard, over four years we’ve delivered 8.6 per cent running yield, plus franking on top of that. And we’ve also done that with less than half the market volatility. Over the last year, the yield has been 8.3 per cent and again, less than half the market volatility. So, we think that is an attractive return and meets our Fund objectives.
Lelde Smits: Which stocks have made you money this year and what has been a recent addition?
Darren Thompson: Fortunately there have been a number of stocks which have added to the portfolio. Couple of examples, Macquarie Bank [Macquarie Group Limited (ASX:MQG)] has been a core holding for a period of time and has performed well, as it’s been leveraged to offshore earnings, particularly in the Funds Management space. Also Lend Lease Group (ASX:LLC) has been a positive contributor, strong development pipeline, which is being executed well on and exposure to the residential markets.
And then finally, stock we’ve added to more recently is Suncorp Group Limited (ASX:SUN). There’ve been a large number of weather events that many of you know about. And, in that environment the stock has been sold off. But it remains a very strong long-term play with a good domestic bank and an improving life insurance. So we’ve taken that opportunity to enter that position.
Lelde Smits: Finally Darren, what is the Fund’s outlook for the remainder of the calendar year?
Darren Thompson: With interest rates low and equity markets at reasonable valuations, I think that that’s supportive for equity markets. And importantly, option volatility has gone up, which enables us to generate more income from our option premium. So this is where we’re confident in our ongoing ability to continue to generate the income yields that we’ve delivered to date.
Lelde Smits: Darren Thompson, thank you for the update from Northward Equity Income Fund.
Darren Thompson: My pleasure.

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