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AGM Recap: Outperforming in a strong market

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AGM Recap: Outperforming in a strong market

Djerriwarrh’s performance has been strong over the last 12 to 18 months in both absolute terms and relative to the benchmark S&P/ASX 200 Accumulation index. In FY21, our total portfolio return, including franking credits, was 29.6% versus 29.1% for the index.


Keeping up with the benchmark index in such a strong market when you have on average just over 30 per cent of the portfolio covered by call options, is not easy. So, our out-performance is a great credit to our investment team.


Our out-performance has been sustained in the 12 months to the end of September, with our portfolio performing 2.1 per cent above the S&P/ASX 200 benchmark index when the full benefit of franking is included.


Over the longer term, we’re a little bit behind the benchmark index, but the call option coverage does cap our upside when markets are strong. However, our shareholders have benefited from receiving most of the returns through fully franked dividends and in that regard, the franking credits we supply to our shareholders are a very important part of the total return.


Our final dividend of 5.75 cents was up from 5.25 cents at the half year but overall was down from the previous year. Nonetheless, we are still producing a yield that is comfortably above the index when you include franking credits.


The impact of COVID continued to drag on company dividends, so our income from this source was lower, especially given a cut in the dividend paid by CBA. Companies such as Woodside, Oil Search, Alumina and Ramsay Health also cut their dividends. Also, holdings such as Sydney Airport did not pay a dividend.


Conversely, market volatility helped income from option premiums. Volatility is a measure of how much a stock price rises and falls. It’s a key input into option pricing because the chances are much higher of somebody being able to exercise that option because the stock price will suddenly change. This is one of the ingredients that our team considers when managing the option positions.


The option income and the fall in interest costs offset the fall in dividend income but could not make up for all of it. However, it has helped to maintain that all-important dividend yield.


Although option income was strong in 2020-21, it’s difficult to assess the likely outcome for this source of income in the current year at this early stage. It’ll be very dependent on the level of share price volatility through the year. However, there is an expectation that company dividends across the market will show some improvement.


Our net tangible assets have been increasing over the last 12 months, but our share price is currently trading at a discount to the NTA. We cannot control the share price ‒ that’s a function of the market.


Our management expense ratio (MER) ‒ that is, the costs of running the company – is just 45 cents for every $100 invested. Also, there are no performance fees paid to an external management company. There’s just the cost of running Djerri, including listing fees, audit fees, shareholder communications, and salaries. We think that that compares very favourably to similar products on the market.


Market Outlook

During the recent company reporting season, we observed that, overall, balance sheets are strong, with a number of companies now in a net cash position. Dividend payments were higher than market expectations in several cases.


Many companies are focused on their digital strategies to take advantage of trends such as the growth in e-commerce, which has been accelerated by the COVID pandemic.


We see that the equity market continues to be influenced by several factors. The market has had a great run over the last 18 months, leaving valuations high based on historical averages but supported by low interest rates.


Takeover activity has also supported share prices, with companies such as Sydney Airport and Spark Infrastructure recently receiving takeover bids.


Finally, inflation levels, commodity prices and the pace of the reopening of economies will be large influences on company profits in the short term. This will naturally flow through to our two key revenue items: dividend income and option income.


Irrespective of these short-term factors, we believe that the current portfolio settings will enable us to achieve our long-term objectives.

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