News: Generating income in uncertain times

.

Transcription of Finance News Network Interview with Northward Equity Income Fund Portfolio Manager, John Moore and CEO and Sector Portfolio Manager, Darren Thompson



Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today from the Northward Equity Income Fund is Portfolio Manager, John Moore and CEO and Sector Portfolio Manager, Darren Thompson. John, Darren welcome.



John Moore: Thank you.



Darren Thompson: Thanks Lelde, pleasure to be here.



Lelde Smits: John, you’ve just completed the first year of running the Fund. Could you run us through the Fund’s key focus and also, has it performed in line with your expectations?



John Moore: We looked to dampen market volatility through index protection and also pay quarterly distribution through Lifecycle. And pleasingly, the product has outperformed since inception by 10 per cent. So we’ve seen varying degrees of volatility, high volatility last year where the market was down – our benchmark was down 15 per cent, yet the Northward Equity Income Fund was flat.



This year we’ve gone through a period of low volatility and recently when we last saw you in June, the market has rallied 9.5 per cent, yet the Northward Equity Income Fund is up 6.5 per cent. So what through cycle we’ll see is that the Northward Equity Income Fund will outperform a down market, will underperform slightly on a rally market – like we’ve seen a strong rally market, and will go with it in a grinding higher market.



Lelde Smits: So what did the Fund distribute over the last year and was it in line with your expectations of between eight to 10 per cent?



John Moore: Pleasingly again, it distributed 10.81 per cent in terms of income distributions. So we were very happy with that, that it met the 8 to 10 per cent target range that we were looking for.



Lelde Smits: And were the sources of income or components also in line with your expectations?



John Moore: When we set out and inspect this Fund; we came up with ranges and what we thought we could achieve in terms of option income, around five to seven per cent. And last year we met the target of six per cent. Our dividends is obviously, you know, very transparent; we met that with 4.4 per cent. And the rest of the income distribution was from our cash holding, we hold some cash holding, so we had some interest income as well.



Lelde Smits: Now John, to the major event markets have been anticipating for months, QE3 {Quantitative Easing 3]. Has this caused you to adjust both your holdings and your options overlay?



John Moore: We are well positioned for this and as you say, it was well anticipated. So what we did is we increased our long stock only portion of the Northward Equity Income Fund. Normally we hold approximately 10 per cent of the Fund in long stock only without options against that. So what we did we increased that to 15 per cent and in particular, one of the stocks we held was Newcrest Mining Limited (ASX:NCM) which was in anticipation of a reinflation of the gold price. So that’s kind of played out now and since then, we’ve actually written calls against that Newcrest position.



Lelde Smits: And John, how is the Fund positioned for any potential macro shocks from the US fiscal cliff or China slowing?



John Moore: I believe the Northward Equity Income Fund is well positioned for any macro shocks like we saw last year. The Fund volatility is approximately half the volatility of our underlying benchmark, and that was kind of how it played out last year when we saw the big move down. So we believe it’s well positioned for any shocks in the system to protect the Fund to the downside.



Lelde Smits: Now to you Darren, strong fundamental research is a core part of your approach at Northward. What were the key features of reporting season?



Darren Thompson: Well I guess in terms of the reporting season just gone there were downgrades in earnings leading into the reporting season, and certainly they continued through the reporting season. We saw countless management teams come through our offices and essentially their overriding themes were difficulty in generating revenue growth, and with a subdued cuts consumer environment. And certainly also cost inflation coming through as well. So the combination of those two meant that earnings were somewhat subdued and indeed, the outlook going forward was somewhat cautious.



Lelde Smits: And Darren, did the reporting season just gone cause much turnover within the Equity Income Fund?



Darren Thompson: Overall the results broadly met our expectations, so we didn’t see a lot of turnover in the Fund as a result of the Company’s reporting. We did add some positions, certainly in stocks we like in our core portfolios from a fundamental perspective. Stocks like QR National (ASX:QRN) and Worleyparsons Limited (ASX:WOR) we added to the portfolio, anticipated holding them and also writing calls over those. But essentially it was more a steady implementation strategy.



Lelde Smits: And what about at a sector level, what is Northward’s view on resources at these prices?



Darren Thompson: Look essentially we’re somewhat underweight resources in the Equity Income Fund. It’s a difficult time for resources, it’s quite volatile. As you are aware commodity prices are volatile, particularly bulk commodities, iron ore in particular are weakening. We do see there being some value emerging in certain of the resource names and in terms of the Equity Income Fund, we’re positioned within Rio Tinto Limited (ASX:RIO) and to some extent Newcrest in terms of those. And we also, obviously are writing calls over those to generate further income.



Lelde Smits: Finally Darren, what is Northward’s outlook for the Australian Share Market going forward?



Darren Thompson: They’re obviously very uncertain times from a macro level and we’ve touched on a couple of those issues already. We would see that overall, notwithstanding that uncertainty that the macro environment coming out of Asia is broadly well understood, and it will be supportive of the resource space within the Australian market to some degree. And also I guess we see that whilst economic growth would be somewhat subdued, it’s largely in the pricing terms of Equity. So overall Equity’s valuations, we think are reasonable and it’s certainly a good environment to hold equities, and to write calls over those. And hence, good conditions for Northward Equity Income Fund.



Lelde Smits: Darren, John, thanks so much for the update.



Darren Thompson: Thanks very much.



John Moore: Thank you very much.





Ends