Welcome to the July 2024 Investment Update for the Switzer Dividend Growth Fund (SWTZ or the Fund).

The portfolio delivered a return of 2.77% during the month, compared with the benchmark S&P/ASX 100 Accumulation Index (ASX 100) return of 4.21%. The Fund’s performance was impacted by not holding some of the largest stocks in the ASX100 including Commonwealth Bank of Australia (CBA) and Wesfarmers (WES), which recorded strong gains. The Fund’s return was accompanied by an income distribution of 18.8 cents per unit, translating to a 10.72% annual income return, outpacing the Benchmark’s income return of 4.20%. The distribution for the month of June 2024 was significantly larger than prior corresponding periods, due to capital gains which came from the rebalancing of the portfolio following change in the investment manager from Blackmore Capital to Vertium Asset Management, which was effective 28 March 2024.

Under new investment management, the Fund is focused on generating sustainable income from both dividends and options. This diversified approach has significantly enhanced the Fund’s income profile, as evidenced by the 12.5% increase in monthly distributions from 0.8 cents to 0.9 cents per unit. Currently, the Fund is positioned with one third less volatility risk than the ASX 100.

The ASX 100 rose in July, driven by Consumer Discretionary and Real Estate Investment Trusts. However, these gains were partially offset by a fall in the Utilities sector.

The Reserve Bank of Australia (RBA) has kept the cash rate unchanged at 4.35%, despite growing expectations for an interest rate cut. Although there was some easing of inflation in the June 2024 quarter, the RBA believes the economy remains overheated and inflation remains stubbornly high. Government spending and a tight labour market are contributing factors. The RBA expects inflation to remain above its target for an extended period, pushing back rate cut hopes.

During the month, the Fund benefited from its investments in Amcor (AMC) and Newmont Corporation (NEM), with an underweight position in Fortescue Metals Group (FMG) also adding value. AMC’s rally reflected investor confidence in its profit turnaround, as some of its US customers reported robust volume growth around the end of the month. NEM benefited from the strength in the gold price and FMG fell largely due to the weakness in the iron ore price.

Conversely, the Fund’s zero holding in CBA and WES detracted from the overall performance. Despite lacking any new developments, both CBA and WES continue to rally, pushing their valuations to record highs. In an extremely concentrated ASX 100 benchmark which is dominated by large stocks, CBA has the largest weighting (9.7%) and WES is the seventh largest (3.7% weight). Hence, from month to month these large benchmark stocks will have an outsized influence (both positive and negative) on the Fund’s relative performance.

The market presents a mixed picture, with pockets of extreme overvaluation. By avoiding these areas and focusing on undervalued stocks, the Fund is well positioned to deliver both attractive income and sustainable returns in the long term.