Contango Income Generator June 2020 NTA Statement and Portfolio Update

Please find below the June 2020 Investment Update and NTA Statement for Contango Income Generator (ASX:CIE). Click 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 group of companies that exhibit good cash flows and business models.

Over the past 12 months, CIE has paid a dividend yield of 5.21%, or 7.16% including franking credits. Dividend yield is calculated as the dividends attributable to the 12 months to 30 June 2020 relative to the closing share price at the beginning of the period.

Performance Summary

After strong performance the past couple of months, CIE’s investment portfolio was steady throughout June with a return of 0.11%. The NTA before tax of the portfolio was $0.74 per share. The broader market, as measured by the S&P/ASX All Ordinaries Accumulation Index, returned 2.34% during the month. The performance of the broader market was aided by a number of larger companies recovering after a difficult period. After removing the top 20 companies by market capitalisation to better reflect CIE’s investment universe, the index returned 1.45%.

Portfolio Commentary

Over June, companies most sensitive to the easing of COVID-19 restrictions gave up some of their recent gains. The S&P/ASX 200 Index sector performance saw the Consumer Discretionary (5.4%), Consumer Staples (5.0%) and Information Technology (4.8%) sectors do best. The laggards were Energy (-2.1%), Industrials (-1.5%) and REITs (-1.3%). While sectoral performance was mixed over the month, those sectors that continue to best navigate the current economic environment were generally favoured.

Portfolio activity slowed in June after the sizeable rally over April and May. The cash weighting was increased back towards 5-6%. This increase was achieved by selective selling in those companies that we expect to be most vulnerable to a potential market pullback caused by a slowdown in economic activity. Some profits were taken in stocks including Appen and Breville Group.

Aurizon Holdings (ASX:AZJ), the large rail freight company, was added to the portfolio in June. AZJ recently reaffirmed guidance for FY2020 Net Profit After Tax and is expected to pay an attractive dividend in August. So far, the business remains largely untouched by the pandemic.

Over the month there were six stocks that delivered in excess of 10% returns for the portfolio. These included Adbri (formerly Adelaide Brighton Cement) (17%), Oz Minerals (16%), Coles Group (12%), Appen (10%) and the two regional banks, Bank of Queensland (16%), and Bendigo and Adelaide Bank (14%).

There were four holdings that delivered less than 10% over the month. These were all stocks that had recovered strongly from the March lows including: Southern Cross Media Group (-26%), Lovisa Holdings (-24%), Webjet Limited (-20%) and oOh!media (-16%).

Source: Vicsig

Market Commentary

Major global markets were higher over June, but with noticeable performance dispersion. The NASDAQ Index was very strong climbing 5.4% mostly due to the success of large US technology stocks. By compairson, the Dow Jones was 1.3% higher and the UK’s FTSE 100 Index broadly flat. The S&P/ASX 200 Accumulation Index (which includes dividends) was 2.6% higher, with some of the larger stocks, such as the banks, having a reasonable bounce after a difficult period.

Bond markets experienced modest rallies (i.e. lower interest rates) over the month. The US 10-year bond continues to trade at around 0.66% and the Australian 10-year bond around 0.87%. Bond markets are holding firm at low interest rates despite the large increase in spending forecast by various governments. This forecast government spend is a positive for financial markets.

Global markets are entering an interesting phase, as government economic support initiatives approach their expiry. While equities have recovered much of the losses suffered earlier in the year, a large-scale withdrawal of support could result in increased volatility.

Source: FT

Portfolio Outlook

Although progress on COVID-19 containment is being made in some parts of the world, there are some worrying signs of deterioration in the southern states of the US. Some other countries – less important to world growth – are also struggling with containing the disease. Generally, markets are taking these issues in their stride.

The REIT sector has largely announced their dividend payments for the last six months and there was a clear differentiation between the weaker and stronger franchises.

The upcoming August market results season will likely see a similar dispersion. The Commonwealth Bank of Australia (ASX:CBA) result is likely to be the bellwether report for the Australian market and particularly the bank sector. We expect to see a smaller but still healthy dividend from the company. A positive result for CBA will likely encourage dividend payments across the market.

Over the past months we have been rotating out of some cyclical, lower-quality names and into a mix of growth and stable defensive companies. We believe these changes are positive and have resulted in a more balanced portfolio. Over the next few months, we will continue to position the portfolio towards a more defensive stance, with lower quality businesses making way for the stronger franchises.

We expect to keep the CIE portfolio relatively fully invested in order to maximise the gathering of dividend income but, at the same time, target those stocks that are expected to be most resilient if economic conditions deteriorate.

The company paid a fully franked dividend of 0.96 cents on June 9.

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.