Contango Income Generator July 2020 NTA Statement and Portfolio Update

Please find below the June 2020 Investment Update and NTA Statement for Contango Income Generator (ASX:CIE). Cick here to download the report.

Investment Objective

Contango Income Generator Limited (ASX:CIE) is an income-focused listed investment company, with a portfolio of companies largely outside of the ASX top-20. CIE’s objective is to pay quarterly dividends that provide investors with an attractive and sustainable income stream that is franked to the maximum possible extent. We select companies that, in aggregate, have a history of paying consistent dividends. The portfolio is characterised by a strong and diverse portfolio of companies that exhibit good cash flows and business models.

Over the past 12 months, CIE has paid a dividend yield of 4.86%, or 6.68% including franking credits. Dividend yield is calculated as the dividends attributable to the 12 months to 31 July 2020 relative to the closing share price at the beginning of the period.

Performance Summary

CIE’s investment portfolio returned -0.70% for the month of July. The NTA before tax of the portfolio was $0.734 per share. The broader market, as measured by the S&P/ASX All Ordinaries Accumulation Index returned 0.95% during the month. After removing the top 20 companies by market capitalisation to better reflect CIE’s investment universe, the index was flat at 0.07%.

Portfolio Commentary

The CIE portfolio was relatively inactive in July as we await reporting season. Some profits were taken in Magellan Financial Group, Southern Cross Media Group and Stockland Corporation to raise cash to around 5.5%. Positions in Aurizon Holdings and Ausnet Services were modestly added to.

Over the month the best returns for the portfolio were from Fortescue Metals Group (25.7%), Oz Minerals (24.4%) and Breville Group (13.9%). These stocks are all relatively new holdings. The worst returns came from Adbri (-30.5%), which lost a significant lime supply contract, oOh!Media (-17.5%) and Webjet (-14.8%). We have actively reduced our exposure to stocks affected by the lockdown until the recovery becomes clearer.

The S&P/ASX 200 Index sector performance saw Materials (5.8%), Information Technology (4.6%), Consumer Staples (3.5%) and Communication Services (3.4%) do best. The laggards were Energy (-6.6%), Health Care (-3.9%) and Industrials (-3.7%). Sectoral dispersion was broadly neutral this month. The Financial sector (-1.1%) and REIT sector (0.0%) weighed slightly on fund performance.

Market Commentary

Major global markets were mixed over July, with continuing noticeable performance dispersion. The NASDAQ Index was very strong climbing 5.3%, mostly due to the success of large technology stocks. The rally in these stocks has been a feature of global markets over the last several months and is influencing both returns and sectoral performance in other markets.

Outside of the US, China staged a recovery as retail investors flooded the market leaving the CSI 300 Index 6.2% higher. Other major markets struggled with Europe, Hong Kong and Japan all flat to lower. Locally, the S&P/ASX 200 Accumulation Index (which includes dividends) was 0.5% higher, benefitting from gains in large resource stocks like BHP and RIO.

The gradual deterioration in Victoria’s ability to contain the COVID-19 virus, and the reinstatement of economic restrictions, played a part in stalling the local market. This has reduced the likelihood of an imminent economic recovery, resulting in divergent stock performance over the period. Generally, domestic stocks with exposure to the delayed recovery such as entertainment, travel and associated activities suffered the most. Alternatively, global companies which can grow regardless of the economic restrictions, such as resources, did well. Commodity companies generally strengthened as iron ore, copper and gold prices moved higher or held higher levels. CIE has a modest, but growing, exposure to these areas due to their low yield but stronger growth characteristics.

Bond markets strengthened (i.e. lower interest rates) over the month. The US 10-year bond moved lower to a yield of around 0.53% and the Australian 10-year bond moved to around 0.81%. The reduction in yield was caused by a slight softening in the economic recovery and fears this is being caused by a resurgence in COVID-19 infections.

Portfolio Outlook

Generally we believe equity markets are trading at fair value, especially when compared to bond markets which are trading well below 1%. There is likely with be a certain degree of volatility over the coming months as the initial rally from market lows appears to have largely run its course.

Another issue on which the Australian market will focus is the likely impact on the world economy as fiscal and monetary support is withdrawn by governments. A continuation of large-scale supportive measures by global governments would be well received by markets.

As Australia moves towards the August reporting season, results are likely to show the impact of the COVID-19-inspired economic restrictions on company performance. To some degree the impact of the virus is known, so the focus will be on outlook statements and how stocks report in line with expectations. The market may be willing to forgive those stocks which have suffered during the crisis but are showing some tentative signs of recovery.

The outlook for dividends remains uncertain. In the current environment, company boards are likely to err on the side of conservationtism and retain liquidity and strong balance sheets instead of paying out large percentages of earnings as dividends. The difficulty Victoria is having with containing COVID-19 is likely to delay any prospect of recovery and will lead to dividends remaining lower over the next several months.

The strategy of the CIE portfolio will be to remain relatively fully invested to maximise the gathering of dividend income (especially franking), but to position the portfolio towards those stocks that are expected to be most resilient if economic conditions deteriorate through to the end of the year.

DISCLAIMER: Past performance is not a predictor of future returns. This update has been prepared for information purposes only. Any figures provided in this document are unaudited and approximate. This post does not contain investment recommendations nor provide investment advice.

You are strongly encouraged to obtain detailed professional advice and to read any relevant offer document in full before making any investment decision. This is not an offer to invest in any security or financial product.

© 2022 Contango Asset Management Limited.