Looking around the markets, the Model Portfolio’s large and growing exposure to global share markets ensured investors benefited from the significant upside delivered around the world. Whilst the performance of the ASX was strong, it was usurped by the US and Asia.
Within Australia the highlights remained the mining and materials sector as the likes of BHP and Rio Tinto benefitted from well publicised iron ore supply issues even as export volumes stagnated. The Plato Fund has an exposure to both companies whilst both Boral and Orora fall into this group.
The other performers were driven by the aftermath of the Federal Election and subsequent rate cut with those businesses offering defensive income streams and exposed to the right sectors performing strongly. This month they were financials and banking (3.49%), healthcare (4.20%) like Ramsay and CSL, Consumer Staples (3.02%) including Woolworths and Industrials (4.47%) which includes both technology and operational companies like Qube.
Gold bullion: Gold bullion remained one of the best performing asset classes of 2019, reaching all-time highs above $2,000 in Australian dollar terms and delivering a return of 7% for the month. Gold is a much-maligned investments with traditional stock pickers, brokers and the likes of Warren Buffet unable (or unwilling) to properly value the asset due to its lack of cashflows. What we know is that gold acts as an alternative currency in times of volatility and most importantly for Australian’s offers a direct hedge against the biggest risk to our economy; China. In the month gold benefitted from geopolitical escalation in Iran and China, as well as the rate cut delivered by the Reserve Bank of Australia. Major central banks outside the US and Australia continue to buy substantial amounts of gold to hedge against the USD.
Qube Holdings (QUB): Qube continued to deliver during the month, moving to an all-time high as the integration of the Patrick and Asciano businesses continued. The company continues to expand its service offering and has been gaining market share as its competitors decided to increase their prices at an less than opportune time. The strength has been driven by the companies strong Bulk Commodity volumes, as South American iron ore struggled in light of the Vale dam collapse. This offset weakness in car and soft commodity volumes impacted by the drought and flooding in various parts of Australia. Management recently announced the Moorebank Intermodal Terminal will be ready to receive trains from the Port of Botany in the third quarter of this year, with the Target site complete prior to this. The company has been investing heavily into solar energy and the automation of on-site logistics at Moorebank making it one of the more innovative businesses in Australia.
Hybrids and Preference Shares: Whilst we don’t typically focus on the Capital Stable Bucket investments in this report, the performance of the sector was such that it couldn’t be ignored. According to the Solactive Australian Hybrid Securities Index, the sector was up around 2.5% since the start of May and 1.8% in the month of June alone. The preference share sector fell out of favour in the lead up to the Federal Election due to the fact that most pay a fully franked distribution which was likely to be impacted by the Labor Party’s policies. As outlined previously, it is important not to assume that the expected will occur. The result has been the mass selling of preference shares by stockbrokers and short-term investors missing out on the re-pricing of these securities following the election. As mentioned previously, the lack of interest from retail investors has opened the market to the likes of the industry super funds, which are supporting greater liquidity and demand in the sector.
Telstra Corporation (TLS): Telstra continued its upward march during June after announcing higher than expected impairment in May on the back of its substantial business restructure. The company continued to benefit from the ACCC’s decision to block the merger between TPG and Vodafone and the subsequent commencement of an appeal process, which will act to distract both competitors in the short-term. This combined with the banning of Huawei’s technology, used by Telstra’s competitors, from the Australian 5G network is seeing the sentiment towards the company finally turn. A number of brokers upgraded their recommendations during the month, noting that Optus has begun increasing it mobile pricing reducing the gap to Telstra’s more expensive but higher quality service. They also note that the NBN rollout is now 70% complete and believe the market is undervaluing Telstra dominance in technology and investment to deliver the best 5G network.
Boral Ltd (BLD): Boral’s recovery slowed during the month but the company reaffirmed guidance for the financial year and indicated weather conditions were conducive to a strong finish for the year. The company also announced a multi-billion-dollar project with Mirvac that would involve the redevelopment of its Scoresby site in Eastern Victoria. Boral expects this to deliver $66m in earnings through to 2026.
Magellan Infrastructure Fund: The Magellan Fund continued to deliver for investors increasing 4% in the lead up to the end of the financial year. The performance was driven by a further deterioration in bond rates around the world, with some 50% of European bonds now trading on negative yields. This is leaving investors with few opportunities to find low risk income and increasing the attractiveness of Magellan’s key infrastructure assets. Transurban performed strongly as news filtered through of their sweet heart deal with the Victorian Government should the construction of the new western freeway be delayed, whilst Crown Castle, which owns telecommunications towers in the US benefitted from the capitulation of China Tower due to its use of Huawei technology that is banned in many developed countries.