Aiming for steady income & capital preservation


Transcription of Finance News Network Interview with Northward Equity Income Fund, Fund Manager, John Moore

Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from the Northward Capital Equity Income Fund is Fund Manager, John Moore. John welcome back to FNN.

John Moore: Thank you, great to be back.

Lelde Smits: Could you start by introducing the Fund and explain how your strategy generates returns?

John Moore: The Northward Capital Equity Income Fund has a distinct income focus. We prioritise income and we do this by investing in a portfolio of Aussie shares, and we combine this with our option strategy. So the combination of these two helps generate income, high income, from multiple sources. Those multiple sources include dividend income, interest income, option income and also additionally some franking credits. Also over time, we expect to get some capital growth from the portfolio as well.

Lelde Smits: The Australian share market hit post-GFC highs in July. How have you refined your strategy to best capture returns?

John Moore: The Northward Capital Equity Income Fund is exposed to roughly 50 per cent of our benchmark. And what we do is we continue to be exposed to quality names, with earnings expectations that are strong and with a proven track record. We feel this is the best way to continue to stay exposed to share market gains.

Lelde Smits: The Fund has the strong focus on capital preservation through option writing and also hedging. Could you give us an example to highlight how this works?

John Moore: We do have a strong capital preservation within the Fund and we do use option income, to cushion the downside and smooth out volatility. So it’s a very important facet of the Fund and one of our key differentiations, is that we do use also index options as mentioned before, to smooth out the volatility. And this has been successful in June, I think we saw the market was down 1.4 per cent and the Northward Capital Equity Income Fund, was just down 41 basis points. So therefore, it helped to perform and cushion the downside through our index hedging.

Lelde Smits: While reporting season may have just begun, what have been some of your highlights among company results?

John Moore: We’re half way through reporting season and there’ve certainly been some mixed results. But certainly stocks like Suncorp Group Limited (ASX:SUN) that came up with a special dividend, which we hold in the Northward Capital Equity Income Fund, we’re pleased with that. And also Telstra Corporation Limited (ASX:TLS), clearly off market buyback is pleasing as well as the increasing dividend there. And also CSL Limited (ASX:CSL) held in the Northward Capital Equity Income Fund as well, with a buyback there as well. So pleasingly we’ve had some good reporting for some stocks held in the Fund.

Lelde Smits: Which sectors are you overweight and underweight, and why?

John Moore: We’ve been overweight telecommunications and insurance, mainly because of supportive valuation and also around the prospect of capital management. We’ve been underweight, or we’ve had roughly a 50 per cent exposure to the banking sector and that’s because we feel valuations are full. But whilst acknowledging that fully franked dividend income will provide some support for those banking stocks, we feel that capital upside is limited at the moment in that sector.

Lelde Smits: The Fund has delivered between eight to 10 per cent annual income since you’ve been running. What have been the biggest drivers behind your performance?

John Moore: Consistently has delivered eight to 10 per cent as you said, and it’s come from multi sources. As mentioned before, dividends have contributed to a large portion of that, as has option income, as has interest income. So multiple sources have contributed solely to that over time, as has some capital growth as well.

Lelde Smits: More recently, over a period the ASX was climbing higher. How did your Fund perform in the June quarter?

John Moore: Again over the June quarter, the market was up I think roughly 1.15 per cent and pleasingly, the Fund did quite well over that quarter. We were up 1.5 per cent or just over 1.5 per cent, and so the Fund tends to do well in those grindy months. So pleasingly it outperformed in the June quarter.

Lelde Smits: Finally John, what do you believe are the main factors that will impact equity markets over the coming months and where are the opportunities?

John Moore: Good question, because it’s interesting times as we mentioned before and there’s certainly geopolitical risks out there on the horizon. You’ve got some softness in the Eurozone economies, which is weighing on markets over there and there’s also a lot of focus on Chinese data that’s been coming out. So certainly those factors are things that you need to consider, but on the other side we’ve got still some strong signs of economic growth coming out of the US, which is a good thing. So we feel it’s best to be exposed to companies with offshore earnings, like James Hardie Industries PLC (ASX:JHX), Amcor Limited (ASX:AMC), Macquarie Bank [Macquarie Group Limited (ASX:MQG)]  and QBE Insurance Group Limited (ASX:QBE).

Lelde Smits: John Moore, thank you for the update from Northward Capital Equity Income Fund.

John Moore: Great, thanks for having me.